Auto-enrollment has been proven to be effective in raising participation rates in 401(k) plans. As a result, it's been pretty widely adopted across the country, especially in mid- to larger plans. Automatic enrollment creates a situation where many employees fail to make an investment election on their own. This creates a need for a default investment in the lineup. A cash fund has no risk, but also has no growth potential. Other investments may have income or growth potential, but expose you, as plan sponsor, to fiduciary risk by making the decision to direct such contributions. For this reason, industry regulators established what has become known as a Qualified Default Investment Alternative or QDIA.
A QDIA is designed to meet the criteria of a specific regulation - ERISA section 404(c) - which provides you with a safe harbor from fiduciary liability for investment decisions made by your employees in their 401(k) accounts. In other words, if you offer a QDIA as the default investment in your plan, you won't be liable for investment losses related to contributions made on behalf of employees who failed to make their own investment choices.
Under these regulations, a QDIA can either be a target date fund, a balanced fund or a professionally managed account. It's important to note that the selection of one of these needs to reflect the age and income ranges of the employee population as well as your comfort as the plan fiduciary. Don't worry; we're here to help you get this right. It's also important to note that employees must always be able to opt-out of the the QDIA and self-direct their investments should they wish.
Offering a QDIA doesn't alleviate all of the fiduciary liability you have, but it does eliminate your specific risk related to the default investment of the plan when it's used for contributions by employees who enroll but fail to make their own elections. A QDIA makes the idea of offering auto-enrollment more attractive, and that can drive greater plan participation and improve plan cost efficiency.