Definition
A default investment is the investment option into which a defined contribution plan directs participant contributions when the participant has not made an affirmative election among the plan's investment choices.
Why it matters
The default investment shapes what the majority of participants actually own, because most participants do not actively choose among plan investment options. What the default is — and whether it qualifies for fiduciary safe-harbor protection under the qualified default investment alternative regulation — determines both the accumulation experience of defaulted participants and the fiduciary exposure of the plan sponsor.
How it works
Every defined contribution plan that permits participant-directed investment must designate what happens when a participant makes no election. Historically many plans used stable value funds or money market funds as the default because of their principal-preservation characteristics. Following the Pension Protection Act of 2006 and the Department of Labor's 2007 qualified default investment alternative regulation, plans that direct participant contributions into a QDIA and comply with the notice, disclosure, and transfer-rights conditions receive fiduciary safe-harbor protection for the resulting individual outcomes; plans that use a default that does not qualify as a QDIA retain fiduciary responsibility for those outcomes under the general ERISA prudence and diversification standards. The default operates automatically at enrollment and on ongoing contributions until the participant makes an affirmative election redirecting some or all of the balance.
In practice
For an individual participating in a defined contribution plan, the default investment is what the account is invested in unless something else has been actively chosen. A participant can find the specific default in the summary plan description or the qualified default investment alternative notice, and can redirect contributions and existing balances into other plan options at any time. A professional advising a defaulted participant can identify what the default is, whether it is a QDIA, what the resulting asset allocation and cost structure are, and whether the default's characteristics are appropriate for the participant's age, other assets, and retirement expectations. Plan fiduciaries selecting a default remain subject to ERISA duties of prudence and diversification even when the selection qualifies for QDIA safe-harbor protection.
Related terms
- Qualified default investment alternative
- Target date fund
- Stable value fund
- Money market fund
- Investment menu design
- Investment policy statement
- ERISA fiduciary
- Automatic enrollment