PD08: QDIAs: What do the regulations mean for your plan?

Most plan sponsors and advisers will agree that the majority of their participants are unprepared to manage their retirement accounts, and are rarely equipped with the information necessary to make an informed decision when joining a retirement plan or maintaining involvement after enrolling.

The use of qualified default investment alternatives (QDIAs), therefore, is a practical option for plan sponsors that want to help their participants take part in the company-sponsored retirement plan but want to have protection under the Employee Retirement Income Security Act (ERISA).

align=”center”> The Panel Audio File

align=”center”>The QDIA regulations are available here .

Introducing the topic during a panel at PLANSPONSOR ‘s 2008 Plan Designs conference, moderator Alison Cooke, Managing Editor of planadviser , divided QDIAs into three (and a half) categories.

First, are target-date funds, in which plan sponsors default individual participants into funds that correspond with their age and the expected number of years until their retirement; these funds are more aggressive for younger participants and become more conservative as they get older.

When using a balanced fund as a default, plan sponsors must consider the entire participant base as one group and select a fund that is appropriate for the group demographic. Managed accounts are administered by an outside manager who also considers individual time horizons, but uses the funds on a plan’s investment menu.

The “half” option Cooke referred to, is the ability to default participants into a stable value fund for a 90-day window. However, Tony Ciocca, Managing Director at the NPR Member Firm Institutional Investment Consulting, pointed out that interim options are more problematic than profitable, as they call for otherwise unnecessary transactions and operations that could go wrong.

Ciocca pointed out that plan sponsors' current responsibilities, as related to overseeing QDIAs, are not static, and roles will have to evolve with changes in legislation, market trends, and new regulations and restrictions. When deciding on a QDIA for a plan's participants, it is important to be aware of their expectations, wants, and needs. Each default option is better suited to different client groups.

James Daley, VP Head of Asset Allocation for Diversified Investment Advisors, Inc., said he believes managed accounts work well when they can be customized for individual investors because they become more valuable the more closely tailored they are to the individual's tastes.

Unfortunately, they are not guaranteed to be beneficial or cost effective for everyone, and as the most expensive and time-consuming-generally speaking-of the QDIA options, many participants are not willing to put in the necessary effort.

Christina Stauffer, VP at PIMCO, said she believes stable value funds could reduce volatility in a QDIA when implemented in structures where they could replace a nominal fixed income bond fund. This kind of stability, she said, could help keep returns up and maximize the total number of people within a plan who made it to a successful retirement.

Plan sponsors and advisers must be aware of their options, keep well-informed of the varying services and costs associated with different funds, and especially, be willing to make alterations as necessary if their client demographic changes.

"Ultimately when you look at this decision, it is important" said Cooke, "to really see how this fits in your plan and in your program as a whole, and make sure you're doing the right thing for your participants."