Using Target Date Funds as a QDIA

The Pension Protection Act of 2006 (PPA) encouraged employers to adopt automatic enrollment features for their participant‐directed plans by providing a new type of fiduciary liability relief for “default investments,” or Qualified Default Investment Alternatives (QDIAs).

A QDIA is used when a participant fails to make his or her own election. An investment must have specific qualifications to be considered a QDIA. Importantly, a QDIA’s asset allocation strategy need only take into account participant age, and does not need to consider an individual participant’s risk tolerance or other investment assets.

The three general categories that may be used for a QDIA are life‐cycle or target date funds (TDFs), balanced funds, or managed accounts. Target retirement date funds have overwhelmingly become the favored QDIA choice among fiduciaries.

Target date mutual fund assets grew to $763 billion by December 31, 2015. In 2015, $69 billion in net new monies were invested into the funds. This was an all-time new asset flow high.

While target date strategies have garnered an increasingly significant proportion of retirement assets since they were approved as QDIAs by PPA, there may be value in offering a balanced fund within the lineup as well. A balanced fund will provide exposure to both stocks and bonds, and typically offers a static 60% stock/40% bond allocation. This investment option might appeal to participants who are not comfortable with a TDF and want allocation to both stocks and bonds within one vehicle.

Read 4 Steps to Building an Optimal Retirement Plan Lineup for Participants and download the Fiduciary Checklist for Target Date Fund Decisions to learn more. If you have any questions, or would like to begin talking to a retirement plan advisor, please get in touch by calling (800) 388-1963 or e-mail us at hbs@hanys.org.

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