recognizes the trade-off between capital
appreciation and capital preservation.
Management of the fund is based on the
employee’s age and/or target retirement date. A QDIA must be a mutual fund
managed by either an investment manager, plan sponsor, plan trustee or a
committee made up of employees of the plan sponsor or an investment company.
There
are four types of QDIAs:
1.
A
product with a mix of investments that takes into account the individual’s age,
life expectancy or retirement date. Investment allocations must change over
time to become more conservative with increasing age. Investments, risk
preferences or other factors of an individual participant need not to be
considered. An example of this is an age-based life cycle or targeted
retirement-date fund.
2.
A
product with a mix of investments that has the characteristics of a group of
employees as a whole, rather than each individual. Individual participant ages,
risk preferences or investments need not to be considered. Plan fiduciaries
must consider participant demographics, such as age of the participant
population. An example of this is a balanced fund or risk-based lifestyle fund.
3.
An
investment service that allocates contributors among existing plan options to
provide an asset mix that takes into account the person’s age or retirement
date and changes over time to become more conservative as the person gets
older. The decisions are not required to take into account risk preferences,
investments or other factors of an individual participant. An example of this is
a professionally-managed account.
4.
Designed
to be only a temporary solution, a capital preservation product for the first
120 days of participation after the first elective contribution is made in an
eligible automatic contribution management. Plan sponsors hoping to simplify
administration if workers opt-out of the plan before incurring an additional
tax fee. By the end of the 120-day period, the individual’s account must be
transferred to a long-term QDIA in order to continue the fiduciary safe harbor.
This is also known as a short-term QDIA.
Technically, the short-term QDIA is defined as
an investment that seeks to maintain the dollar value that is equal to the
amount invested, provides a reasonable rate of return, and is offered by a
state or federally regulated financial institution.
The long-term QDIAs are target maturity funds or
models, balanced funds or models (including risk-based lifestyle funds) and
managed accounts.
The grandfathered QDIA is a stable value investment.
The regulation defines it generally as a product “designed to guarantee principal and a rate of return generally
consistent with that earned on intermediate investment grade bonds.”
To
gain a better understanding of the types of QDIAs, here are examples of three
investments that qualify:
Lifecycle/target date
option:
This is an investment fund, model portfolio, or product that is diversified to
minimize the risk of massive losses and is designed to provide varying degrees
of long-term appreciation and capital preservation through a mix of equity and
fixed income exposure based on the employee’s age, life expectancy, or target
retirement date.
Lifecycle
options are constantly monitored and managed to get the best retirement income
and help to offset the opportunity for longevity and inflation. Each of these
options increasingly becomes more conservative as it nears closer to the target
retirement year.
Balanced option: This is an investment
fund, model portfolio, or product that is a diversified mix of investments
designed to provide long-term appreciation and capital preservation based on
the target level risk for the employees as a whole, rather than each
individual.
Different
from lifecycle options, balanced options aren’t automatically reallocated to
become more conservative over time. A fiduciary must review the investment from
time to time to make sure the target level of risk is appropriate for the
employees taking advantage of the plan.
Managed account: This is an investment
service where the investment manager allocates and manages the assets of the
individual’s portfolio. Like lifecycle options, managed accounts are
diversified to minimize the risk of massive losses and also seek varying
degrees of long-term appreciation and capital preservation through a mix of
equity and fixed income securities. This account is based on the employee’s
age, life expectancy or target retirement date. This service might also taking
into consideration the employee’s financial situation, goals and risk
preferences.
One
major difference between lifecycle options and managed accounts is that the
latter usually use a plan’s existing investment lineup. Lifecycle options are
an established portfolio of funds.
In
order for a person to qualify for a QDIA safe harbor protection, these
conditions must be satisfied:
· The individual and their
beneficiaries must have had the opportunity to direct the investment of the
assets in their accounts, but did not do so.
· The individual’s assets
must be invested in a QDIA, as defined by the Department of Labor.
· The individual and their
beneficiaries must have the opportunity to direct investments out of a QDIA as
often as other plan investments, but not less often than once per quarter.
written by Bradford Richdale
copyright Brad Richdale TM 2010 all rights reserved
