Default investments are the investments that are utilized when a participant fails to make an investment election for their account. There are a number of methods that can be used to designate a default investment, but it is recommended that you document your decision-making process for any investment decision made in your retirement plan.

Since participants can hold plan fiduciaries responsible for the default investment option, it is best to seek safe harbor protection under ERISA Section 404(c) for the default investment decision. This safe harbor can help protect plan sponsors against potential litigation issues that may arise from the default investment that they designated.

Safe harbor protection is granted if the default investment meets the standards of a Qualified Default Investment Alternative (QDIA). QDIA rules require specific notices to be given to participants before they participate in the plan and annually thereafter.

Default investments may use a single investment option or they may use a matrix to match participants up to different investments based on the participant’s demographic information – usually age.

This allows for better default investment assignments that are investment time horizon-oriented and can provide for a better investment experience for participants that are assigned to the default.