Department of Labor Issues Guidance on Qualified Default Investment Alternatives:

On September 23, the Department of Labor (the “DOL”) published Advisory Opinion 2025-04A (the “Opinion”). The Opinion addresses whether lifetime income products can be part of a defined contribution retirement plan’s qualified default investment alternative (“QDIA”).

As background, when a participant makes plan contributions but fails to elect how those contributions will be invested, the plan sponsor must decide how to have those contributions invested for the participant. To help plan sponsors address that situation, DOL regulations allow plans to include a QDIA. A QDIA is the default fund, in which participants’ contributions are invested when they fail to make investment elections. Under those DOL regulations, if certain requirements are satisfied, the plan’s fiduciaries are not liable for any investment losses that occur in the QDIA. One of those requirements is that the QDIA must be in one of the regulation’s approved categories of investment alternatives, such as a target date fund.

The applicant who requested the Opinion explained that:

• The Lifetime Income Strategy (“LIS”) program at issue includes a guaranteed lifetime withdrawal benefit (“GLWB”), under which participants can receive a guaranteed lifetime income stream in retirement. GLWBs insure a portion or all of a participant’s plan account balance. Also, the insurance allows participants to withdraw a specified amount during their retirement years, even if their account has been exhausted because of poor investment returns or participants’ longevity.
• The LIS program offers guaranteed lifetime income to participants through the funding of a separate portfolio (the Secure Income Portfolio, or the “SIP”) which is offered through a variable annuity contract. The plan’s investment advisor gradually allocates participant funds to the SIP, beginning when a participant reaches age 50 (or such other age selected by a plan fiduciary), and ending two years before the participant’s designated retirement age. 
• Participants can specify the percentage of their account to be placed in the SIP and that will thus receive lifetime income protection. With respect to participants who do not make a selection, the plan sponsor selects a default allocation percentage to be placed in the SIP for each participant.
• The LIS program includes “extensive education and training for participants.” For example, before participants invest in the LIS program as a default, they receive a notice that satisfies the QDIA regulation’s requirements (e.g., the notice includes a complete description of the LIS program and its SIP and GLWB features). As another example, participants who are defaulted into the LIS program before reaching age 50 are also notified in writing soon before their first allocation to the SIP.
• Each quarter, multiple insurers that are selected by the investment advisor submit bids to provide a guaranteed lifetime income stream (based on the total allocation amounts for that quarter). The investment advisor uses an objective formula to allocate amounts across insurers, “with a goal of maintaining insurer diversification while maximizing the amount of guaranteed income for plan participants.”
• Participants can elect to transfer their account balance from the LIS Program to other investment options in the plan. Participants can withdraw amounts from the SIP at any time without incurring a termination or liquidity fee. 

The DOL began it analysis in the Opinion by noting that in the QDIA regulation’s preamble, the DOL “emphasized that the approach taken in the regulation was intended to be sufficiently flexible to accommodate future innovation and developments in retirement products.” The DOL then noted that “Since the adoption of the QDIA regulation, stakeholder attention has continued to focus on the availability of, need for, and importance of lifetime income products and features as a way to protect participants and beneficiaries against the longevity risk of outliving the assets they saved to provide retirement income and the risk of having retirement savings eroded by investment losses.”

The DOL then concluded that “the LIS program would not fail to be a QDIA solely because it is offered through a variable annuity contract with a GLWB component,” and the LIS program “would satisfy the requirements to be a QDIA…” In short, the Opinion helpfully concludes that a QDIA can include a GLWB.

The Opinion then addressed the issue of how a plan fiduciary (here, the investment advisor) can satisfy its duty to act prudently under ERISA, with respect to the selection and monitoring of insurers for participation in the LIS program or a similar program. In this regard, the Opinion states:

• There are two safe harbors available under ERISA for fiduciaries selecting annuity providers for defined contribution plans: a 2008 DOL regulatory safe harbor and a 2019 statutory safe harbor.
• Each of those safe harbors provide relevant considerations with respect to the selection of the particular insurers to participate under the LIS program or a similar program. Therefore, the investment advisor here would satisfy its fiduciary responsibilities under ERISA if it makes the selections in accordance with the conditions of one of those two safe harbors.