QDIA PRACTICES CHECKLIST

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1 QDIA PRACTICES CHECKLIST PLAN SPONSOR: PLAN NAME(S): RECORDKEEPER: ADVISOR: ADVISOR GUIDELINES FOR RECOMMENDING QDIAS OVERVIEW: A common question asked by plan sponsors is: How do I select a qualified default investment alternative (QDIA) for my retirement plan? While the specific answers are spread out across numerous regulations, the purpose of these guidelines is to provide a summary view of what s important to both you and the plan sponsor with respect to the QDIA regulations. The checklist below goes into all of the additional, relevant details. HISTORY: The Pension Protection Act of 2006 (PPA) encourages employers to adopt automatic enrollment features for their participant-directed plans. Further, for any participant who doesn t make an investment decision, if the employer invests these assets in an investment that meets the QDIA rules, PPA provides a new type of fiduciary liability relief for these default investments. This fiduciary relief states that participants who are defaulted into a QDIA are responsible for their passive decision, or negative election, to invest in this specific investment option. However, the preamble to the DOL s final regulation on QDIAs states that the plan fiduciary continues to have the obligation to prudently evaluate, select and monitor any investment option that will be made available to the plan s participants, including any option that is used as a default investment for a plan with an automatic enrollment feature. In other words, the plan sponsor remains responsible for ensuring that the QDIA, just like any other option in the plan s investment menu, is a prudent investment choice. These guidelines and the attached checklist can assist you in supporting the plan sponsor with this responsibility.

2 WHAT TYPES OF INVESTMENTS QUALIFY AS QDIAS? Following the enactment of the PPA and the issuance of the DOL s final regulations on QDIA, which is incorporated into ERISA 404(c)(5), * many 401(k)s and other types of participant-directed plans started considering QDIAs as default investments that are more appropriate than money market or other stable-value investments in helping participants meet their long-term retirement planning goals. Three Types of Investments Qualify as Long-Term QDIAs: 1. Managed Account 2. A Life-Cycle or Target- Retirement- Date Fund 3. Balanced Fund Definition Investment management service made available by the plan fiduciary that allocates contributions among existing plan options. Takes into account the participant s age, target retirement date or life expectancy. A diversified investment fund, product or model portfolio (for example, a fund of funds ) designed to provide varying degrees of long-term appreciation and capital preservation. A single fund, product, or model portfolio with a target level of risk appropriate for all participants. Asset-Allocation Decisions Decisions may be based solely on age. Does not need to take any other participantspecific characteristics into account, such as risk tolerance, investments, other assets or preferences. Decisions not required to take into account an individual participant s risk tolerance, investments or other preferences. Decisions not required to take into account the characteristics of any individual participant. Does Asset Allocation Change Over Time?, will change over time and become more conservative as the participant ages., must become more conservative over time based upon the participant s age, target retirement date or life expectancy.. Asset allocation is generally static. Plan fiduciary will need to monitor the option on an ongoing basis to ensure that the risk characteristics take into account the plan s group of employees as a whole. * Because the QDIA rules are incorporated into 404(c)(5), plan sponsors and plan advisors should note that if a plan does NOT comply with 404(c)(5), the plan may have a default fund, but it will NOT have the QDIA fiduciary protection from investment losses if a participant sues. HOW CAN THIS RESOURCE HELP ME? While there are many sections and subsections that are required to meet the definition of QDIA, there are only six (6) primary requirements. The most critical item for advisors to pay specific attention to is #5 on the following page participants must have the opportunity to transfer out of the QDIA at least once every three months, and the transfer would not subject them to any surrender fees or expenses. What this means is that plan sponsors must understand the following for any investment that is used as a QDIA: Transferring capabilities Any restrictions All fees LPL FINANCIAL 2

3 Most of the other five requirements are relatively obvious to experienced plan advisors. In addition, many provider platforms also have some of these built in. Plan advisors are knowledgeable about each of the items below and will be easily able to identify whether any additional focus and attention is needed. The below checklist goes into greater detail about each of these six requirements: 1. The assets are invested in a way that meets all of the QDIA rules and regulations. 2. Participant has the opportunity to direct the investment of the assets but did not choose to do so. 3. Participant is provided with notice that meets the QDIA requirements. 4. Plan must provide participant with any additional material relating to investing in the QDIA (e.g., a prospectus). 5. Participants have the opportunity to transfer out of the QDIA at least once every three months, and the transfer would not subject them to any surrender fees or expenses. 6. The plan offers a broad range of investment choices under 404(c) most plans today meet this requirement; i.e., the plan offers at least three investment choices that meet certain standards with regard to diversification and risk-andreturn characteristics. CHECKLIST OF ALL THE QDIA REQUIREMENTS: The following checklist lists the six primary requirements listed above, including subsections, and is in the language of the actual requirements for QDIAs, along with specific references to the DOL regulation where that requirement can be found. 1. Assets are invested in a QDIA that meets the definition in c-5(e) c-5(c)(1) and c-5(e) a. Does not hold or permit the acquisition of employer securities, except under certain circumstances c-5(e)(1) b. Permits the transfer of assets from the QDIA to any other investment alternative available under the plan, subject to the criteria in c-5(c)(5) c-5(e)(2) c. The QDIA is (i) managed by an investment manager [within the meaning of ERISA section 3(38)], a trustee of the plan, or the plan sponsor who is named fiduciary, or (ii) is an investment company registered under the Investment Company Act of 1940, or (iii) is an investment product or fund that meets certain criteria c-5(e)(3) LPL FINANCIAL 3

4 d. An investment fund product, model portfolio or investment management service that applies generally accepted investment theories and satisfies the following: c-5(e)(4) i. An investment product, fund or model portfolio that is diversified so as to minimize the risk of large losses and that is designed to provide varying degrees of long-term appreciation and capital preservation through a mix of equity and fixed income exposure based on the participant s age, target retirement date or life expectancy. Such products and portfolios change their asset allocations and associated risk levels over time with the objective of becoming more conservative with increasing age (e.g., life-cycle or targetedretirement-date funds) c-5(e)(4)(i) ii. An investment product, fund or model portfolio that is diversified so as to minimize the risk of large losses and that is designed to provide long-term appreciation and capital preservation through a mix of equity and fixed income exposures consistent with a target level of risk appropriate for participants of the plan as a whole (e.g., balanced funds) c-5(e)(4)(ii) iii. An investment management service that allocates the assets of a participant s individual account to achieve varying degrees of long-term capital appreciation and capital preservation through a mix of equity and fixed income exposures, offered through investment alternatives under the plan, based on the participant s age, target retirement date or life expectancy. Such portfolios are diversified so as to minimize the risk of large losses and change their asset allocations and associated risk levels for an individual account over time, with the objective of becoming more conservative with increasing age c-5(e)(4)(iii) LPL FINANCIAL 4

5 2. The participant or beneficiary on whose behalf the investment is made had the opportunity to direct the investment of the assets in his or her account but did not direct the investment of the assets c-5(c)(2) 3. The participant or beneficiary on whose behalf an investment in a QDIA may be made is furnished a notice that meets the requirements of c-5(d) c-5(c)(3) a. The notice must be provided either (i) at least 30 days in advance of the date of plan eligibility, or at least 30 days in advance of the date of any first investment in the QDIA, or (ii) on or before the date of plan eligibility, provided the participant has the opportunity to make a permissible withdrawal c-5(c)(3)(i) b. The notice must also be provided within a reasonable period of time of at least 30 days in advance of each subsequent plan year c-5(c)(3)(i) c. The notice shall be written in a manner to be understood by the average plan participant and shall include the following: c-5(d) i. A description of the circumstances under which assets may be invested in a QDIA and, if applicable, information regarding elective contributions c-5(d)(1) ii. An explanation of the right to direct the investment of assets in an individual s account c-5(d)(2) iii. A description of the QDIA, including a description of the investment objectives, risk-and-return characteristics, and fees and expenses c-5(d)(3) LPL FINANCIAL 5

6 iv. A description of the right of the participants and beneficiaries to direct the investment of the assets to any other investment alternative under the plan, including a description of any applicable restrictions, fees or expenses in connection with such transfer c-5(d)(4) v. An explanation of where the participants and beneficiaries can obtain investment information concerning the other investment alternatives available under the plan c-5(d)(5) 4. A fiduciary provides the participant or beneficiary the material set forth in 404c-1(b)(2)(i)(B)(1)(viii) and (ix) and 404c-1(b)(2)(i)(B)(2) relating to a participant s or beneficiary s investment in a QDIA c-5(c)(4) Refer also to 404c-1 ERISA Section 404(c) Plans, and 404a-5 Fiduciary for Disclosure in Participant-Directed Individual Account Plans 5. Any participant or beneficiary on whose behalf assets are invested in a QDIA may transfer, in whole or in part, such assets to any other investment alternative available under the plan with a frequency consistent with that afforded to a participant or beneficiary who elected to invest in the QDIA, but not less frequently than once within any three-month period; and unless otherwise permissible under the rule, shall not be subject to any restrictions, fees or expenses c-5(c)(5) 6. The plan offers a broad range of investment alternatives within the meaning of c-1(b)(3) c-5(c)(6) Refer also to 404c-1 ERISA Section 404(C) Plans This checklist is being used to assist the plan sponsor to better fulfill its responsibilities in connection with the requirements under Section 404c-5. It is for informational purposes only. Please note that this checklist is not meant to ensure compliance with Section 404c-5 or ERISA and is not legal advice or a legal opinion. You should consult with legal counsel regarding compliance with ERISA and other applicable laws. ERISA Section 404c-5 does not relieve the fiduciaries of responsibility to prudently select and monitor QDIAs. Securities offered through LPL Financial, member FINRA/SIPC. For plan sponsor use only. t for use with participants or the general public. To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial is not an affiliate of, and makes no representation with respect to, such entity. RP Tracking #