This Advisor Brief is part of a “QDIA Policy Kit” designed to help you systematically educate your clients on critical issues that will differentiate you from your competition. While these investments can hold a majority of plan assets, many plans fail to have an objective process in place to guide the fiduciaries in fulfilling their duty to prudently select and monitor the plan’s QDIA. If a plan sponsor cannot demonstrate it acted prudently, it risks losing the broad protection against liability for investment-related losses afforded by the QDIA rules. Moreover, if the plan fails to select an appropriate QDIA, based upon participant demographics, market conditions and/or plan design, defaulted participants will be less likely to be capable of securing a timely and dignified retirement—a fundamental metric of a plan’s success. By following the steps below and using the materials contained in the Kit, you can develop a consistent and repeatable solution to protect your plan sponsors and enhance your value in an increasingly competitive marketplace.

STEP 1: BECOME FAMILIAR WITH THE PLAN SPONSOR GUIDE

“QDIA Policy Guide: Best Practices for Plan Sponsors” is designed to educate plan fiduciaries on some of the basic duties of selecting and monitoring QDIAs. It contains two parts that can be used together or on a standalone basis.

Part I Review the fundamentals of QDIA selection, and
Part II Special Considerations for examining Target Date Funds (TDFs)

The section on TDFs incorporates the most recent DOL guidance on the most popular QDIA type used by plan sponsors. We leave it up to you to decide what information is most appropriate for a particular client or prospect based upon their sophistication, preferences, etc.

There are two distinct themes that appear throughout the Plan Sponsor Guide: 1) plan fiduciaries should document the QDIA selection and monitoring process; and 2) where they lack the expertise to make well-informed decisions, they are required to hire outside experts. The Supporting Materials described below provide you with an actionable approach to each of these calls to action.

STEP 2: REVIEW THE PLAN’S CURRENT QDIA STRATEGY

Selecting an appropriate QDIA requires a two-step approach: first, plan fiduciaries must demonstrate that the type of QDIA is appropriate for their plan; and second, they must exercise prudence in selecting and monitoring a QDIA within the chosen type. The chart entitled “Qualified Default Investment Alternatives” provides you with a quick reference tool to help plan fiduciaries chose among the three types of QDIAs. Once they determine that a particular type of QDIA is an appropriate choice for their plan, you can introduce the corresponding “QDIA Policy” and help them document the basis for their selection of a particular QDIA.

STEP 3: INCORPORATE A QDIA POLICY

There are three QDIA Policies representing each QDIA type:

1. A Group-Based Investment Product (e.g. balanced fund);
2. An Individually-Based Investment Service (e.g. professionally managed account); and
3. An Individually-Based Investment Product (e.g. life-cycle or target date fund).

It is important to note that the QDIA Policies are designed to serve as samples to help you and your clients navigate the selection process. You should use the sample QDIA Policy that represents the type chosen by the plan fiduciaries in the previous step and help them complete the sample policy based upon the information determined to be relevant to their particular plan. If the plan fiduciaries elect to adopt the sample QDIA Policy, there is a place for the Responsible Plan Fiduciary to sign and date the document in the left-hand margin.

STEP 4: MONITOR QDIA AND REVIEW AS APPROPRIATE

The QDIA should be monitored in a way that comports with the plan’s investment policies (e.g., quarterly, compared against peer groups, etc.), and the QDIA type should be revisited periodically to ensure it continues to be an appropriate choice for the plan. You may consider re-enrolling the plan if the process described above results in a new QDIA type or the selection of a different QDIA to ensure the plan’s participants benefit from the enhanced QDIA selection process. You may also consider suggesting that the plan periodically re-enroll participants thereafter to ensure that the fiduciaries receive the maximum protection under the QDIA rules.

One Franklin Parkway
San Mateo, CA 94403-1906
(800) 530-2432
franklintempleton.com