QDIA Basics

What plan sponsors need to know about qualified default investment alternative rules and how to select the appropriate one for their employees.

Qualified default investment alternatives provide plan sponsors with a safe harbor for investing retirement plan participants’ contributions in the absence of participant direction. Along with allocating participants’ retirement deferrals, such investment options also ease the employer’s fiduciary liability, according to industry experts.

QDIAs were authorized by the Pension Protection Act of 2006, and final regulations were issued by the Department of Labor in 2007. By easing plan sponsors’ fiduciary liability for defaulting participants’ savings into certain investments, experts say QDIAs removed an impediment to more widespread use of automatic enrollment in defined contribution plans.

“These options really helped address plan fiduciary concerns about the liability of undirected investment decisions,” explains Joni Tibbetts, vice president for management, retirement and income solutions at Principal Financial Group, in Des Moines, Iowa. “They’re really addressing plan fiduciaries’ concerns about the liability of investment losses, while providing participants [with] investments that may lead to future growth. That’s really the genesis of why they were introduced.”

QDIAs help to maximize participants’ accumulated retirement savings over a career, says David Morehead, vice president at retirement pan adviser OneDigital, in San Diego, California.   

“For employees, it takes what can sometimes feel like guesswork or maybe uninformed decision making out of the equation and allows the professional money manager to allocate their assets on their behalf with a lot of thought and research behind the decisions being made there,” Morehead explains.

He says QDIAs benefit plan sponsors as well. “The fiduciary liability protection that comes with QDIA compliance makes employers tremendously more comfortable putting employees in an investment option that entails a little bit of risk but is likely the best investment option for them long term,” he says.

Rules of the Road

The DOL’s Employee Benefits Security Administration is in charge of executing Congress’ PPA legislation for QDIAs, effecting the rules and regulations, and providing ongoing oversight. 

Plan sponsors can select from a menu of approved QDIAs, according to EBSA. That includes:

  • A product with a mix of investments that takes into account the individual’s age or retirement date (an example of such a product could be a lifecycle [risk-based] or targeted-retirement-date fund);
  • An investment service that allocates contributions among existing plan options to provide an asset mix that takes into account the individual’s age or retirement date (an example of such a service could be a professionally managed account);
  • A product with a mix of investments that takes into account the characteristics of the group of employees as a whole, rather than each individual (an example of such a product could be a balanced fund); and
  • A capital preservation product for only the first 120 days of participation (an option for plan sponsors wishing to simplify administration if workers opt out of participation before incurring an additional tax).


Plan sponsors must also conform to several conditions under the rules to obtain safe harbor relief from fiduciary liability for investment outcomes:

  • Assets must be invested in a “qualified default investment alternative” as defined in the regulation;
  • Participants and beneficiaries must have been given an opportunity to provide investment direction but have not done so;
  • A notice generally must be furnished to participants and beneficiaries in advance of the first investment in the QDIA and annually thereafter. The rule describes the information that must be included in the notice;
  • Material, such as investment prospectuses, provided to the plan for the QDIA must be furnished to participants and beneficiaries;
  • Participants and beneficiaries must have the opportunity to direct investments out of a QDIA as frequently as from other plan investments, but at least quarterly;
  • The rule limits the fees that can be imposed on a participant who opts out of participation in the plan or who decides to direct their investments; and
  • The plan must offer a “broad range of investment alternatives” as defined in the DOL’s regulation under Section 404(c) of the Employee Retirement Income Security Act.


Morehead reaffirms that disclosure requirements are key for plan sponsors. “Otherwise, [the QDIA selected] loses basically all of the benefits for the plan sponsor,” he says.

Some funds won’t qualify as a QDIA, Morehead adds, including funds without fixed-income exposures, for example. “That knocks the fund out from being a QDIA right there,” he says.

“The main requirement for a QDIA is generally that it not be exclusively in one particular kind of investment,” explains Andrew Oringer, a partner in Dechert’s ERISA and executive compensation group in New York City.

QDIA Trends

Since the introduction of QDIAs, target-date funds, which assign an asset allocation to participants based on their age, have become the most popular choice. According to the 2021 PLANSPONSOR Defined Contribution Survey, 75.6% of respondents overall use a TDF as their default investment for automatic enrollment.

By comparison, only 1% of DC plan sponsors indicated that they use a stable value fund or guaranteed investment contract as the default for automatic enrollment; 2.3% said they use a risk-based asset allocation fund; 3.4% reported they use a professionally managed account; and 5.1% use a balanced fund.

The vast majority, nearly 99% of OneDigital’s plan sponsor clients, use an age-based QDIA, Morehead says.

“More recently, they’ve also been looking at managed accounts, but I’d say an age-based option is generally the starting point,” he adds.

While “a broad array of possible QDIAs,” are available to plan sponsors, “what we have seen in the market is fairly clear, trending to the use of target-date funds,” Oringer says.

A Cerulli and Associates study with the SPARK [Society of Professional Asset Managers and Recordkeepers] Institute shows that 71% of plan sponsors use a TDF, 9% use a managed account and 5% use a dynamic QDIA.

Dynamic QDIAs are investment options that start a participant off in one investment product or solution, such as a target-date fund, and automatically transition the participant—upon reaching a certain threshold including account balance or age—into another retirement-focused product.

QDIA Selection

The right QDIA for a plan sponsor depends on the demographics of the employer’s workforce, its plan design and its investment philosophy, sources explain. Another important consideration is the level of investment sophistication of the workforce, Tibbets says.

“An employer can consider factors such as participant ages, compensation levels, plan contribution rates, automatic enrollment percentages, turnover and distribution activity,” she says.

For example, some plan sponsors may use managed accounts to maximize participants’ retirement readiness because these funds can offer greater personalization of investment options and tailored advice, Tibbetts explains.

“Most of the QDIA options are designed for the plan generally at the plan level, but managed account options are really customized at that individual participant’s needs,” she says. “The employer, of course, needs to evaluate the cost of the performance of each option, but it’s really key for the plan fiduciary to understand the differences in these options, the asset classes and how this really might change over time, because it’s really important that a fiduciary selects the best option upfront.”

Morehead performs demographic analysis with the plan sponsor, with several questions, to select a few fund managers that offer target-date or managed account funds to find the best fit, he says. Morehead says he will talk with the plan sponsor about its investment philosophy and fund composition, and he will educate the investment committee on nuances between selections.

The firm’s analysis also includes U.S. Census data, the average age at the company and median age. Additionally, it will consider whether the plan sponsor prefers active or passive asset management, and tactical or strategic investment management, Morehead adds.  

“Income is another big demographic factor that we look at, as well as number of participants with an outstanding loan. We also look at the percentage of terminated participants that take a distribution versus leave their money in the plan,” he says. “A couple of other really prominent ones that I also like to look at are presence of a self-directed brokerage account [and] other retirement plans that the plan sponsor may be offering.”

Morehead explains that, typically, higher average income translates into higher participation and savings rates. “When we have high, consistent investments from participants, this affords us more ability to assume a higher level of market risk in our TDF recommendation based on this positive behavior,” he says. “If we have lower income, participation and savings rates, this will typically lend toward a more conservative strategy being more important.”

The number of participants with an outstanding loan and the percentage of terminated participants that take a distribution versus leave money in the plan help establish a time horizon when making investment recommendations to plan sponsors, Morehead adds. 

“The presence of an SDBA will help guide our recommendations when it comes to the number of asset classes and the overall investment strategy—for example, active versus passive, or tactical versus strategic,” he says.

In addition, Morehead says, if participants have access to a defined benefit pension plan, it allows them to take more risk in DC plan investments. “That’s a really good foundation which would then allow them to have a little bit riskier investment allocation for potentially higher returns, better growth,” he says.