Is there a devil in your 401k investment menu?

target date Investment menu

Could your 401k QDIA actually be a liability?

If an investment advisor or broker recommended an investment with a 3 month track record for your employees would you take it? That is what many sponsors did when Qualified Default Investment Alternatives as the default choice for their employees. While Department of Labor regulations allow fiduciaries to protect themselves from liability (avoid fiduciary breach) when selecting investments, the devil is in the details. If you took it, be sure your investment policy or another process document allows for the decision. If not you may find yourself answering to a judge (Google “Scott Simon ABB” or check out Michael Barry’s Plan Advisory Services ABB vs. Tussey)

A QDIA Might Reduce (or Increase) Your Fiduciary Liability

The 2006 Pension Protection Act provided sponsors A Qualified Defualt Investment Alternative (QDIA. This is a default investment option chosen by a plan fiduciary for participants who fail to make an election regarding investment of their account balances. As a sponsor, you may be faced with investment choices based on:

  • Projected date of retirement that invests more conservatively over time
  • Strategic mix of stocks and bonds, based on one’s tolerance for market risk
  • Do-it-yourself

Research shows that employees generally that do it yourself fare far worse than those that use a professional to come up with their investment mix. The projected date of retirement approach has become the most popular choice when plan sponsors choose to use auto enrollment. However, if you pick the default choice from your provider (especially if it is their proprietary one) you may have gotten yourself into trouble. The DOL has clarified that you are held responsible for showing wisdom in how you select and monitor that and any other choice on your menu. Moreover, it might be harmful to your employees in that it fails to consider anything else about them.

DOL Clarifies The Detail to Reduce Your Fiduciary 401(k) Liability

Plan fiduciaries should document the selection and review process, including how you reached decisions about individual investment options. The Department of Labor, clarified your monitoring responsibilities in 2013 (Google “tips for fiduciaries February 2013”). I have highlighted a few below.

  • Establish a process for comparing and selecting investments.
  • Establish a process to review the investments and their fees and expenses.
  • Document the process.

72% of DOL investigations netted a total of $1.27 billion dollars.1

Bottom line, if you are working with a platform provider that allows only proprietary investments you will always be at risk. The risk is that if those investments do not pass prudent screens and you don’t change providers, you could be part of the 72% of DOL investigations that netted $1.27 billion dollars.

Are you working with a fiduciary advisor?

I recommend working with an ERISA 3 (21) investment advisor that focuses on retirement plans. As an ERISA 3 (21) investment advisor we have access to monitoring tools to help you assess your investments. I believe your employees are best served with a low-cost, globally diversified, strategic approach along with the guidance of a retirement advisor. This allows a tailored approach based on factors such as, how much retirement income does the participant need and how much can he/she save. Let us know your approach to monitoring or if you need a second look, email me,

1EBSA Achieves Over $1.2 Billion in Total Monetary Results in Fiscal Year 2012. EBSA Fact Sheet.

(1) The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. (2) Securities and Advisory services offered through LPL Financial, a Registered Investment Advisor. Member FINRA/SIPC. (3) The LPL Financial Registered Representatives associated with this site may only discuss and/or transact securities business with residents of the following states: AZ, IN, IL, MI


About Envision Wealth Architects

Architecting and encouraging your vision of wealth and retirement planning. We help individuals and families design and build their financial life plan based on their unique values. We translate your vision of financial independence into a customized financial plan. We can help coordinate a team of professionals, such as legal and tax, to help you enjoy the construction. We guide retirement, tax, investment, insurance and wealth transfer planning... What’s your vision?™
This entry was posted in 401k Monitoring, Fee monitoring, Investment Monitoring, Investment selection, Uncategorized and tagged , . Bookmark the permalink.

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