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Trending QDIAs Unlock Retirement Income

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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.

QDIA Basics

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.

Newly Emerging QDIA Options

While many QDIAs do still concentrate on TDFs as primary investment offerings, some larger plan sponsors have begun to rely more heavily on managed accounts, which offer investment advice that is more customized for the individual participant.  Further, firms have begun to develop QDIAs that will automatically transfer the participant’s funds from a TDF to a managed account when the participant reaches a pre-determined age (or when other criteria, such as years of service or years until retirement, are satisfied).

Generally, participants whose assets have been transferred to a managed account will have accumulated significant retirement assets by that point, and are likely nearing retirement age—so are also more likely to have specific goals regarding retirement income options in mind.  Once the transfer has occurred, participants can then choose to actively manage their funds or continue to have default selections made.

Some of the default selections, however, are more narrowly tailored toward the participant who is nearing retirement age.  Importantly, products have been developed that will automatically allocate a portion of the QDIA funds to a fixed annuity or Treasury Inflation Protected Securities (TIPs) at periodic intervals over time.  The annuity options are designed to provide a specific level of guaranteed income to the participant once he or she retires.

To qualify as a QDIA, the participant must be given the flexibility to transfer funds out of the annuity at fairly regular intervals, but the DOL has indicated that plan sponsors have more latitude in using annuities that could potentially lead to the approval of a more lengthy investment period in the future.


While QDIAs with automatic annuity features are now commonly only available in very large 401(k) plans, it is a trend that has been growing in recent months—and one that should be expected to trickle down to small-to-mid-sized plans in the future.

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