What is a Qualified Default Investment in a 401k Plan?
Understanding Qualified Default Investments
When you’re automatically enrolled in a 401(k) plan, your contributions often go into a Qualified Default Investment Alternative (QDIA). Think of a QDIA as a starting point investment to help you begin saving for retirement, even if you haven’t made a specific investment choice yourself.
Why Opt for a QDIA?
A QDIA is designed to balance the risk and reward based on a variety of factors, including when you might retire. Usually, it’s a mix of stock and bond investments that automatically adjust over time.
Characteristics of QDIAs:
- Diversified holdings: typically offers a mix of different asset classes.
- Automatic rebalancing: adjusts the investment mix as you near retirement.
- Management: professionally managed, offering a hands-off approach for participants.
Types of QDIAs:
- Target-date funds: Automatically adjusts the asset mix as the target retirement date approaches.
- Balanced funds: Keeps a fixed asset allocation between stocks and bonds.
- Managed accounts: Personalized based on individual characteristics like age and risk tolerance.
- Capital preservation funds: Used for shorter periods, particularly for the first 120 days of participation.
Here’s a snapshot of what a default investment might entail:
| Type | Asset Allocation | Management Style |
|---|---|---|
| Target-date fund | Glide path to less risk over time | Professional |
| Balanced fund | Fixed ratio of stocks to bonds | Professional |
| Managed account | Personalized to the investor | Professional |
| Capital preservation | Mostly cash or stable value investments | Professional |
We focus on ensuring QDIA options provide a prudent balance for employees who do not wish to, or can’t, make investment decisions on their own.
Remember, while QDIAs are a default, employees can opt for different investments at any time to suit their unique retirement goals.