J.P. Morgan Asset Management’s ERISA strategist Tina Anstett, J.D., explains why this marks a significant step forward for plan sponsors and financial advisors seeking to enhance retirement security for participants.

The QDIA landscape expands

Traditionally, QDIAs have included target date funds, balanced funds and managed accounts. However, more recently, the retirement industry has seen a surge in products designed to provide guaranteed income throughout retirement, addressing the growing concern that participants may outlive their savings.

The DOL’s latest opinion clarifies that target date funds featuring guaranteed lifetime withdrawal benefits can qualify as QDIAs, provided they meet all regulatory requirements. (AOs apply to specific facts and circumstances presented by a requesting party and are generally helpful indicators of the DOL’s view on the applicable subject matter.)

How lifetime income strategies work

This new AO addresses lifetime income programs involving a target date fund structure, where an investment manager acts as a fiduciary, constructing personalized portfolios that shift from equities to fixed income as participants age.

At a designated age (commonly 50 or 55), a portion of a participant’s account is allocated to an income portfolio, which is backed by insurance guarantees. When payments begin, a participant receives a designated periodic payment until their plan account balance is fully depleted. At that point, the insurance component is activated to continue payments for the remainder of the participant’s life.

Participants typically receive extensive education and support, including advance notice before allocations begin as well as on an ongoing basis. Importantly, these programs may offer flexibility: participants can transfer out at any time without penalties, and withdrawals above the guaranteed amount simply reduce future guarantees. Upon death, beneficiaries receive any remaining account value or, in joint-life cases, the spouse may continue to receive payments.

Regulatory compliance: Meeting QDIA standards

The DOL’s opinion underscores several key regulatory requirements for all QDIAs:

• Participant choice: Participants must be able to direct investments, but do not make affirmative investment elections
• Clear notices: Plans must provide detailed information about investment objectives, risks, fees and transfer rights associated with the default investment option
• No early withdrawal fees: There can be no withdrawal or transfer fees in the first 90 days, except for standard investment-related fees

Crucially, the DOL clarified QDIAs may include products offered through variable annuity contracts with features such as annuity purchase rights, death benefit guarantees and investment guarantees. The presence of lifetime income features does not disqualify a product from QDIA status if all other requirements are satisfied.

Fiduciary responsibilities: Safe harbors and oversight

For plan sponsors and advisors, fiduciary compliance remains paramount.

The selection and monitoring of insurers providing guaranteed income is a fiduciary act governed by ERISA. The DOL AO highlights two available safe harbors for selecting annuity providers and income products:

• Regulatory safe harbor: Focuses on the selection of an annuity provider and contract for benefit distributions from defined contribution plans 
• Statutory safe harbor: By way of the SECURE Act of 2019 offers additional guidance for evaluating the claims-paying ability and appropriateness in selecting providers of guaranteed retirement income contracts

When an investment manager acts in a fiduciary capacity, it may rely on these safe harbors in its prudent selection and monitoring of insurers. Meanwhile, the plan’s named fiduciary has the limited responsibility to prudently select and monitor the investment manager itself.

Implications for plan sponsors and advisors

The new AO provides much-needed clarity and reassurance.

Plan sponsors and advisors can designate lifetime income strategies as QDIAs, knowing that the DOL, through its regulations, supports innovation in retirement plan design. By following the safe harbor provisions and ensuring robust participant communications, plans can offer participants greater retirement security without running afoul of fiduciary or regulatory requirements.

Conclusion: A new era for retirement income

The DOL’s endorsement of lifetime income features within QDIAs opens the door for defined contribution plans to offer participants a more secure retirement.

As the industry continues to innovate, plan sponsors and advisors should review their default investment options and consider whether a lifetime income strategy aligns with their participants’ needs and their fiduciary obligations.

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