Fiduciaries Can’t Set It and Forget It – The Challenge of Monitoring the QDIA

Fortunately, steps to create suitable protections are well-established.  At the core of this strategy is having an expressly articulated process for selecting and monitoring the plan structure, investments, and service providers and creating thorough documentation each time a review is conducted.  These activities should be a deliberate effort of every well-run plan.

The risks for not following a structured monitoring and evaluation process are many and, can be very expensive.  A significant number of legal cases focus on the suitability of the investment options available to participants. These cases are increasingly centering on a plan’s Qualified Default Investment Alternatives, or QDIAs.

QDIAs have rapidly grown to become the most significant component of a majority of defined contribution investment menus. Target Date Funds now represent some 40% of all defined contribution assets and in many cases over 80% of new flows.  Given their attributes, Target Date Funds are the most popular choice for a QDIA.

Selection of the suite of funds appropriate for the participants in a particular plan is a duty that fiduciaries must implement with appropriate care – evaluating fees, investment policies, glidepaths, management capabilities, and more vis a vis the participant demographics in the plan.  To that end, there are many tools and experienced professionals available to help plan sponsors through this process.

While target date funds are an efficient means of implementing QDIAs, they aren’t a ‘set it and forget it’ solution.  Fiduciaries have an important role and are responsible for monitoring those investments for continued suitability, even as plan needs and marketplace dynamics change.

This responsibility is important enough that in 2013 the Department of Labor (DoL) issued an advisory memo (a copy can be seen here (target-date-retirement-funds.pdf (dol.gov)) for plan fiduciaries on best practices in meeting their duty of care.  This memo outlines the minimum “suggested” elements one must undertake to select and monitor these strategies – each element of which should be documented in terms of approach and activity, and this done on a regular basis.

How is a plan sponsor to manage this process?  The DoL memo specifically suggests that plan sponsors “take advantage of available sources of information to evaluate the TDF and recommendations you received regarding the TDF selection.”  They go on to note that there are an increasing number of commercially available sources for information and services to assist plan fiduciaries in their decision-making, review, and due diligence processes – creating the expectation that plan sponsors and their agents should avail themselves of appropriate resources or have a well-documented reason why they do not.

To assist plan fiduciaries with these duties, Door recently introduced a robust TDF question set to its due diligence platform.  Door enables participants in the due diligence process an efficient way to exchange information digitally.  Through the platform, fiduciaries can quickly gather crucial but hard to obtain information on a QDIA they should consider including:

Detailed elements of glidepath construction, including assumptions on investor behavior and use of a model participant

The underlying funds, asset classes, and changes in strategic and tactical allocations for a QDIA

The cascade of fees, expense ratios across vintages, and details on the calculation of those expenses

The construction and use of portfolio benchmarks

Door was designed to support ongoing monitoring – alerting users to changes implemented by the asset manager.  Additionally, Door makes the documentation process easy, allowing users to create permanent copies of the factors evaluated.  Door is available to qualifying plan sponsors and their consultants free of charge.

The rigors of due diligence in selection and monitoring investments in the ERISA fiduciary markets will only increase.  It is essential to establish a well-documented process for review if you don’t already have one.  If you would like to explore how Door can help you meet your fiduciary obligations, please visit our website at www.guidetodoor.com or contact one of our client service representatives for a demonstration of the platform.