Department of Labor Issues Final Default Investment Regulations

11.16.2007

The Department of Labor (“DOL”) recently issued final regulations regarding qualified default investment alternatives (“QDIAs”).

The final regulations provide relief from losses for plan fiduciaries who invest in QDIAs on behalf of plan participants in individual account plans, such as 401(k) plans, who do not make investment directions. 

If your plan currently has a default investment that would qualify as a QDIA (see below for the requirements), you may obtain fiduciary relief for amounts already invested in such QDIA, provided that you issue the required notice to participants no later than November 24, 2007. (Although the new rules become effective December 24, 2007, it is possible to issue the initial notice in advance of the effective date and thereby obtain relief for existing as well as new investments with one notice).

What are the Requirements for Obtaining the Relief?

• Contributions must be invested in a QDIA;
• The participant was given the opportunity to direct investment, but failed to do so;
• The participant must be given an initial and annual notice.  The initial notice must be received at least 30 days before the first investment in a QDIA or the date of plan eligibility.  If the plan has an automatic enrollment feature, the initial notice must be received on or before the date of eligibility, but the participant must be able to withdraw all such contributions within the 90 day period following the initial contribution.  An annual notice must be provided at least 30 days before each subsequent plan year;
• The plan must provide the participant with material it receives relating to the investment in the QDIA;
• The participant must be able to transfer (at least once in any three month period) all or part of the QDIA investment to any other available investment alternative under the plan. Restrictions, fees or expenses (such as surrender charges or early withdrawal penalties) are prohibited during the first 90 days following the initial investment, although standard investment management fees and expenses may be charged.  After 90 days, a defaulted participant may be subject to all restrictions, fees or expenses charged to all participants.
• The plan must offer a broad range of investment alternatives.

Which Investment Vehicles Can Be QDIAs?

A QDIA must satisfy certain requirements.  For example, generally it must not hold or permit the acquisition of employer securities.  In addition, it must constitute one of the following investment vehicles:

• Life-cycle or targeted-retirement-date funds;
• Professionally managed accounts; or
• Balanced funds.

In addition, there are two limited options for investment vehicles:

• Capital preservation products or funds, but only for the 120-day period after the participant’s first deferrals into the plan.  If the participant fails to provide direction after such 120 day period, contributions must be transferred to another QDIA as the long-term default investment.
• Assets invested as of December 24, 2007 in stable value products or funds.

The final regulations reiterate that fiduciaries must continue to select and monitor prudently all QDIAs, including consideration of  investment fees and expenses.  In addition, fiduciaries must continue to satisfy other ERISA requirements (such as compliance with ERISA’s fiduciary duties and prohibited transaction rules).  Fiduciaries will be liable for losses arising from violations of such requirements.

What Information must be included in the Notice to Participants?

The initial and annual notices must be understandable to the average participant and must be provided separately from the summary plan description or any summaries of material modifications. 

The notices must contain certain information, including: a description of the circumstances under which default investments may be made, including, if applicable, an explanation of any automatic enrollment; an explanation of a participant’s right to direct investments; a description of the QDIA, including a description of investment objectives, risk and return characteristics and fees and expenses; a description of the participant’s right to transfer the investment, including a description of any restrictions, fees or expenses; and, an explanation of where participants can obtain information concerning other available investment alternatives.

Dipa Sudra contributed to this piece.