On October 24th, the DOL issued its final regulation for qualified default investment alternatives, or QDIAs.
Since then, we have been advising plan sponsors, recordkeepers, investment managers, investment advisers and other service providers about how those rules apply to their products and services. In doing that work, we have been surprised by both the complexity and the flexibility of the regulation.
First, let me give you some background. The regulation creates three types of long-term QDIAs. Those are commonly called:
- age-based or target maturity investments.
- risk-based, or balanced or lifestyle, investments
- managed accounts.
The regulation goes on to say that the investment must either be a mutual fund or must be managed by a fiduciary: registered investment adviser (RIA), a bank or trust company, or the plan sponsor.
You might think that a mutual fund is the vehicle for fulfilling the first two categories, that is, the age-based and risk-based investments. You might also think that, for the managed account alternative, you would use an RIA investment manager. However, that is not always the case—or, better put, there is more to the definitions than is first apparent.
For example, the definitions of the first two categories can be satisfied through the use of asset allocation models, if the plan sponsor, a bank or trust company, or an RIA will manage the asset allocation models as a fiduciary.
In addition, an investment manager can provide its services through either the age-based or risk-based alternative. In other words, investment managers are not limited to providing managed accounts. As an example, an investment manager could, through a collective trust, a common trust, or a pooled fund, create accounts that either grow more conservative as a participant ages or that are designed to target a level of risk that is appropriate for the participant population as a whole. In those cases, the vehicle managed by the investment manager could satisfy the definition of the age-based approach or the definition of the risk-based or balanced approach.
Because the QDIA regulation is, in many ways, definitional, there are opportunities to be creative, yet legally correct, in the application of those rules.
As a result, investment providers and advisers, as well as plan sponsors, are given flexibility by the regulation to use a variety of investments and services to match the needs of employees for qualified default investment alternatives. However, to maximize that opportunity, an in-depth understanding of the regulation is required.
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.