Qualified default investment alternatives (QDIAs) are not naturally the type of retirement income planning tool that are at the back of a client’s mind—if the client is aware of them at all.
Despite this, new studies have shown that the recent evolution of QDIA options is likely to drive 401(k) plan participants’ future access to lifetime retirement income options. The QDIA evolution was perhaps spurred by relaxed IRS rules designed to encourage the use of annuity options within defined contribution plans. Large plan sponsors’ current willingness to use multiple types of accounts as QDIAs to offer more personalized retirement solutions, including lifetime income solutions, for participants shows that this is a key retirement trend that is likely to continue in the coming years—making it critical that advisors have all the information necessary to allow clients to capitalize on a potentially valuable retirement income solution.
QDIAs are types of funds that are specifically identified by the Department of Labor (DOL) as being secure enough to be used as default 401(k) investment options for plan participants who do not proactively allocate their contributions among the otherwise available plan investment options. QDIAs commonly include target date funds (TDFs), but can also include balanced funds and managed accounts.
QDIAs are important because a plan sponsor’s allocation of a participant’s contributions to a QDIA is treated as though the participant himself made the allocation, removing the fear that the default allocation will cause the sponsor to become liable as a fiduciary if market volatility causes the QDIA to perform poorly.
The DOL’s approval of these types of funds, coupled with the fact that many participants do not actively manage their 401(k) investment allocations, has made QDIAs even more relevant in recent years. However, the QDIA does little to help the plan participant manage his or her account balance after retirement, increasing the likelihood that the funds could run dry.
As a result, recent IRS guidance has specifically allowed plan sponsors to include deferred annuities in TDFs (even if the TDF is also a QDIA) without violating otherwise applicable nondiscrimination rules (relating to age and compensation levels) that impact 401(k) investments. This move is a part of a wider view that the IRS and Treasury have taken toward encouraging lifetime income products (annuities) within retirement plans.