A new U.S. Department of
Labor (DOL) regulation protects fiduciaries when selecting and investing employee
assets in qualified default investment alternatives (QDIAs) for 401(k) plans.
The rule, effective Dec. 24, 2007, expands the relief provided to plan
fiduciaries under the federal Employee Retirement Income Security Act (ERISA)
and should be particularly valuable to fiduciaries of 401(k) plans that have
automatic enrollment features. Employers should be aware of the new regulation
and administer their retirement plans accordingly. Here’s what you need to
know.
Background
Participants in 401(k)
plans are typically responsible for their own investment decisions. However,
the DOL has found that participants who do not give instructions to their
employers on how to invest their individual accounts are not “exercising
investment control,” and, as a result, plan fiduciaries could potentially be responsible
for the losses suffered by accounts invested in default investments.
Because of this
possibility, the DOL issued the final regulation that provides that
participants who don’t give investment directions (and whose accounts are invested
by default rules) will be considered to be exercising investment control if
certain notice requirements are met and the accounts are invested in QDIAs. Participants
are thus treated as exercising investment control, and plan fiduciaries are
therefore protected from liability for the losses that may result from
investing those accounts in a QDIA.
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Types of QDIAs
Four types of
investments qualify as QDIAs under the new regulation:
• An investment fund
product or model portfolio with a group of investments that considers the
employee’s age, target retirement date, or life expectancy (such as a
life-cycle or targeted-retirement-date fund or account).
• An investment fund
product or model portfolio with a group of investments that takes into account
the characteristics of a group of employees as a whole, rather than those of
each individual (such as a balanced fund).
• An investment service
that allocates contributions among existing plan options to offer a group of assets
that considers the employee’s age, target retirement date, or life expectancy
(such as a professionally managed account).
• A capital preservation
product for only the first 120 days that an employee participates in the plan.
All of these QDIA
investments may be offered through variable annuity contracts and similar
contracts, and through common and collective trust funds or pooled funds.
CONTENTS
Which Conditions Must Be
Met?
Besides investing assets
in a QDIA, an employer must meet these requirements to avoid fiduciary
liability for investment outcomes:
• Participants and
beneficiaries must have been allowed to direct how the accounts are invested
but have not done so.
• Participants and
beneficiaries must be given a notice at least 30 days before the plan
eligibility date or at least 30 days in advance of the initial QDIA investment.
Alternatively, notice may be given at any time on or before the plan
eligibility date if the participant has the opportunity to withdraw from
automatic enrollment.
• Notices must be
provided at least 30 days before the start of each plan year.
• An employer must give
to participants and beneficiaries any materials, such as investment
prospectuses, provided to the plan for the QDIA.
• Participants and
beneficiaries must be allowed, if they so choose, to move their investments out
of a QDIA as often as out of other plan investments but at least every quarter.
• Plan participants must
be given a “broad range of investment alternatives,” as provided by ERISA.
What Does This Mean for
Employers?
The final regulation
imposes several requirements in order for fiduciaries to qualify for this liability
protection. Employers using a default investment that does not qualify as a
QDIA should review the new rule and strongly consider, after conferring with
their tax adviser, choosing a QDIA investment. An employer that chooses a QDIA
should regularly review it with the plan’s investment adviser to ensure that it
is still an appropriate fund. It is important to note that plan fiduciaries are
not relieved of the fiduciary responsibilities related to the diligent
selection and monitoring of funds, including a QDIA investment, offered under a
401(k) plan.
Additionally, employers
should be aware that the prohibited-transaction provisions of ERISA continue to
apply, and that they need to carefully evaluate and monitor investment fees and
expenses associated with retirement plans.
For More Information
The full text of the
final rule is available at www.dol.gov/ebsa/regs/fedreg/final/07-5147.pdf.