Annual Qualified Default Investment Alternative

Date:

Vanguard Target Retirement Income Fund

Financial regulators release 2021 annual report
  • Ticker: VTINX
  • Gross expense ratio: 0.08% as of 01/31/2022
  • Net expense ratio: 0.08% as of 01/31/2022

Objective: The investment seeks to provide current income and some capital appreciation.

Strategy: The fund invests in a mix of Vanguard mutual funds according to an asset allocation strategy designed for investors currently in retirement. Its indirect bond holdings are a diversified mix of short-, intermediate-, and long-term U.S. government, U.S. agency, and investment-grade U.S. corporate bonds inflation-protected public obligations issued by the U.S. Treasury mortgage-backed and asset-backed securities and government, agency, corporate, and securitized investment-grade foreign bonds issued in currencies other than the U.S. dollar.

Risk: The fund is subject to the volatility of the financial markets, including that of equity and fixed income investments. Fixed income investments carry issuer default and credit risk, inflation risk, and interest rate risk. Principal invested is not guaranteed at any time, including at or after retirement. Additional risk information for this product may be found in the prospectus or other product materials, if available.

Short-term redemption fee: None

This description is only intended to provide a brief overview of the mutual fund. Read the fund’s prospectus for more detailed information about the fund.

Dol Issues Final Rules For Qualified Default Investment Alternatives

On October 24, 2007, the Department of Labor published final regulations on “qualified default investment alternatives” for 401 type retirement plans. The regulations, effective 60 days after the date of publication, detail the conditionsincluding a required notice to participants and beneficiariesunder which plan fiduciaries will be protected against liability for investment performance of so-called “default” investment funds in the absence of an investment election by a participant. Although most default investment funds are maintained in plans that are intended to satisfy the conditions of Section 404 of ERISA, a plan need not be a “404 plan” to obtain relief under the regulations.

Background

Impact on Plan Sponsors and Fiduciaries

As a consequence of these finalized regulations, companies that move quickly and have not yet done so can implement automatic enrollment provisions effective January 1, 2008, not just for new employees but for existing employees who do not participate in the company’s 401 or other form of individual account retirement plan. Increasing employees’ plan participation often will aid a company’s ability to satisfy tax-code discrimination testing and lengthen employee tenure. The implementation effort will involve amending the plan, contracting with an outside vendor to provide for one of the four approved forms of qualified default investment alternatives, and providing the required notices, all as discussed below.

Fiduciary Liability Relief

Choosing Default Investment Alternatives For 401ks Requires Close Due Diligence

Target-date funds are the runaway top choice to serve as the default option for 401k plans. But successfully gathering assets doesn’t necessarily mean that a TDF is the right choice for every plan’s QDIA. It certainly doesn’t mean that TDFs are well-suited for every plan participant, so plan fiduciaries should not act hastily in choosing a QDIA.

Target-date funds and other QDIAs are often thought of as set-it and forget-it investments, but new data from J.P. Morgan Asset Management highlights some troubling behaviors among participants invested in their plan’s default.

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Your Right To Direct Investments

You have the right to direct investments for contributions to the Faculty and Staff Retirement Plan.

If you have a payroll deduction set up to contribute or will start receiving Duke’s contribution but do not make investment elections through Fidelity, your contributions will be automatically deposited in the default investment fund. The default investment fund established under the plan is the Vanguard Target Retirement Date Fund series. Your contributions will be invested in the Target Date Fund closest to the year in which you will reach age 65.

It is intended that the default investment fund be a “qualified default investment alternative” as defined under the Employee Retirement Income Security Act of 1974 . See details about the Vanguard Target Retirement Date Funds below.

The High Stakes Of Qdia Selection

Jack Byrne Ford Employee Security Plan

For plan sponsors, the tremendous growth in assets, changing market conditions and balancing the needs of younger and older participants complicates selection and monitoring of target-date funds. Advisors can help by bringing plan demographics to the discussion and looking at the distribution of ages and account balances of a plan population.

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Your Default Investment Options

This section describes how your contributions to the Faculty and Staff Retirement Plan will be invested if you have a payroll deduction set up to contribute but do not select specific investment funds. It also describes your rights and responsibilities in connection with default investments. You are eligible to make voluntary contributions in the Faculty and Staff Retirement Plan regardless of whether you are exempt or non-exempt staff.

How Sticky Is Your Plan’s Default Investment

There’s been a significant increase in the use of “intelligent,” or diversified, investment defaults in 401k plans over the past 10 years. Given the many positive effects that these default investments have had on investors, the authors wanted to study their stickiness, or rather, the likelihood that plan participants would initially accept the default and remain in it.

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Four Things You Need To Know About Default Funds

A growing number of retirement plan participants, and retirement plan assets, are being invested in the default option selected for the plan. The existence of default funds isn’t exactly a new phenomenon. Arguably it’s as old as that first participant enrollment form returned without the investment election section completed. Here are four things you should know about default funds.

Companies that sponsor 401k plans need to consider employee demographics when deciding which types of qualified default investment alternative to offer, according to research by Manning & Napier.

How Can I Tell If A Plan Has A Qdia

Alternative Investments Explained

Review your plan documents and the notices provided to participants. The plan document should indicate if the plan will comply with ERISA Section 404. If so, its ready to take advantage of a QDIA. If the plan currently has a QDIA, an annual QDIA notice will be produced , which will state the plans QDIA.

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Appropriate Types Of Qdias

If you are a fiduciary responsible for creating a QDIA, keep in mind these four types of QDIAs are considered appropriate for participants and beneficiaries who fail to direct their investments:

  • Lifecycle or target date retirement funds A product with a mix of investments taking into account the individuals age, retirement date or life expectancy
  • Professionally managed accounts An investment service can allocate contributions among existing plan options. The asset mix should account for the individuals age or retirement date
  • Balanced funds A product with a mix of investments, which takes into account characteristics of the employee group rather than each individual
  • Capital preservation products This option only exists during employees first 120 days of participation. After that, amounts must be transferred to another type of QDIA. This should be the long-term default investment selected by the plan fiduciaries.
  • Qdias Under The Pension Protection Act

    The Department of Labor’s final fiduciary rule could be released before the next presidential inauguration in January 2017. For some, it is a very ambitious time frame and raises a question about how they can do it in that time frame.

    A recent GAO report takes a look at the various factors plan sponsors consider when they pick and monitor default investments, and the results of their monitoring efforts, which hinge on plan-specific considerations.

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    Qualified Default Investment Alternative

    A qualified default investment alternative is the default investment for defined contribution employer-sponsored retirement plans. If an employee contributes to a defined contribution retirement plan, like a 401, and does not specify how they want their money invested, it is automatically invested in the plans QDIA. A financial advisor could help you create or adjust a retirement plan for your needs and goals. Lets break down how a QDIA works.

    Vanguard Target Retirement 2035 Fund

    Electronic Delivery of Retirement Plan Notices Could Become Easier ...
    • Ticker: VTTHX
    • Gross expense ratio: 0.08% as of 01/31/2022
    • Net expense ratio: 0.08% as of 01/31/2022

    Objective: The investment seeks to provide capital appreciation and current income consistent with its current asset allocation.

    Strategy: The fund invests in a mix of Vanguard mutual funds according to an asset allocation strategy designed for investors planning to retire and leave the workforce in or within a few years of 2035 . The fund’s asset allocation will become more conservative over time, meaning that the percentage of assets allocated to stocks will decrease while the percentage of assets allocated to bonds and other fixed income investments will increase.

    Risk: The target date funds are designed for investors expecting to retire around the year indicated in each fund’s name. The funds are managed to gradually become more conservative over time as they approach their target date. The investment risk of each target date fund changes over time as its asset allocation changes. They are subject to the volatility of the financial markets, including that of equity and fixed income investments in the U.S. and abroad, and may be subject to risks associated with investing in high-yield, small-cap, and foreign securities. Principal invested is not guaranteed at any time, including at or after their target dates. Additional risk information for this product may be found in the prospectus or other product materials, if available.

    Short-term redemption fee: None

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    Vanguard Target Retirement 2060 Fund

    • Ticker: VTTSX
    • Gross expense ratio: 0.08% as of 01/31/2022
    • Net expense ratio: 0.08% as of 01/31/2022

    Objective: The investment seeks to provide capital appreciation and current income consistent with its current asset allocation.

    Strategy: The fund invests in a mix of Vanguard mutual funds according to an asset allocation strategy designed for investors planning to retire and leave the workforce in or within a few years of 2060 . The fund’s asset allocation will become more conservative over time, meaning that the percentage of assets allocated to stocks will decrease while the percentage of assets allocated to bonds and other fixed income investments will increase.

    Risk: The target date funds are designed for investors expecting to retire around the year indicated in each fund’s name. The funds are managed to gradually become more conservative over time as they approach their target date. The investment risk of each target date fund changes over time as its asset allocation changes. They are subject to the volatility of the financial markets, including that of equity and fixed income investments in the U.S. and abroad, and may be subject to risks associated with investing in high-yield, small-cap, and foreign securities. Principal invested is not guaranteed at any time, including at or after their target dates. Additional risk information for this product may be found in the prospectus or other product materials, if available.

    Short-term redemption fee: None

    Qdia Lawsuits: A New Fiduciary Risk For 401k Plan Sponsors

    Here’s a new risk for plan sponsors to be aware of, you could be sued based on the qualified default investment alternative you choose for your retirement plan. For example, participants could claim you failed to fulfill your fiduciary duty if the plan’s qualified default investment option — typically a target-date fund — doesn’t deliver the expected outcomes.

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    Tdf With Annuity That Restricts Transfers May Be Prudent Default Investment

    The DOL recently concluded that a target date fund with a fixed guaranteed annuity restricting transfers or withdrawals for a 12-month period does not meet the qualified default investment alternative requirements. But noting the need for lifetime income as a public policy issue, DOL said a fiduciary could prudently select a default investment that complies with all requirements of the QDIA regulation save the liquidity and transferability rules. Fiduciaries may be hard pressed, however, to select such an investment as a plan default investment because it does not protect them from liability for investing contributions on behalf of employees.

    Target-date funds with annuities can now be considered prudent default investment options, so long as certain liquidity requirements are met, the Department of Labor said in informal guidance.

    The QDIA regulations do not establish fixed income or equity exposures necessary to satisfy the requirement for a mix within a QDIA, but an investment fund or product with zero fixed income would not qualify as a QDIA.

    Hybrids: The Next Generation Of Qdia

    Alternative Investment Options | Should You Go for them? | ET Money

    Qualified Default Investment Alternatives are a fairly recent invention but have already become a central component of the corporate defined contribution retirement system. Although target date funds have been the most popular choice to date, recently-introduced hybrid forms of QDIA represent a notable new variation.

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    Qdia Q& a: A Resource For Plan Sponsors

    A qualified default investment alternative, or QDIA, is intended to encourage investment of employee assets in appropriate vehicles for long-term retirement savings. This Q& A will help you understand how selecting QDIAs that comply with the Department of Labor regulations can reduce fiduciary liability for plan sponsors and help participants save for retirement.

    What If I Dont Have A Qdia

    If after doing your due diligence, your plan doesnt have a QDIA, you have a couple of options. You can determine whether an investment option within your plan meets QDIA requirementsor you can talk to a retirement plan provider about establishing one.

    Human Interest makes it easy to save for the future. We combine automatically managed portfolios based on individual risk profiles to help small businesses and their employees achieve their retirement goals. Refer to our Investment Philosophy to learn more about our low-cost funds and built-in investment educationor talk with a retirement specialist to learn more.

    Article By

    Wendy Baker, J.D.

    Wendy Baker is Legal Counsel at Human Interest, bringing over 25 years of experience exclusively in the ERISA space, spanning defined contribution plan recordkeeping and administration. She has a J.D. from Case Western Reserve University, is a member of the North Carolina and Ohio Bars, the American Bar Association, and industry groups.

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    How To Evolve Default Options For Retirees In Dc Plans

    Current target-date structures tend to manage competing objectives through trade-offs. Sponsors are generally responsible for determining which target-date design makes sense for their participants, given demographics, behaviors, and fund objectives. This is a challenging task, and while the industry has developed most of the elements of a more-complete retirement solution, they have yet to broadly create more versatile and complete forms of QDIAs. On its own, change occurs slowly, so as an industry, we need to encourage progress by combining these existing components into more useful solutions.

    Navigating The Qdia Notice Requirements

    Solutions
    • Grandfathered protection is available for amounts contributed before December 24, 2007 if the plan was invested in a qualifying stable value investment before the regulation became effective and a transition notice is distributed. However amounts contributed thereafter would need to be placed in a qualifying target-date investment, a risk-based investment, or a managed account QDIA in order for fiduciaries to have protection under ERISA section 404.
    • If the plan used a money market account before the regulation became effective, fiduciaries would not receive protection unless the assets in the money market account and newly defaulted money was placed in a QDIA. Even then, the safe harbor protection would only be prospective.
    • Plans that used a default investment that satisfies the requirements for a QDIA before the regulation became effective may continue to use it as the plans QDIA, if the transition notice is given. The safe harbor will only be prospective, beginning 30 days after the notice is given.

    Disclaimer Required by IRS Rules of Practice:Any discussion of tax matters contained herein is not intended or written to be used, and cannot be used, for the purpose of avoiding any penalties that may be imposed under Federal tax laws.

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    Are Managed Accounts A Better Qdia

    The basic premise of a managed account is the construction of a completion portfolio with participants’ defined contribution assets, built around their whole asset profile and individual circumstances. Paper posit that managed accounts, customized at the participant level, have the ability to improve retirement outcomes if designed and implemented appropriately.

    Fiduciary responsibility requires the careful selection of default retirement investments. Benefit advisers can add value with knowledgeable advice on qualified default investment alternatives, including through the use of selection tools.

    Plan Sponsors Approach Target

    Even though the DOL has suggested that selecting a target-date fund with a lifetime income component as a plan’s default investment alternative may be prudent, the protections afforded by ERISA 404 will not apply if the product does not meet all of the QDIA requirements. This means that a plan fiduciary will not be automatically insulated from liability for participants’ investment losses by selecting this investment option as the default alternative.

    The DOL issued an information letter that indicated employer plan sponsors are entitled to use lifetime income products as a part of a prudent qualified default investment alternative , even if the products contain certain liquidity and transferability restrictions.

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    What Is The Risk Not Having A Qdia

    The plans investment fiduciaries will lose some of the protection of ERISA Section 404, assuming the plan is taking advantage of that safe harbor. Without a QDIA, the investment fiduciaries will remain responsible for determining how to invest assets for participants who do not make their own selection.

    Is Your Qdia Increasing Your Fiduciary Risk

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    If a Qualified Default Investment Alternative is supposed to help employees, how can it increase your fiduciary risk? The QDIA is supposed to go under a due diligence screen similar to your other investments. This screen is your fiduciary liability unless you transfer the risk to a financial professional that takes on the risk of its selection, monitoring and replacement. Many financial professionals and the press say that the target date strategy is the most popular. They often then rush to recommend its use. However, what is it and what are the other choices?

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