Wednesday, November 7, 2007

What is a QDIA? and why should I care?

QDIA stands for ‘qualified default investment alternative”. The recent determination of what investments qualify as QDIAs opens the door for automatic enrollment of many Americans into their corporate 401K plans. Nearly 20% of workers do not enroll in their corporate plans, many times missing out on company matching and the ability to accumulate funds for retirement.

Under the Pension Protection Act of 2006, employers can now automatically enroll their employees in the company’s 401(k) plan. However firms have been waiting on the ruling by the U.S. Department of Labor regarding what meets the requirement to be QDIAs before moving forward.

Employers can now direct the funds of automatically enrolled employees to balanced mutual funds, lifecycle / target-date funds, and managed accounts. Stable value funds and guaranteed insurance contracts (GICs) no longer meet the criteria to serve as QDIAs in 401K plans. Most financial planners view this change in a positive light; balanced and lifecycle funds are far more appropriate for 401K retirement plans then fixed rate investments focused on capital preservation.

Qualified Approval