A "Default Investment" in the context of the 401k industry refers to the investment option that a participant's contributions will automatically go towards if they do not actively choose an investment option for their 401k plan.
The Pension Protection Act of 2006 introduced the concept of Qualified Default Investment Alternatives (QDIAs). A QDIA is a specific type of default investment that offers plan sponsors liability protection for the investment outcomes of participants who do not make active investment elections.
QDIAs generally include:
- Target-date funds (TDFs): These funds adjust the allocation of investments from more aggressive to more conservative as the target retirement date (usually the year in the fund's name) approaches.
- Balanced funds: These funds invest in a mix of stocks and bonds with the aim to achieve a balance of income and growth.
- Managed accounts: These are investment services where a professional manager adjusts the allocation of assets over time based on the participant's age, risk tolerance, and other factors.
The Department of Labor (DOL) has provided guidelines for the selection and monitoring of QDIAs, and plan sponsors are required to notify participants of their rights and the circumstances under which their assets may be invested in a QDIA.
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