3 New QDIA Recommendations Approved by ERISA Advisory Council

An advisory body for the Department of Labor voted on Thursday to send three proposals to the DOL to increase participant awareness of and retirement income use of qualified default investment alternatives in defined contribution retirement plans.

The 2024 Advisory Council on Employee Welfare and Pension Benefit Plans, commonly known as the ERISA Advisory Council, met on Thursday and Friday to discuss proposals its members had offered in prior meetings, ultimately voting to send several proposals to the DOL.

The meeting was led by Chair Jack Towarnicky, counsel at Koehler Fitzgerald LLC, and Vice Chair Bill Ryan, a partner in and defined contribution team leader at NEPC. The discussion focused on QDIAs’ roles in both the accumulation and decumulation phases of retirement saving.

On Friday, the DOL’s assistant secretary for employee benefits security, Lisa Gomez, and Office of Regulations and Interpretations acting director Jeff Turner, attended the meeting and heard the council’s recommendations.

Unanimous ‘Yes’ Votes

The council first discussed the three proposals and then held a vote, with all in attendance voting “Yes.” The proposals sent to the DOL are as follows:

1. The DOL would issue guidance in the form of a comprehensive “Tips” document or another form to serve as a road map for plan fiduciaries when selecting and monitoring both nonguaranteed and guaranteed retirement income options, inside or outside of a QDIA. For instance, the DOL would provide guidance on how to choose an appropriate target-date fund with an embedded annuity option;
2. The DOL would provide and update guidance to plan fiduciaries on giving participants education and notices regarding their QDIA investments in all phases of plan participation (accumulation, transition and decumulation). The council stated it believes participants need more education on how their default investments are being managed; and
3. The DOL would amend the safe harbor for automatic, involuntary rollovers into individual retirement accounts to allow the use of the same QDIAs available to employer-sponsored plans, rather than the current capital preservation default. This recommendation would provide a safe harbor to fiduciaries to make investment decisions on funds forced out of a retirement plan into an IRA.

The DOL’s reaction at Friday’s meeting was that the first recommendation sounds “overwhelming,” Turner said.

“[It’s] a challenging task, because if we provide tips on drawdown, the insurance industry will object,” Turner said. “If we provide tips only on [selecting] insurance products, then the non-insurance portion of the industry will explode. So the only solution would be to provide tips that cover the entire waterfront, and that can be challenging.”

Gomez also noted that educating participants on retirement income options is challenging because people learn things in different ways—whether that be through a calculator tool, a publication or a video. She asked the council if it had received any testimony from plan sponsors about effective educational tools.

Holly Verdeyen, a member of the council and a partner in and U.S. defined contribution leader at Mercer, said many retirement income solutions include customized participant education support and that as more plan sponsors adopt these solutions, these educational tools will likely be used more.

Revisiting QDIAs in Light of SECURE Reforms

The council had set this year to consider several areas for deeper analysis that led to the recommendations passed Thursday:

• QDIA selection and usage: understanding how plan sponsors choose and implement these investments;
• Decumulation strategies: evaluating the integration of lifetime income components, such as insured or pooled products, and their impact on participant behavior;
• Performance metrics and transparency: defining benchmarks for success and assessing transparency in investment options like target-date funds and collective investment trusts, including their exposure to private equity, annuities and associated fees; and
• Participant disclosures: examining disparities in disclosure requirements for mutual funds versus collective investment trusts.