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GAO Says Clearer QDIA Guidelines Would Help Ease Sponsors’ Fiduciary Concerns

Posted by Duane Thompson, AIFA®, Senior Policy Analyst, fi360, Inc. on October 05, 2015

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Although federal policymakers still maintain that Qualified Default Investment Alternatives (QDIAs) have been a huge success in drawing more employees into defined contribution plans, the independent auditing arm of the government says more could be done to improve plan fiduciaries’ understanding of the criteria used to select investment options.

In August the Government Accountability Office reviewed QDIA regulations, in addition to three recent industry surveys, in writing the latest in a series of studies on improving defined contribution plans.  The GAO also interviewed 96 stakeholders, analyzed responses to a questionnaire from 227 plan sponsors, and later reached out to the Department of Labor for a response to its report.  The report was later submitted to Sen. Elizabeth Warren, D-Mass.

Plan sponsors, according to the GAO, generally monitor default plan investments to periodically ensure alignment with plan objectives and investment strategies.  However, at times they may be reluctant to change options in a QDIA from fear of generating additional fiduciary liability.  The report cited one sponsor’s investment committee that decided against the change even though it believed that while its initial selection decisions had been prudent, participants would have been better served by a new QDIA.

Some sponsors, responding to a GAO questionnaire, said it was difficult to find a QDIA that best fit the age range of a plan’s workers, particularly when a company has varied demographic profiles.  Others were troubled by what they perceived to be a “one-size-fits all”  solution based on the variety of options available under the safe harbor – balanced funds, custom TDFs, and managed account services – that from their perspective appeared to be a sliding scale of fiduciary protection.

One sponsor also noted that the investment mix for a single participant using different QDIA options, such as a balanced fund, off-the-shelf target-date fund, customized TDF, and a managed account, could end up with portfolios with significantly different equity and bond mixes.

According to the GAO, part of the confusion for plan sponsors has been the lack of clear guidance from the DOL.  Agency guidance, according to stakeholders, offers very little in the way of specific suggestions, focusing primarily on the ages of participants as the principal basis for selecting a QDIA.  The one exception to the age requirement, the GAO noted, is DOL guidance stating sponsors considering a balanced fund “are not required to take into account the age of an individual participant,” but rather focus on the entire worker population of the company.

Readers of this blog will not be surprised to learn that the surveys confirmed that the majority of employers sponsoring 401(k) plans use a TDF as their default option.  Plan sponsors who completed a GAO questionnaire also responded that they generally looked for asset diversification, ease of participant understanding, a way to minimize fiduciary liability, and as a good fit with participant demographics in making their selection.

Perhaps more surprising was that auto enrollment and offering a default investment (excluding money markets and stable value funds) by small plans had increased threefold since 2009, catching up with the large plans in raw numbers, so that by 2013 each group had approximately 12,500 plans with auto enrollment and QDIAs.

DOL Assistant Secretary Phyllis Borzi responded to the GAO report favorably, stating that the agency welcomed the GAO’s suggestions “to help produce greater retirement savings.”  Ms. Borzi added that the agency will consider whether a public comment process or research project would help the DOL assess whether additional clarification was needed.

- See more at: http://www.gao.gov/products/GAO-15-578

-- DOL’s “What to Remember When Choosing Target Date Funds” at:  http://www.dol.gov/ebsa/pdf/fsTDF.pdf

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