Qualified Default Investment Alternative (QDIA)

Lesson

Qualified Default Investment Alternative (QDIA) under the Employee Retirement Income Security Act (ERISA) is an investment option that plan sponsors can use as a default for participants who do not make an investment election. It is designed to provide a balanced, long-term investment strategy for participants and offers certain protections for plan fiduciaries.

Practice Question #1

Which of the following is a characteristic of a Qualified Default Investment Alternative (QDIA)?

A) It is only available to plan sponsors.

B) It is designed to provide a balanced, long-term investment strategy.

C) It is only available to plan participants who make an investment election.

D) It is not subject to ERISA regulations.

Select an option above to see an explanation here.

A) QDIAs are available to plan participants, not just plan sponsors. B) QDIAs are designed to provide a balanced, long-term investment strategy for plan participants. C) QDIAs are default investments for plan participants who do not make an investment election. D) QDIAs are subject to ERISA regulations.

Terms

ERISA:: Employee Retirement Income Security Act, a federal law that sets minimum standards for pension plans in private industry.
Fiduciary:: A person or entity responsible for managing another party's assets, such as a plan sponsor managing a retirement plan.
QDIA:: Qualified Default Investment Alternative, an investment option that can be defaulted for participants who do not make an investment election.
Plan Sponsor:: The entity responsible for establishing and maintaining a retirement plan.
Plan Participant:: An individual who is enrolled in a retirement plan.
Investment Election:: The process by which a plan participant chooses how their contributions will be invested.
Default Investment:: The investment option is automatically selected for plan participants who do not make an investment election.
Fiduciary Protection:: The legal protection afforded to plan fiduciaries who meet certain requirements under ERISA.

Practice Question #2

Which of the following investment options can be used as a QDIA?

A) Target Date Funds

B) Individual Stocks

C) Real Estate Investment Trusts (REITs)

D) Cryptocurrencies

Select an option above to see an explanation here.

A) Target Date Funds can be used as a QDIA. B) Individual Stocks are not typically used as a QDIA. C) Real Estate Investment Trusts (REITs) are not typically used as a QDIA. D) Cryptocurrencies are not typically used as a QDIA.

Historical Example

In 2006, the Pension Protection Act was passed, including provisions encouraging plan sponsors to adopt QDIAs as default investment options. This was in response to concerns that many plan participants were not adequately diversified in their retirement investments, leading to increased risk and potential losses.

Practice Question #3

What is the primary purpose of a QDIA?

A) To provide a high-risk investment option for plan participants.

B) To provide a default investment option for plan participants who do not make an investment election.

C) To provide a guaranteed rate of return for plan participants.

D) To provide a tax-advantaged investment option for plan participants.

Select an option above to see an explanation here.

A) QDIAs are designed to provide a balanced, long-term investment strategy, not a high-risk option. B) The primary purpose of a QDIA is to provide a default investment option for plan participants who do not make an investment election. C) QDIAs do not provide a guaranteed rate of return. D) QDIAs are not specifically designed to provide tax advantages.

Real-World Example

A company offers a 401(k) plan for its employees. The plan sponsor selects a target date fund as the QDIA for the plan. When new employees enroll in the plan but do not make an investment election, their contributions are automatically invested in the target date fund corresponding to their expected retirement date.