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Selecting Your Retirement Plan Default Investment

Lumin Client Asks: Our 401(k) plan has had the same default investment for several years. We want to make sure it is still a suitable choice for our plan. What should we consider when choosing a default investment?

Lumin Answers: First, you should decide if you want a default investment that meets the pension law’s requirements for a “qualified default investment alternative,” or QDIA. Using a QDIA in conjunction with automatic enrollment can help you secure liability protection for the investment of employees’ account assets when they have been given the opportunity to direct their investments but have failed to do so.

Under U.S. Department of Labor regulations, a QDIA must be a mutual fund or managed by an investment manager, plan trustee, or plan sponsor who is a named fiduciary and generally cannot invest employee contributions in employer securities. Options include:

 

  • Life-cycle funds, targeted retirement date funds, and similar products that take into account the individual’s age or retirement date
  • Balanced funds and similar products with a mix of investments that take into account the characteristics of the group of employees as a whole, rather than each individual
  • Capital preservations products, but only for the first 120 days of plan participation

Many plan sponsors have selected target date funds as their plan’s QDIA. Recently, the U.S. Government Accountability Office (GAO) solicited feedback regarding why sponsors select target date funds over other QDIAs. Sponsors completing the GAO’s questionnaire said that they generally looked for asset diversification, ease of participant understanding, limited fiduciary liability, and fit with participant characteristics when selecting a default investment.

In its report, the GAO notes that some plan sponsors forgo the fiduciary relief associated with using QDIAs and instead select a non-QDIA default investment, such as a money market fund or a stable value fund. The GAO notes that sponsors may do this for a variety of reasons. For example, a sponsor may have few employees and decide to require participants to make an investment election.

There are many factors to consider in choosing a suitable default investment. If you would like assistance in choosing the best default investment for your plan, please contact us.

To learn more about choosing default investments, contact a Lumin Financial advisor.

Disclosure:  Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific investment, or investment strategy. Investments involve risk and are not guaranteed.  Information has been gathered from sources believed to be reliable, but cannot be represented as accurate or complete.  Before investing, you should consult your investment, tax, or legal advisor.

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Investment advisory services offered through Lumin Financial LLC, which is an independent Registered Investment Adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed on this site.