The Markets October 9, 2009

PANC 2009: What to Consider When Selecting a QDIA

The selection of a qualified default investment alternative is one of the most important plan sponsor investment decision because of how many participants it may affect.

Reported by

Rebecca Moore

So said Brett Howell, wealth management advisor with The Howell & Sharp Group at Merrill Lynch, as he opened up a panel discussion at the PLANADVISER National Conference in Orlando, Florida. Advisers should educate plan sponsors about the different QDIA choices, said Howell, and help them find the best option for their plan based on plan demographics.

Presenting findings from fi360, Glenn Dial, vice president at J.P. Morgan, said that if plan participants have a low level of knowledge and low level of engagement, target-date funds are usually the best QDIA; risk-based funds are for participants with a little more knowledge and that are a little more engaged; and managed accounts work for participants with above average knowledge and above average involvement.

A single fund QDIA, such as a balanced fund, is only appropriate if the participant demographic is all the same, according to Jason Roberts, partner, Reish Luftman Reicher & Cohen. When helping participants with fund selections, advisers should consider more than just their age or knowledge, if that information is available, according to Roberts. As an example, he noted that a participant expecting a significant inheritance can afford to be more aggressive, even if older.

John Upham, president, SageView Advisory Group, pointed out that there are really two decisions for the sponsor: which type of QDIA and which fund provider. Advisers can add value by helping the sponsor with other aspects of his fiduciary role, such as benchmarking funds, providing ongoing monitoring, and showing prudent selection, he added.

Roberts said that if a plan sponsor wants to use a non-QDIA default investment for its plan, the adviser should explain the fiduciary risk. Advisers should review the non-QDIA default selection more frequently to make sure it remains appropriate for the plan. While stable value funds and others are still allowed as plan defaults, they do not carry the same protection as a QDIA and must be justified, Upton added.