56806 Federal Register / Vol. 71, No. 187 / Wednesday, September 27, 2006 / Proposed Rules 

1Stephen P. Utkus & Jean A. Young, Lessons from 

Behavioral Finance and the Autopilot 401(k) Plan, 

(Vanguard Center for Retirement Res.) April 2004; 

Sarah Holden & Jack VanDerhei, The Influence of 

Automatic Enrollment, Catch-Up, and IRA 

Contributions on 401(k) Accumulations at 

Retirement, 283 Employee Benefit Res. Inst. Issue 

Brief (2005). The issue brief indicates that the 

‘‘EBRI/ICI model shows that prior to automatic 

enrollment, 66 percent of eligible workers at yearend 2000 were participants in 401(k) plans, while 

immediately after adding automatic enrollment to 

the model, the participation rate rises to 92 percent 

of eligible employees.’’ Id. at 4. See also James J. 

Choi, David Laibson, & Brigitte C. Madrian, Plan 

Design and 401(k) Savings Outcomes, 57 National 

Tax J. 275 (2004); see also James J. Choi, David 

Laibson, Brigitte Madrian, & Andrew Metrick, For 

Better or For Worse: Default Effects and 401(k) 

Savings Behavior (Pension Research Council, 

Working Paper No. 2002–2, 2001), available at 

http://prc.wharton.upenn.edu/prc/PRC/WP/ 

WP2002–2.pdf. 

2The incidence of automatic enrollment appears 

to be growing, by one estimate from 8.4 percent of 

plans in 2003 to 10.5 percent in 2004 (48th Annual 

Survey of Profit Sharing and 401(k) Plans, (Profit 

Sharing/401(k) Council of America, Chicago, Ill.), 

2005, at 36), by another from 14 percent in 2003 

to 19 percent in 2005 (Survey Findings: Trends and 

Experiences in 401(k) Plans 2005, (Hewitt 

Associates LLC), 2005, at 1, 13). Another survey 

found no growth between 2003 and 2004 (2004 

Annual 401(k) Benchmarking Survey (Deloitte 

Consulting LLP), 2004, at 6). 

3See studies cited supra note 2. See also Stephen 

P. Utkus, Selecting a Default Fund for a Defined 

Contribution Plan (Vanguard Center for Retirement 

Res.), July 2004. 

4Of the responding plans with automatic 

enrollment, the default investment option was a 

stable value fund for 26.9%, a money market fund 

for 23.7%, a balanced fund for 29%, a life cycle 

fund for 8.6%, a professionally managed account 

for 6.5%, and 5.4% were reported as ‘‘other.’’ 48th 

Annual Survey of Profit Sharing/401(k) Plans, supra 

note 2, at 37, Table 64. Other surveys indicate the 

use of money market, stable value and similarly 

performing investment vehicles at 58 percent (2004 

Annual 401(k) Benchmarking Survey, supra note 2, 

at 7, Exhibit 20) and 81 percent (Stephen P. Utkus, 

Selecting A Default Fund for a Defined Contribution 

Plan, (Vanguard Center for Retirement Res.), 

Volume 14, June 2005, at 3). 

5This proposal encompasses situations beyond 

automatic enrollment. Examples include: failure of 

a participant or beneficiary to provide investment 

instruction following the elimination of an 

investment alternative or a change in service 

provider, failure of a participant or beneficiary to 

DEPARTMENT OF LABOR 

Employee Benefits Security 

Administration 

29 CFR Part 2550 

RIN 1210–AB10 

Default Investment Alternatives Under 

Participant Directed Individual Account 

Plans 

AGENCY: Employee Benefits Security 

Administration, Department of Labor. 

ACTION: Proposed regulation. 

SUMMARY: This document contains a 

proposed regulation that, upon 

adoption, would implement recent 

amendments to title I of the Employee 

Retirement Income Security Act of 1974 

(ERISA) enacted as part of the Pension 

Protection Act of 2006, Public Law 109– 

280, under which a participant of a 

participant directed individual account 

pension plan will be deemed to have 

exercised control over assets in his or 

her account if, in the absence of 

investment directions from the 

participant, the plan invests in a 

qualified default investment alternative. 

A fiduciary of a plan that complies with 

this proposed regulation will not be 

liable for any loss, or by reason of any 

breach that occurs as a result of such 

investments. The types of investments 

that qualify as default investment 

alternatives under section 404(c)(5) of 

ERISA are described in the proposal. 

Plan fiduciaries remain responsible for 

the prudent selection and monitoring of 

the qualified default investment 

alternative. The proposed regulation 

conditions relief upon advance notice to 

participants and beneficiaries describing 

the plan’s provisions governing the 

circumstances under which 

contributions or other assets will be 

invested on their behalf in a qualified 

default investment alternative, the 

investment objectives of the default 

investment alternative, and the right of 

participants and beneficiaries to direct 

investments out of the default 

investment alternative without penalty. 

The regulation, upon adoption, will 

affect plan sponsors and fiduciaries of 

participant directed individual account 

plans, the participants and beneficiaries 

in such plans, and the service providers 

to such plans. 

DATES: Written comments on the 

proposed regulation should be received 

by the Department of Labor on or before 

November 13, 2006. 

ADDRESSES: Comments should be 

addressed to the Office of Regulations 

and Interpretations, Employee Benefits 

Security Administration, Room N–5669, 

U.S. Department of Labor, 200 

Constitution Avenue, NW., Washington, 

DC 20210, Attn: Default Investment 

Regulation. Commenters are encouraged 

to submit comments electronically to 

e-ORI@dol.gov or www.regulations.gov 

(follow instructions for submission). 

Comments will be available to the 

public at www.dol.gov/ebsa and 

www.regulations.gov. Comments also 

will be available for public inspection at 

the Public Disclosure Room, N–1513, 

Employee Benefits Security 

Administration, 200 Constitution 

Avenue, NW., Washington, DC 20210. 

FOR FURTHER INFORMATION CONTACT: Erin 

M. Sweeney or Lisa M. Alexander, 

Office of Regulations and 

Interpretations, Employee Benefits 

Security Administration, (202) 693– 

8500. This is not a toll-free number. 

SUPPLEMENTARY INFORMATION: 

A. Background 

It is well established that many of 

America’s workers are not adequately 

saving for retirement. Part of the 

retirement savings problem is 

attributable to employees who, for a 

wide variety of reasons, do not take 

advantage of the opportunity to 

participate in their employer’s defined 

contribution pension plan (such as a 

401(k) plan). The retirement savings 

problem is also exacerbated by those 

employees who enroll in their 

employer’s plan, but do not assume 

responsibility for investment of their 

contributions, leaving their accounts to 

be invested in a conservative default 

investment that over the career of the 

employee is not likely to generate 

sufficient savings for a secure 

retirement. 

A number of recent studies indicate 

that significant improvements can be 

made in 401(k) plan participation and in 

retirement savings levels through plan 

design changes. Specifically, the studies 

show that adoption of automatic 

enrollment provisions (provisions 

pursuant to which employees are 

automatically enrolled in the plan and 

must affirmatively opt-out of plan 

participation) by 401(k) plans can 

dramatically increase plan participation 

rates.1 However, most surveys suggest 

that fewer than 20 percent of the 

employers sponsoring 401(k) plans have 

adopted an automatic enrollment 

provision.2

Many of the studies also indicate that 

the accumulation of retirement savings 

in automatic enrollment plans depends 

heavily on the default investment 

alternative and the default contribution 

rate provided under the plan.3 The 

scope of this proposal is limited to 

default investment alternatives in which 

individual account plan assets are 

invested on behalf of those participants 

or beneficiaries who fail to give 

investment instructions. Modification of 

contribution rates implicates issues 

beyond the jurisdiction of the 

Department of Labor. 

Several studies note that the 

contributions of automatically enrolled 

participants are frequently invested in 

products that present little risk of 

capital loss, e.g., money market funds, 

stable value funds and similarly 

performing investment vehicles.4 It also 

appears that many plans without 

automatic enrollment provisions 5


rwilkins on PROD1PC63 with PROPOSAL_3
Federal Register / Vol. 71, No. 187 / Wednesday, September 27, 2006 / Proposed Rules 56807 

provide investment instruction following a rollover 

from another plan, and any other failure of a 

participant or beneficiary to provide investment 

instruction. 

6 Investments in capital preservation vehicles 

deprive investors of the opportunity to benefit from 

the returns generated by equity securities that have 

historically generated higher returns than fixed 

income investments. 

7See Final Regulation Regarding Participant 

Directed Individual Account Plans (ERISA Section 

404(c) Plans), 57 FR 46,906 (Oct.13, 1992) (codified 

at 29 CFR 2550.404c–1). 

8See Rev. Rul. 98–30, 1998–1 C.B. 1273; see also 

Rev. Rul. 2000–8, 2000–1 C.B. 617; see also Final 

Regulation Regarding Participant Directed 

Individual Account Plans (ERISA Section 404(c) 

Plans), 57 FR at 46924; see also Retirement Plans, 

Cash or Deferred Arrangements Under Section 

401(k) and Matching Contributions or Employee 

Contributions Under Section 401(m) Regulations, 

69 FR 78144, 78146 n. 2 (Dec. 29, 2004) (codified 

at 26 CFR pts. 1 & 602). 

utilize similar capital preservation 

default investment products for those 

employees who enroll in the plan but 

fail to direct the investment of their 

contributions or their employer’s 

matching contributions. As a short-term 

investment, money market or stable 

value funds may not significantly affect 

retirement savings. Such investments 

can play a useful role as a component 

of a diversified portfolio. However, 

when such funds become the exclusive 

investment of participants or 

beneficiaries, it is unlikely that the rate 

of return generated by those funds over 

time will be sufficient to generate 

adequate retirement savings for most 

participants or beneficiaries.6

A frequently cited impediment to 

adoption of automatic enrollment 

provisions in individual account plans 

is the assumption of fiduciary 

responsibility for the investment 

decisions that the plan fiduciary must 

make on behalf of the automatically 

enrolled participants. In the case of a 

participant directed individual account 

plan designed to comply with the 

requirements of ERISA section 404(c)(1), 

responsibility for the result of specific 

investment directions rests with the 

directing plan participant or beneficiary, 

rather than the plan sponsor or other 

fiduciaries.7 Before enactment of the 

Pension Protection Act, which became 

law on August 17, 2006, the Department 

indicated that a participant or 

beneficiary would not be considered to 

have exercised control when the 

participant or beneficiary is merely 

apprised of investments that will be 

made on his or her behalf in the absence 

of instructions to the contrary.8 In effect, 

the Department treated the plan 

fiduciary’s investment decision on 

behalf of a participant or beneficiary as 

if the decision were made in connection 

with a participant directed individual 

account plan that is not designed, or 

fails, to meet the conditions for a section 

404(c) plan. While some employers, in 

adopting automatic enrollment 

provisions or otherwise dealing with the 

absence of investment direction from 

plan participants, have been willing to 

assume fiduciary responsibility for their 

investment decisions, many of those 

employers attempt to minimize their 

fiduciary liability by limiting default 

investments to funds that emphasize 

preservation of capital and little risk of 

loss (e.g., money market and stable 

value funds). 

As part of the Pension Protection Act, 

section 404(c) of ERISA was amended to 

provide relief accorded by section 

404(c)(1) to fiduciaries that invest 

participant assets in certain types of 

default investment alternatives in the 

absence of participant investment 

direction. Specifically, section 624(a) of 

the Pension Protection Act added a new 

section 404(c)(5) to ERISA. Section 

404(c)(5)(A) of ERISA provides that, for 

purposes of section 404(c)(1) of ERISA, 

a participant in an individual account 

plan shall be treated as exercising 

control over the assets in the account 

with respect to the amount of 

contributions and earnings which, in 

the absence of an investment election by 

the participant, are invested by the plan 

in accordance with regulations 

prescribed by the Secretary of Labor. 

Section 624(a) of the Pension Protection 

Act directed that such regulations 

provide guidance on the 

appropriateness of designating default 

investments that include a mix of asset 

classes consistent with capital 

preservation or long-term capital 

appreciation, or a blend of both. In the 

Department’s view, this statutory 

language provides the stated relief to 

fiduciaries of any participant directed 

individual account plan that complies 

with its terms and with those of the 

Department’s proposed regulation under 

section 404(c)(5) of ERISA. This relief 

therefore, is not contingent on a plan 

being an ‘‘ERISA 404(c) plan’’ or 

otherwise meeting the requirements of 

the Department’s regulations at 

2550.404c–1. 

Section 624(a) of the Pension 

Protection Act also added notice 

requirements in section 404(c)(5)(B)(i) 

and (ii) of ERISA. Section 404(c)(5)(B)(i) 

requires that each participant—(I) 

receive, within a reasonable period of 

time before each plan year, a notice 

explaining the employee’s right under 

the plan to designate how contributions 

and earnings will be invested and 

explaining how, in the absence of any 

investment election by the participant, 

such contributions and earnings will be 

invested, and (II) has a reasonable 

period of time after receipt of such 

notice and before the beginning of the 

plan year to make such designation. 

Section 404(c)(5)(B)(ii) requires each 

notice to be sufficiently accurate and 

comprehensive to appraise the 

employee of such rights and obligations, 

and to be written in a manner calculated 

to be understood by the average 

employee eligible to participate. 

The amendments made by section 624 

of the Pension Protection Act shall 

apply to plan years beginning after 

December 31, 2006. Section 624(b) of 

the Pension Protection Act directed the 

Department to issue final regulations 

under section 404(c)(5)(A) of ERISA no 

later than 6 months of the date of 

enactment of the Pension Protection 

Act. 

In an effort to increase plan 

participation through the adoption of 

automatic enrollment provisions, and 

increase retirement savings through the 

utilization of default investments that 

are more likely to increase retirement 

savings for participants and 

beneficiaries who do not direct their 

own investments, the Department, 

exercising its authority under section 

505 of ERISA and consistent with 

section 624 of the Pension Protection 

Act, is proposing to provide relief to 

fiduciaries of participant directed 

individual account plans that invest 

participant assets in certain types of 

default investment alternatives in the 

absence of participant investment 

direction. The proposed regulation is 

described below. 

B. Overview of Proposal 

Scope of the Fiduciary Relief 

The proposal would, upon adoption, 

implement the fiduciary relief afforded 

by ERISA section 404(c)(5), under 

which a participant, who does not give 

investment directions, will be treated as 

exercising control over his or her 

account with respect to assets that the 

plan invests in a qualified default 

investment alternative. See § 2550.404c–

5(a)(1). 

The relief provided by the proposed 

regulation is conditioned on the use of 

certain investment alternatives, but the 

limitations of the proposed regulation 

should not be construed to indicate that 

the use of investment alternatives not 

identified in the proposed regulation as 

qualified default investment alternatives 

would be imprudent. For example, the 

Department recognizes that investments 

in money market funds, stable value 

products and similarly performing 

investment vehicles may be prudent for 

some participants or beneficiaries. 


rwilkins on PROD1PC63 with PROPOSAL_3
56808 Federal Register / Vol. 71, No. 187 / Wednesday, September 27, 2006 / Proposed Rules 

Paragraph (b) of § 2550.404c–5 defines 

the scope of the fiduciary relief 

provided. Specifically, paragraph (b)(1) 

provides that, subject to certain 

exceptions, a fiduciary of an individual 

account plan that permits participants 

and beneficiaries to direct the 

investment of assets in their accounts 

and that meets the conditions of the 

regulation, as set forth in paragraph (c) 

of § 2550.404c–5, shall not be liable for 

any loss under part 4 of title I, or by 

reason of any breach, that is the direct 

and necessary result of investing all or 

part of a participant’s or beneficiary’s 

account in a qualified default 

investment alternative, or of investment 

decisions made by the entity described 

in paragraph (e)(3) in connection with 

the management of a qualified default 

investment alternative. The scope of this 

relief is the same as that extended to 

plan fiduciaries under ERISA section 

404(c)(1)(B) in connection with carrying 

out investment directions of plan 

participants and beneficiaries in an 

‘‘ERISA section 404(c) plan’’ as 

described in 29 CFR 2550.404c–1(a), 

although it is not necessary for a plan 

to be an ERISA section 404(c) plan in 

order for the fiduciary to obtain the 

relief accorded by this proposed 

regulation. As with section 404(c)(1) of 

the Act and the regulation issued 

thereunder (29 CFR 2550.404c–1), the 

proposed regulation would not provide 

relief from the general fiduciary rules 

applicable to the selection and 

monitoring of a default investment 

alternative or from any liability that 

results from a failure to satisfy these 

duties, including liability for any 

resulting losses. See paragraph (b)(2) of 

§ 2550.404c–5. Paragraph (b) further 

makes clear that nothing in the 

proposed regulation relieves an 

investment manager from its general 

fiduciary duties or from any liability 

that results from a failure to satisfy these 

duties, including liability for any 

resulting losses. See paragraph (b)(3) of 

§ 2550.404c–5. In addition, the 

proposed regulation provides no relief 

from the prohibited transaction 

provisions of section 406 of ERISA or 

from any liability that results from a 

violation of those provisions, including 

liability for any resulting losses. See 

paragraph (b)(4) of § 2550.404c–5. 

Like other investment alternatives 

made available under a plan, a plan 

fiduciary would be required to carefully 

consider investment fees and expenses 

in choosing a qualified default 

investment alternative for purposes of 

the proposed regulation. To the extent 

that a plan offers more than one 

investment alternative that could 

constitute a qualified default investment 

alternative, the Department anticipates 

that fees and expenses would be an 

important consideration in selecting 

among the alternatives. 

Conditions for the Fiduciary Relief 

The conditions for relief are set forth 

in paragraph (c) of the proposal. The 

proposal has six conditions. 

The first condition requires that assets 

invested on behalf of participants or 

beneficiaries under the proposed 

regulation be invested in a ‘‘qualified 

default investment alternative.’’ See 

§ 2550.404c–5(c)(1). ‘‘Qualified default 

investment alternatives’’ are defined in 

paragraph (e) of the proposed regulation 

and discussed in detail below. The 

second condition provides that the 

participant or beneficiary on whose 

behalf assets are being invested in a 

qualified default investment alternative 

had the opportunity to direct the 

investment of assets in his or her 

account but did not direct the assets. 

See § 2550.404c–5(c)(2). In other words, 

no relief is available when a participant 

or beneficiary has provided affirmative 

investment direction concerning the 

assets invested on the participant’s or 

beneficiary’s behalf. 

The third condition requires that the 

participant or beneficiary on whose 

behalf an investment in a qualified 

default investment alternative may be 

made is furnished a notice within a 

reasonable period of time of at least 30 

days in advance of the first such 

investment, and within a reasonable 

period of time of at least 30 days in 

advance of each subsequent plan year. 

As described in the regulation, the 

required notice can be furnished in the 

plan’s summary plan description, 

summary of material modifications, or 

as a separate notification. See 

§ 2550.404c–5(c)(3). The specific 

content requirements for the notice are 

described in paragraph (d) of the 

proposed regulation and discussed in 

detail below. 

The Department notes that a similar 

notice requirement is contained in 

section 401(k)(13)(E) of the Internal 

Revenue Code (Code), as amended by 

the Pension Protection Act. The 

Department anticipates that the notice 

requirements of this proposed 

regulation and the notice requirements 

of section 401(k)(13)(E) of the Code 

could be satisfied in a single notice. 

The Department further notes that the 

phrase—‘‘in advance of the first such 

investment [in a qualified default 

investment alternative]’’—is not 

intended to foreclose availability of 

relief to fiduciaries that, prior to the 

adoption of a final regulation, invested 

assets on behalf of participants and 

beneficiaries in a default investment 

alternative that would constitute a 

‘‘qualified default investment 

alternative’’ under the regulation. In 

such cases, the phrase ‘‘in advance of 

the first such investment’’ should be 

read to mean the first investment with 

respect to which relief under the 

proposed regulation is intended to 

apply after the effective date of the 

regulation. The Department is proposing 

to make this regulation effective 60 days 

after publication of the final rule in the 

Federal Register. 

The fourth condition of the proposed 

regulation requires that the terms of the 

plan provide that any material provided 

to the plan relating to a participant’s or 

beneficiary’s investment in a qualified 

default investment alternative (e.g., 

account statements, prospectuses, proxy 

voting material) will be provided to the 

participant or beneficiary. See 

§ 2550.404c–5(c)(4). 

The fifth condition requires that any 

participant or beneficiary on whose 

behalf assets are invested in a qualified 

default investment alternative be 

afforded the opportunity, consistent 

with the terms of the plan (but in no 

event less frequently than once within 

any three month period), to transfer, in 

whole or in part, such assets to any 

other investment alternative available 

under the plan without financial 

penalty. See § 2550.404c–5(c)(5). This 

provision assures that participants and 

beneficiaries on whose behalf assets are 

invested in a qualified default 

investment alternative have the same 

opportunity as other plan participants 

and beneficiaries to direct the 

investment of their assets, and that 

neither the plan nor the qualified 

default investment alternative impose 

financial penalties that would restrict 

the rights of participants and 

beneficiaries to direct their assets to 

other investment alternatives available 

under the plan. This provision does not 

confer greater rights on participants or 

beneficiaries whose accounts the plan 

invests in qualified default investment 

alternatives than are otherwise available 

under the plan with respect to the 

timing of investment directions. Thus, if 

a plan provides participants and 

beneficiaries the right to direct 

investments on a quarterly basis, those 

participants and beneficiaries with 

investments in a qualified default 

investment alternative need only be 

afforded the opportunity to direct their 

investments on a quarterly basis. 

Similarly, if a plan permits daily 

investment direction, participants and 

beneficiaries with investments in a 

qualified default investment alternative 


rwilkins on PROD1PC63 with PROPOSAL_3
Federal Register / Vol. 71, No. 187 / Wednesday, September 27, 2006 / Proposed Rules 56809 

9 29 CFR 2550.404c–1(b)(3) provides that ‘‘[a] 

plan offers a broad range of investment alternatives 

only if the available investment alternatives are 

sufficient to provide the participant or beneficiary 

with a reasonable opportunity to: (A) Materially 

affect the potential return on amounts in his 

individual account with respect to which he is 

permitted to exercise control and the degree of risk 

to which such amounts are subject; (B) Choose from 

at least three investment alternatives: (1) Each of 

which is diversified; (2) each of which has 

materially different risk and return characteristics; 

(3) which in the aggregate enable the participant or 

beneficiary by choosing among them to achieve a 

portfolio with aggregate risk and return 

characteristics at any point within the range 

normally appropriate for the participant or 

beneficiary; and (4) each of which when combined 

with investments in the other alternatives tends to 

minimize through diversification the overall risk of 

a participant’s or beneficiary’s portfolio; * * *’’

must be permitted to direct their 

investments on a daily basis. 

The Department notes that this 

proposal does not address or provide 

relief with respect to the direction of 

investments out of a qualified default 

investment alternative into another 

investment alternative available under 

the plan. See generally section 404(c)(1) 

of ERISA and 29 CFR 2550.404c–1. 

The last condition requires that the 

plan offer participants and beneficiaries 

the opportunity to invest in a ‘‘broad 

range of investment alternatives’’ within 

the meaning of 29 CFR 2550.404c–

1(b)(3).9 See § 2550.404c–5(c)(6). For 

purposes of the proposed regulation, the 

Department believes that participants 

and beneficiaries should be afforded a 

sufficient range of investment 

alternatives to achieve a diversified 

portfolio with aggregate risk and return 

characteristics at any point within the 

range normally appropriate for the 

pension plan participant or beneficiary. 

The Department believes that the 

application of the ‘‘broad range of 

investment alternatives’’ standard of the 

section 404(c) regulation accomplishes 

this objective. Moreover, the 

Department believes that virtually all 

individual account plans that provide 

for participant direction, without regard 

to whether such plans meet all the 

requirements for an ERISA section 

404(c) plan, likely will meet this 

standard without having to undertake 

significant changes in available 

investment alternatives. 

Notices 

As discussed above, relief under the 

proposed regulation is conditioned on 

furnishing participants and beneficiaries 

advance notification concerning the 

default investment provisions of their 

plan. See § 2550.404c–5(c)(3). The 

specific information required to be 

contained in the notice is set forth in 

paragraph (d) of the regulation. 

Paragraph (d) of § 2550.404c–5 

requires that the notice to participants 

and beneficiaries be written in a manner 

calculated to be understood by the 

average plan participant and contain the 

following information: (1) A description 

of the circumstances under which assets 

in the individual account of a 

participant or beneficiary may be 

invested on behalf of the participant and 

beneficiary in a qualified default 

investment alternative; (2) a description 

of the qualified default investment 

alternative, including a description of 

the investment objectives, risk and 

return characteristics (if applicable), and 

fees and expenses attendant to the 

investment alternative; (3) a description 

of the right of the participants and 

beneficiaries on whose behalf assets are 

invested in a qualified default 

investment alternative to direct the 

investment of those assets to any other 

investment alternative under the plan, 

without financial penalty; and (4) an 

explanation of where the participants 

and beneficiaries can obtain investment 

information concerning the other 

investment alternatives available under 

the plan. 

It is the view of the Department that 

the notice requirements of this proposed 

regulation are consistent with the notice 

requirements added to section 404(c)(5) 

of ERISA by section 624 of the Pension 

Protection Act. The Department believes 

the required information is sufficient to 

put participants and beneficiaries on 

notice as to the consequences of failing 

to direct investment of the assets in 

their account, and encourages active 

decisionmaking by participants and 

beneficiaries. The Department invites 

suggestions as to whether additional 

information should be considered for 

inclusion in the notice. 

Qualified Default Investment 

Alternatives 

Under the proposal, relief from 

fiduciary liability is provided with 

respect to only those assets invested on 

behalf of a participant or beneficiary in 

a ‘‘qualified default investment 

alternative.’’ See § 2550.404c–5(c)(1). 

Paragraph (e) of § 2550.404c–5 sets forth 

five requirements for a qualified default 

investment alternative. 

The first requirement is intended to 

limit investment in employer securities 

as part of a qualified default investment 

alternative’s investment strategy. 

Subject to two exceptions, the proposal 

provides that a qualified default 

investment alternative shall not hold or 

permit the acquisition of employer 

securities. See § 2550.404c–5(e)(1)(i). 

The first exception to this general 

prohibition is applicable to employer 

securities held or acquired by an 

investment company registered under 

the Investment Company Act of 1940, 

15 U.S.C. 80a–1, et seq., or a similar 

pooled investment vehicle regulated 

and subject to periodic examination by 

a State or Federal agency and with 

respect to which investment in such 

securities is made in accordance with 

the stated investment objectives of the 

investment vehicle and independent of 

the plan sponsor or an affiliate thereof. 

While the Department does not believe 

it is appropriate for a qualified default 

investment alternative to encourage 

investments in employer securities, the 

Department also recognizes that an 

absolute prohibition against holding or 

investing in employer securities may 

unnecessarily complicate the selection 

and monitoring of qualified default 

investment alternatives by publicly 

traded companies, the stock of which 

may be held or acquired pursuant to an 

investment strategy wholly independent 

of the employer. The Department 

believes that the foregoing exception is 

sufficiently broad to accommodate 

publicly traded companies and pooled 

investment vehicles that may invest in 

such companies. 

The second exception is for employer 

securities acquired as a matching 

contribution from the employer/plan 

sponsor or at the direction of the 

participant or beneficiary. This 

exception is intended to make clear that 

an investment management service will 

not be precluded from serving as a 

qualified default investment alternative 

under § 2550.404c–5(e)(5)(iii) merely 

because the account of a participant or 

beneficiary holds employer securities 

acquired as matching contributions from 

the employer/plan sponsor, or acquired 

as a result of prior direction by the 

participant or beneficiary, provided that 

the investment management service has 

the authority to dispose of such 

securities. 

In the case of employer securities 

acquired as matching contributions that 

are subject to a restriction on 

transferability, relief would not be 

available until the investment 

management service can exercise 

discretion over such securities, at the 

expiration of the restriction. Although 

an investment management service 

would be responsible for determining 

whether and to what extent the account 

should continue to hold investments in 

employer securities, the investment 

management service could not, except 

as part of an investment company or 

similar pooled investment vehicle, 

exercise its discretion to acquire 

additional employer securities on behalf 


rwilkins on PROD1PC63 with PROPOSAL_3
56810 Federal Register / Vol. 71, No. 187 / Wednesday, September 27, 2006 / Proposed Rules 

10Section 3(38) of ERISA defines the term 

‘‘investment manager’’ to mean ‘‘any fiduciary 

(other than a trustee or named fiduciary, as defined 

in section 402(a)(2) [29 U.S.C. 1102(a)(2)])—(A) who 

has the power to manage, acquire, or dispose of any 

asset of a plan; (B) who (i) is registered as an 

investment adviser under the Investment Advisers 

Act of 1940 [15 U.S.C. 80b–1 et seq.]; (ii) is not 

registered as an investment adviser under such Act 

by reason of paragraph (1) of section 203A(a) of 

such Act, is registered as an investment adviser 

under the laws of the State (referred to in such 

paragraph (1)) in which it maintains its principal 

office and place of business, and, at the time the 

fiduciary last filed the registration form most 

recently filed by the fiduciary with such State in 

order to maintain the fiduciary’s registration under 

the laws of such State, also filed a copy of such 

form with the Secretary; (iii) is a bank, as defined 

in that Act [15 U.S.C. 80b–1 et seq.]; or (iv) is an 

insurance company qualified to perform services 

described in subparagraph (A) under the laws of 

more than one State; and (C) has acknowledged in 

writing that he is a fiduciary with respect to the 

plan.’’

11See ERISA section 401(b)(1). 

of an individual account without 

violating § 2550.404c–5(e)(1). 

In the case of prior direction by a 

participant or beneficiary, if the 

participant or beneficiary provided 

investment direction with respect to 

employer securities, but failed to 

provide investment direction following 

an event, such as a change in 

investment alternatives, and the terms 

of the plan provide that in such 

circumstances the account’s assets are 

invested in a default investment 

alternative, the proposed regulation 

would permit an investment 

management service to hold and manage 

those employer securities in the absence 

of participant or beneficiary direction. 

While the investment management 

service may not acquire additional 

employer securities using participant 

contributions, the investment 

management service may reduce the 

amount of employer securities held by 

the account of the participant or 

beneficiary. 

The second requirement provides 

that, except as otherwise provided in 

paragraph (c)(5), a qualified default 

investment alternative may not impose 

financial penalties or otherwise restrict 

the ability of a participant or beneficiary 

to transfer, in whole or in part, his or 

her investment from the qualified 

default investment alternative to any 

other investment alternative available 

under the plan. The Department does 

not believe that limits on the ability of 

a participant or beneficiary to move 

from a qualified default investment 

alternative should be permitted by the 

plan or the qualified default investment 

alternative. 

The third requirement is that a 

qualified default investment alternative 

be either managed by an investment 

manager, as defined in section 3(38) of 

the Act, or an investment company 

registered under the Investment 

Company Act of 1940. The Department 

believes that when plan fiduciaries are 

relieved of liability for underlying 

investment management/asset allocation 

decisions, those responsible for the 

investment management/asset allocation 

decisions must be investment 

professionals who acknowledge their 

fiduciary responsibilities and liability 

under ERISA. For this reason, the 

proposed regulation requires that, 

except in the case of registered 

investment companies, those 

responsible for the management of a 

qualified default investment alternative 

be ‘‘investment managers’’ within the 

meaning of section 3(38) of ERISA.10

Inasmuch as the assets of an investment 

company registered under the 

Investment Company Act of 1940 do 

include plan assets solely by virtue of a 

plan’s investment in securities issued by 

such investment company 11 and such 

investment companies are subject to 

Federal and State regulation and 

oversight, the proposal permits an 

investment company registered under 

the Investment Company Act of 1940 to 

constitute a ‘‘qualified default 

investment alternative’’ provided that 

the other conditions of the proposed 

regulation are satisfied. 

The fourth requirement provides that 

a qualified default investment 

alternative is diversified so as to 

minimize the risk of large losses. 

The last requirement for a qualified 

default investment alternative 

conditions relief on the use of one of 

three types of investment products, 

portfolios or services. See § 2550.404c–

5(e)(5). In defining qualified default 

investment alternatives, the Department 

presumes that, in those instances when 

a participant or beneficiary chooses not 

to direct the investment of the assets in 

their account, the only objective and 

readily available information relevant to 

making an investment decision on 

behalf of the participant is age. For this 

reason, the investment objectives of the 

qualified default investment alternatives 

are not required to take into account 

other factors, such as risk tolerances, 

other investment assets, etc. 

The first alternative is an investment 

fund product or model portfolio that is 

designed to provide varying degrees of 

long-term appreciation and capital 

preservation through a mix of equity 

and fixed income exposures based on 

the participant’s age, target retirement 

date (such as normal retirement age 

under the plan) or life expectancy. Such 

products and portfolios change their 

asset allocation and associated risk 

levels over time with the objective of 

becoming more conservative (i.e., 

decreasing risk of losses) with 

increasing age. As noted above, asset 

allocation decisions for eligible 

products and portfolios are not required 

to take into account risk tolerances, 

investments or other preferences of an 

individual participant. An example of 

such a fund or portfolio may be a ‘‘lifecycle’’ or ‘‘targeted-retirement-date’’

fund or account. See § 2550.404c–

5(e)(5)(i). The reference to ‘‘an 

investment fund product or model 

portfolio’’ is intended to make clear that 

this alternative might be a ‘‘stand alone’’

product or a ‘‘fund of funds’’ comprised 

of various investment options otherwise 

available under the plan for participant 

investments. In the context of a fund of 

funds portfolio, it is likely that money 

market, stable value and similarly 

performing capital preservation vehicles 

will play a role in comprising the mix 

of equity and fixed-income exposures. 

The second alternative is an 

investment fund product or model 

portfolio that is designed to provide 

long-term appreciation and capital 

preservation through a mix of equity 

and fixed income exposures consistent 

with a target level of risk appropriate for 

participants of the plan as a whole. For 

purposes of this alternative, asset 

allocation decisions for such products 

and portfolios are not required to take 

into account the age of an individual 

participant, but rather focus on the 

demographics of the participant 

population as a whole. An example of 

such a fund or portfolio may be a 

‘‘balanced’’ fund. As with the preceding 

alternative, the reference to ‘‘an 

investment fund product or model 

portfolio’’ is intended to make clear that 

this alternative might be a ‘‘stand alone’’

product or a ‘‘fund of funds’’ comprised 

of various investment options otherwise 

available under the plan for participant 

investments. In the context of a fund of 

funds portfolio, it is likely that money 

market, stable value and similarly 

performing capital preservation vehicles 

will play a role in comprising the mix 

of equity and fixed-income exposures 

for this alternative. 

Unlike the first alternative, which 

focuses on the age, target retirement 

date (such as normal retirement age 

under the plan) or life expectancy of an 

individual participant, the second 

alternative requires a fiduciary to take 

into account the demographics of the 

plan’s participants, similar to the 

considerations a fiduciary would take 

into account in managing an individual 

account plan that does not provide for 

participant direction. For this reason, a 


rwilkins on PROD1PC63 with PROPOSAL_3
Federal Register / Vol. 71, No. 187 / Wednesday, September 27, 2006 / Proposed Rules 56811 

12With regard to this alternative, the Department 

notes that in 2003, a working group of the Advisory 

Council on Employee Welfare and Pension Benefit 

Plans submitted a report on optional professional 

management in defined contribution plans. While 

the Advisory Council report focused on the use of 

managed account services in which participants 

played an active role in preparing an investment 

profile, the report nonetheless provides support for 

including such services within the definition of a 

qualified default investment alternative. This report 

may be accessed at 

http://www.dol.gov/ebsa/publications/ 

AC_1107b03_report.html. 

13 In rare cases, retirement income may decrease 

slightly. A few individuals may wind up 

contributing for some period of time at a default 

rate that is lower than the rate they otherwise 

would have elected (this risk will be minimized in 

plans that automatically escalate default 

contribution rates). A few may realize lower returns 

in a qualified default investment alternative than 

they would otherwise have realized. 

fiduciary may, in connection with the 

duty to monitor investment alternatives 

available under the plan, conclude that 

a new or additional investment fund 

product or model portfolio is required to 

take into account significant changes in 

the demographics (e.g., age) of the plan’s 

participant population. 

The third alternative is an investment 

management service with respect to 

which an investment manager allocates 

the assets of a participant’s individual 

account to achieve varying degrees of 

long-term appreciation and capital 

preservation through a mix of equity 

and fixed income exposures, offered 

through investment alternatives 

available under the plan, based on the 

participant’s age, target retirement date 

(such as normal retirement age under 

the plan) or life expectancy. Such 

portfolios change their asset allocation 

and associated risk levels over time with 

the objective of becoming more 

conservative (i.e., decreasing risk of 

losses) with increasing age. As with the 

first alternative, the proposed regulation 

makes clear that, as with the other 

alternatives described in the regulation, 

asset allocation decisions are not 

required to take into account risk 

tolerances, other investments or other 

preferences of an individual participant. 

An example of such a service may be a 

‘‘managed account.’’ 12

Although investment management 

services are included within the scope 

of relief, the Department notes that relief 

similar to that provided by this 

proposed regulation is available to plan 

fiduciaries under the statute. 

Specifically, section 402(c)(3) of ERISA 

provides that ‘‘a person who is a named 

fiduciary with respect to control or 

management of the assets of a plan may 

appoint an investment manager or 

managers to manage (including the 

power to acquire and dispose of) any 

assets of a plan.’’ Section 405(d) of 

ERISA provides that ‘‘[i]f an investment 

manager or managers have been 

appointed under section 402(c)(3), then 

* * * no trustee shall be liable for the 

acts or omissions of such investment 

manager or managers, or be under an 

obligation to invest or otherwise manage 

any asset of the plan which is subject to 

the management of such investment 

manager.’’ The Department included 

investment management services within 

the scope of fiduciary relief in order to 

avoid any ambiguity concerning the 

scope of relief available to plan 

fiduciaries in the context of participant 

directed individual account plans. 

C. Miscellaneous Issues 

Preemption 

Section 902 of the Pension Protection 

Act added a new section 514(e)(1) to 

ERISA providing that notwithstanding 

any other provision of section 514, title 

I of ERISA shall supersede any State law 

that would directly or indirectly 

prohibit or restrict the inclusion in any 

plan of an automatic contribution 

arrangement. Section 902 further added 

section 514(e)(2) to ERISA defining the 

term ‘‘automatic contribution 

arrangement’’ as an arrangement under 

which a participant: may elect to have 

the plan sponsor make payments as 

contributions under the plan on behalf 

of the participant, or to the participant 

directly in cash; is treated as having 

elected to have the plan sponsor make 

such contributions in an amount equal 

to a uniform percentage of 

compensation provided under the plan 

until the participant specifically elects 

not to have such contributions made (or 

specifically elects to have such 

contributions made at a different 

percentage); and under which such 

contributions are invested in accordance 

with regulations prescribed by the 

Secretary of Labor under section 

404(c)(5) of ERISA. The Department 

specifically requests comments on 

whether and to what extent regulations 

would be helpful in addressing the 

preemption provisions of section 514(e) 

of ERISA. 

Enforcement 

Section 902 of the Pension Protection 

Act amended section 502(c)(4) of ERISA 

to provide that the Secretary of Labor 

may assess a civil penalty against any 

person of up to $1,100 a day for each 

violation by any person of section 

302(b)(7)(F)(vi) or section 514(e)(3) of 

ERISA. Implementing regulations will 

be developed in a separate rulemaking. 

D. Request for Comments 

The Department invites comments 

from interested persons on all aspects of 

the proposed regulation. Comments 

should be addressed to the Office of 

Regulations and Interpretations, 

Employee Benefits Security 

Administration, Room N–5669, U.S. 

Department of Labor, 200 Constitution 

Avenue, NW., Washington, DC 20210, 

Attn: Default Investment Regulation. 

Commenters are encouraged to submit 

comments electronically to eORI@dol.gov or www.regulations.gov. 

All comments received will be available 

to the public at http://www.dol.gov/ebsa 

and www.regulations.gov. Comments 

also will be available for public 

inspection at the Public Disclosure 

Room, N–1513, Employee Benefits 

Security Administration, 200 

Constitution Avenue, NW., Washington, 

DC 20210. 

Comments on this proposal should be 

submitted to the Department on or 

before November 13, 2006. 

E. Effective Date 

The Department proposes to make 

this regulation effective 60 days after the 

date of publication of the final rule in 

the Federal Register. 

F. Regulatory Impact Analysis 

Summary 

This proposed regulation is expected 

to have two major, positive economic 

consequences. First, default investments 

will be directed toward higher-return 

portfolios boosting average account 

performance. Second, automatic 

enrollment provisions will become more 

common boosting participation in 

retirement savings plans. Both of these 

effects will tend on average and on 

aggregate to increase retirement savings, 

especially among younger workers with 

low earnings and frequent job changes. 

A substantial number of individuals 

will enjoy significant increases in 

retirement income.13 The magnitude of 

these effects will be large in absolute 

terms and proportionately large for 

many directly affected individuals, but 

will be modest relative to overall 

aggregate retirement savings. 

The magnitude of the proposed 

regulation’s effects will depend on plan 

sponsor and participant choices. The 

effects will be cumulative and will 

become fully realized only after workers 

beginning their careers today reach 

retirement. For these reasons, any 

estimates of the regulation’s effects are 

subject to substantial uncertainty. The 

Department has developed low- and 

high-impact estimates, to illustrate a 

range of potential long-term effects. 


rwilkins on PROD1PC63 with PROPOSAL_3
56812 Federal Register / Vol. 71, No. 187 / Wednesday, September 27, 2006 / Proposed Rules 

In the very long run the proposed 

regulation is predicted to increase 

aggregate 401(k) plan account balances 

by between 2 percent and 5 percent, or 

approximately $45 billion and $90 

billion if represented at 2005 levels. The 

portion invested in equity will increase 

by between 3 percent and 5 percent, or 

$27 billion and $48 billon. 

For individuals born in 1985 and 

surviving to age 67, holding other 

factors constant, low-impact estimates 

suggest that the proposed regulation 

will increase pension income by an 

average of $2,010 per year (in 2005 

dollars) for 10 percent, but decrease it 

by $1,120 per year on average for 5 

percent. Pension income would be 

unchanged for the remaining 85 percent. 

High-impact estimates suggest that 

average annual pension income will 

increase by $2,740 for 14 percent, fall by 

$1,460 for 6 percent, and be unchanged 

for 80 percent. 

The costs and benefits of the proposed 

regulation are not simple, direct 

functions of the foregoing gross dollar 

estimates. Increases in retirement 

savings due to automatic enrollment 

will be offset by either decreases in 

current consumption or reductions in 

other savings, so net benefits will be 

smaller than the predicted increases in 

retirement savings. The proposed 

regulation may also have 

macroeconomic consequences, which 

are likely to be small but positive. An 

increase in retirement saving is likely to 

promote investment and long-term 

economic productivity and growth. The 

Department therefore concludes that the 

benefits of this proposed regulation will 

exceed its costs by a wide margin. 

In accordance with OMB Circular A–

4(available at http:// 

www.whitehouse.gov/omb/circulars/ 

a004/a–4.pdf), Table 1 below depicts an 

accounting statement showing the 

annualized benefits and transfers 

associated with the provisions of this 

proposed rule. 

BILLING CODE 4510–29–P 


rwilkins on PROD1PC63 with PROPOSAL_3
Federal Register / Vol. 71, No. 187 / Wednesday, September 27, 2006 / Proposed Rules 56813 

BILLING CODE 4510–29–C 

Executive Order 12866 

Under Executive Order 12866, the 

Department must determine whether a 

regulatory action is ‘‘significant’’ and 

therefore subject to the requirements of 

the Executive Order and subject to 

review by the Office of Management and 

Budget (OMB). Under section 3(f) of the 

Executive Order, a ‘‘significant 

regulatory action’’ is an action that is 

likely to result in a rule (1) having an 

annual effect on the economy of $100 

million or more, or adversely and 

materially affecting a sector of the 


rwilkins on PROD1PC63 with PROPOSAL_3EP27SE06.094</GPH>
56814 Federal Register / Vol. 71, No. 187 / Wednesday, September 27, 2006 / Proposed Rules 

economy, productivity, competition, 

jobs, the environment, public health or 

safety, or State, local or tribal 

governments or communities (also 

referred to as ‘‘economically 

significant’’); (2) creating serious 

inconsistency or otherwise interfering 

with an action taken or planned by 

another agency; (3) materially altering 

the budgetary impacts of entitlement 

grants, user fees, or loan programs or the 

rights and obligations of recipients 

thereof; or (4) raising novel legal or 

policy issues arising out of legal 

mandates, the President’s priorities, or 

the principles set forth in the Executive 

Order. OMB has determined that this 

action is significant under section 3(f)(1) 

because it is likely to have an annual 

effect on the economy of $100 million 

or more. Accordingly, the Department 

has undertaken, as described below, an 

analysis of the costs and benefits of the 

proposed regulation. The Department 

believes that the proposed regulation’s 

benefits justify its costs. 

Alternatives Considered by the 

Department 

Prior to the enactment of the Pension 

Protection Act, the Department 

considered providing relief under 

section 404(a) of ERISA, rather than 

section 404(c), in response to concerns 

that conditioning relief on compliance 

with the Department’s regulations under 

section 404(c), 29 CFR 2550.404c–1, 

may deter adoption of automatic 

enrollment provisions. Inasmuch as the 

relief provided by recently enacted 

section 404(c)(5) of ERISA does not 

condition relief on compliance with the 

Department’s regulations under section 

404(c), the Department concluded that 

adopting a regulation under section 

404(c)(5) effectively provided the same 

relief it considered providing under 

section 404(a). 

In defining the three types of 

investment products, portfolios or 

services that may be used as a qualified 

default investment alternative, the 

Department applied certain criteria. 

These criteria included consistency 

with market trends and mainstream 

financial planning practices. The 

Department entertained including as an 

additional type of investment product 

near risk-free fixed income instruments. 

Such instruments might have been 

defined so as to include money market 

mutual funds, certain bank deposits, 

and stable value insurance products. 

Including such instruments might yield 

some benefits. It is possible that at least 

some plan sponsors strongly prefer to 

use as default investments such 

instruments rather than any of the three 

types embraced by the proposed rule. It 

is further possible that some such 

sponsors would adopt automatic 

enrollment programs if and only if the 

fiduciary relief afforded by the proposed 

regulation was extended to include such 

instruments. In that case, including 

such instruments in the proposed 

regulation might boost participation and 

net retirement income for some 

individuals. The Department believes 

such cases would be rare, however. The 

proposed rule, by providing relief from 

fiduciary liability, is both intended and 

expected to tilt plan sponsors’ default 

investment preferences away from such 

instruments and toward the three types 

it embraces. Moreover, many plan 

sponsors currently use such instruments 

as default investments under automatic 

enrollment programs, and they and 

others might continue to do so after 

adoption of the proposed rule. The 

proposed rule leaves intact the current 

legal provisions applicable to the use of 

such instruments as default 

investments. 

On the other hand, including such 

instruments might erode benefits. 

Consider plan sponsors that under the 

proposed rule will adopt automatic 

enrollment programs and use as default 

investments one of the three types 

defined in the proposed rule. If such 

near-risk-free instruments were 

included as a fourth type, some of these 

plan sponsors might instead use such 

instruments as default investments, 

thereby reducing average investment 

performance and retirement income for 

some individuals. The Department 

therefore believes that including such 

instruments would be more likely to 

erode benefits than to increase them. 

Accordingly, the Department omitted 

such instruments from the types defined 

in the proposed rule. 

The Department also considered 

whether to include or omit an 

investment fund product or model 

portfolio that establishes a uniform mix 

of equity and fixed income exposures 

for all affected participants, ultimately 

deciding to include such a type as the 

second of the three types defined in the 

proposed rule. Such a product or model 

portfolio has some drawbacks relative to 

the other two types of investment 

products, portfolios or services that may 

be used as a qualified default 

investment alternative. Unlike the latter 

types, its target level of risk must be 

appropriate for participants of the plan 

as a whole but cannot be separately 

calibrated for each participant or for 

particular classes of participants. 

Therefore, while its risk level may be 

appropriate for all affected participants 

it is unlikely to be optimal for all. 

However, such a product or model 

portfolio may also have relative 

advantages. Compared with the other 

two types such a product or portfolio 

may be simpler, less expensive and 

easier to explain and understand. These 

advantages may outweigh the potential 

advantage of more customized risk 

levels, especially for plans covering 

relatively homogenous populations. 

And the inclusion of such products or 

model portfolios along with the other 

two types of investment products, 

portfolios or services might help 

heighten competition in the market and 

thereby enhance product quality and 

affordability across all three types. 

Regulatory Flexibility Act 

The Regulatory Flexibility Act (5 

U.S.C. 601 et seq.) (RFA) imposes 

certain requirements with respect to 

Federal rules that are subject to the 

notice and comment requirements of 

section 553(b) of the Administrative 

Procedure Act (5 U.S.C. 551 et seq.) and 

are likely to have a significant economic 

impact on a substantial number of small 

entities. Small entities include small 

businesses, organizations, and 

governmental jurisdictions. 

For purposes of analysis under the 

RFA, the Department proposes to 

continue to consider a small entity to be 

an employee benefit plan with fewer 

than 100 participants. The basis of this 

definition is found in section 104(a)(2) 

of ERISA, which permits the Secretary 

to prescribe simplified annual reports 

for pension plans that cover fewer than 

100 participants. Under section 

104(a)(3) of ERISA, the Secretary may 

also provide for exemptions or 

simplified annual reporting and 

disclosure for welfare benefit plans. 

Pursuant to the authority of section 

104(a)(3) of ERISA, the Department has 

previously issued at 29 CFR 2520.104–

20, 2520.104–21, 2520.104–41, 

2520.104–46, and 2520.104b–10 certain 

simplified reporting provisions and 

limited exemptions from reporting and 

disclosure requirements for small plans, 

including unfunded or insured welfare 

plans that cover fewer than 100 

participants and satisfy certain other 

requirements. 

Further, while some large employers 

may have small plans, in general small 

employers maintain most small plans. 

Thus, the Department believes that 

assessing the impact of these proposed 

rules on small plans is an appropriate 

substitute for evaluating the effect on 

small entities. The definition of small 

entity considered appropriate for this 

purpose differs, however, from a 

definition of small business that is 

based on size standards promulgated by 

the Small Business Administration 


rwilkins on PROD1PC63 with PROPOSAL_3
Federal Register / Vol. 71, No. 187 / Wednesday, September 27, 2006 / Proposed Rules 56815 

14The proposed regulation requires affected plans 

to disclose to participants and beneficiaries certain 

information related to default investment 

provisions and default investments. As discussed 

below in connection with the Paperwork Reduction 

Act, the burden of compliance with the information 

collection provisions, which will be borne by plan 

sponsors and plans, will be minor, relative to the 

anticipated benefits of the regulation. 

(SBA) (13 CFR 121.201) pursuant to the 

Small Business Act (15 U.S.C. 631 et 

seq.). The Department therefore requests 

comments on the appropriateness of the 

size standard used in evaluating the 

impact of these proposed rules on small 

entities. 

The reasons the Department is 

proposing this regulation, and the 

objectives of and legal basis for the 

proposed regulation, are discussed 

earlier in this preamble. 

The Department has concluded that 

the primary effects of this proposed 

regulation will be to increase retirement 

savings and pension incomes for 

participants and beneficiaries by 

directing default investments to higherperforming portfolios and by promoting 

the implementation of automatic 

enrollment programs in participant 

directed individual account pension 

plans. Applying this assessment under 

the standards of the RFA, the 

Department believes that the impact of 

this proposed regulation will fall 

primarily on participants in participant 

directed individual account pension 

plans, and not on the plans themselves 

or on the employers that sponsor the 

plans. By promoting automatic 

enrollment programs and thereby 

increasing aggregate participant 

contributions, the proposed regulation 

may also increase some employers’

matching contributions, including 

matching contributions made by small 

plans. For reasons explained below, 

however, the Department has concluded 

that this effect is not a sufficient basis 

for concluding that the proposed 

regulation will have a significant impact 

on a substantial number of small 

entities.14

Many plan sponsors provide matching 

contributions. The Department 

estimates that, if the proposed 

regulation is finalized, approximately 10 

to 20 percent of all small participant 

directed defined contribution plans, or 

as many as 28,000 to 56,000 small plans, 

may adopt automatic enrollment 

programs and, consequently, may incur 

additional matching contributions. Such 

an increase in automatic enrollment 

programs could have the indirect effect 

of increasing aggregate matching 

contributions in small plans by between 

$100 million and $300 million annually 

(expressed at 2005 levels). The effect of 

increased matching contributions is 

expected to be proportionately similar 

for small and large entities. However, 

adverse consequences are not expected, 

for either large or small plans, because 

the adoption of automatic enrollment 

programs and the provision of matching 

contributions are, generally, voluntary 

and at the discretion of the plan 

sponsor. Reliance on the proposed 

regulation and, therefore, compliance 

with its provisions are also voluntary on 

the part of the plan sponsor. 

Accordingly, it is highly unlikely that 

the proposed regulation would have a 

significant impact on a substantial 

number of small entities. Therefore, the 

head of the Employee Benefits Security 

Administration hereby certifies, as 

required under section 605(b) of the 

RFA, that this proposed regulation will 

not, if promulgated, have a significant 

economic impact on a substantial 

number of small entities. 

The Department is unaware of any 

duplicative, overlapping or conflicting 

federal rules. 

Paperwork Reduction Act 

As part of its continuing effort to 

reduce paperwork and respondent 

burden, the Department of Labor 

conducts a preclearance consultation 

program to provide the general public 

and Federal agencies with an 

opportunity to comment on proposed 

and continuing collections of 

information in accordance with the 

Paperwork Reduction Act of 1995 (PRA 

95) (44 U.S.C. 3506(c)(2)(A)). This helps 

to ensure that the public understands 

the Department’s collection 

instructions; respondents can provide 

the requested data in the desired format, 

the reporting burden (time and financial 

resources) is minimized, and the 

Department can properly assess the 

impact of collection requirements on 

respondents. 

Currently, the Department is soliciting 

comments concerning the information 

collection request (ICR) included in the 

Proposed Regulation on Default 

Investment Alternatives under 

Participant Directed Individual Account 

Plans. A copy of the ICR may be 

obtained by contacting the person listed 

in the PRA Addressee section below. 

The Department has submitted a copy 

of the proposed regulation to OMB in 

accordance with 44 U.S.C. 3507(d) for 

review of its information collections. 

The Department and OMB are 

particularly interested in comments 

that: 

• Evaluate whether the proposed 

collection of information is necessary 

for the proper performance of the 

functions of the agency, including 

whether the information will have 

practical utility; 

• Evaluate the accuracy of the 

agency’s estimate of the burden of the 

collection of information, including the 

validity of the methodology and 

assumptions used; 

• Enhance the quality, utility, and 

clarity of the information to be 

collected; and 

• Minimize the burden of the 

collection of information on those who 

are to respond, including through the 

use of appropriate automated, 

electronic, mechanical, or other 

technological collection techniques or 

other forms of information technology, 

e.g., by permitting electronic submission 

of responses. 

Comments should be sent to the 

Office of Information and Regulatory 

Affairs, Office of Management and 

Budget, Room 10235, New Executive 

Office Building, Washington, DC 20503; 

Attention: Desk Officer for the 

Employee Benefits Security 

Administration. Although comments 

may be submitted through November 

13, 2006, OMB requests that comments 

be received within 30 days of 

publication of the Notice of Proposed 

Rulemaking to ensure their 

consideration. 

PRA Addressee: Address requests for 

copies of the ICR to Susan G. Lahne, 

Office of Policy and Research, U.S. 

Department of Labor, Employee Benefits 

Security Administration, 200 

Constitution Avenue, NW., Room N–

5718, Washington, DC 20210. 

Telephone: (202) 693–8410; Fax: (202) 

219–5333. These are not toll-free 

numbers. 

The proposed Regulation on Default 

Investment Alternatives under 

Participant Directed Individual Account 

Plans (29 CFR 2550.404c–5) would 

provide certain relief for fiduciaries who 

make investment decisions on behalf of 

participants and beneficiaries in 

individual account pension plans that 

provide for participant direction of 

investments when such participants and 

beneficiaries fail to direct the 

investment of their account assets. The 

regulation describes conditions under 

which a participant who fails to provide 

investment direction will be treated as 

having exercised control over assets in 

his or her account under an individual 

account plan as provided in section 

404(c)(5)(A) of ERISA. The proposed 

regulation would require that the assets 

of non-directing participants be invested 

in one of the qualified default 

investment alternatives described in the 

proposed regulation and that certain 

other specified conditions be met. 


rwilkins on PROD1PC63 with PROPOSAL_3
56816 Federal Register / Vol. 71, No. 187 / Wednesday, September 27, 2006 / Proposed Rules 

15All numbers used in this paperwork burden 

estimate have been rounded to the nearest 

thousand. 

16Hourly wage estimates are based on data from 

the Bureau of Labor Statistics 2000 Occupational 

Employment Survey and data from the 2001 

Employment Cost Index, and overhead assumptions 

by EBSA. 

This ICR pertains to two separate 

disclosure requirements that are 

conditions to the relief created by the 

proposed regulation, as follows: (1) An 

annual notice containing specified 

information that must be provided to 

any individual whose assets may in the 

future be invested in a qualified default 

investment alternative at least 30 days 

prior to the fiduciary’s initial 

investment, and thereafter at least 30 

days before the beginning of each plan 

year; and (2) pass-through to 

participants and beneficiaries of any 

material (such as account statements, 

prospectuses, and proxy voting 

material) provided to the plan relating 

to the participant’s or beneficiary’s 

investment in a qualified default 

investment alternative. The information 

collection provisions of this proposed 

regulation are intended to ensure that 

participants and beneficiaries who are 

provided the opportunity to direct the 

investment of their account balances, 

but who do not do so, are adequately 

informed about the plan’s provisions for 

default investment and about 

investments made on their behalf under 

the plan’s default provisions. 

The estimates of respondents and 

responses are derived primarily from 

the Form 5500 Series filings for the 2003 

plan year, which is the most recent 

reliable data available to the 

Department. The burden for the 

preparation and distribution of the 

disclosures is treated as an hour burden. 

Additional cost burden derives solely 

from materials and postage. It is 

assumed that electronic means of 

communication will be used in 38 

percent of the responses pertaining to 

annual notices and that such 

communications will make use of 

existing systems. Accordingly, no cost 

has been attributed to the electronic 

distribution of information. 

Annual Notice—29 CFR 2550.404c–

5(c)(3). The proposed regulation 

requires that a notice be provided at 

least 30 days before any portion of a 

participant’s or beneficiary’s account 

balance is initially invested in a 

qualified default investment alternative 

and annually thereafter. The notice 

must describe (1) the circumstances 

under which assets in a participant’s 

individual account may be invested in 

a qualified default investment 

alternative; (2) the qualified default 

investment alternative, including its 

investment objectives, risk and return 

characteristics (if applicable), and fees 

and expenses; (3) the participants’ and 

beneficiaries’ right to direct the 

investment of the assets to any other 

investment alternative offered under the 

plan, without financial penalty; and (4) 

where participants and beneficiaries can 

obtain information about the other 

investment alternatives available under 

the plan. The proposed regulation states 

that the initial notice may be included 

in the plan’s summary plan description 

or a summary of material modifications, 

or it may be provided as a separate 

notice. 

The Department estimates that 

418,000 15 participant directed 

individual account pension plans will 

prepare and distribute annual notices to 

61,612,000 eligible workers, participants 

and beneficiaries in the first year in 

which this proposed regulation (if 

finalized) becomes applicable. 

Preparation of the annual notice in the 

first year is estimated to require one-half 

hour of legal professional time for each 

plan, for a total aggregate estimate of 

209,000 burden hours. For the 62 

percent of participants and beneficiaries 

who will receive the annual notice by 

mail (38,200,000 individuals), 

distribution of the annual notice is 

estimated to require an additional 

306,000 hours of clerical time, based on 

an estimate of one-half minute of 

clerical time per notice. No additional 

burden hours are attributed to the 

distribution of the annual notice to the 

remaining 38 percent of participants 

and beneficiaries who will receive this 

notice electronically (23,413,000 

individuals). The total annual burden 

hours estimated for the annual notice in 

the first year, therefore, are 515,000. The 

equivalent cost for this burden hour 

estimate is $22,548,000 (legal 

professional time is valued at $83 per 

hour, and clerical time is valued at $17 

per hour).16

In addition to burden hours, the 

Department has estimated annual costs 

attributable to the annual notice for the 

first year, based on materials and 

postage, at $18,718,000. This comprises 

the material cost for a two-page annual 

notice ($.10 per notice) to 38,200,000 

participants and beneficiaries (62 

percent of 61,612,000 participants and 

beneficiaries), which equals $3,820,000, 

plus postage at $0.39 per mailing, which 

equals $14,898,000. Total annual costs 

for the annual notice in the first year are 

therefore estimated at $18,718,000. 

In years subsequent to the first year of 

applicability, the Department estimates 

that annual notices will be prepared 

only by newly established participant 

directed individual account pension 

plans and plans that changed their 

choice of qualified default investment 

alternative. For purposes of burden 

analysis, the Department has assumed 

that one-third (1⁄3) of all participant 

directed individual account plans 

(139,000 plans) will prepare and 

distribute new or updated initial notices 

to all participants and beneficiaries, 

requiring 24 minutes of legal 

professional time per notice. The 

preparation of the initial notice in each 

subsequent year is estimated to require 

56,000 hours. However, the number of 

participants receiving initial notices 

stays the same. As in the calculation for 

the initial year, distribution to the 62 

percent of participants and beneficiaries 

who will receive the initial notice by 

mail (38,200,000 individuals) will 

require 306,000 hours and $18,718,000 

additional materials and postage cost. 

(As for the first year, the Department has 

assumed that electronic distribution of 

the initial notice in subsequent years 

will not add any significant additional 

paperwork burden.) 

Based on those assumptions, the 

Department estimates that the total 

burden hours for annual notices in each 

year after the first year of applicability 

will fall to 361,000 hours. The 

equivalent cost of such an hour burden 

(using the same assumptions as for the 

first year) is $9,823,000. The total cost 

burden estimated for subsequent years 

for the annual notice will stay at 

$18,718,000. 

Pass-through Material—29 CFR 

2550.404c–5(c)(4). Under the proposed 

regulation, any material received by a 

plan (such as account statements, 

prospectuses, and proxy voting 

material) that relates to a default 

investment must be passed through to 

the participant or beneficiary on whose 

behalf the default investment was made. 

The proposed regulation imposes this 

requirement only with respect to 

participants and beneficiaries who have 

an investment in a qualified default 

investment alternative that was made by 

default. In conformity with the 

assumptions underlying the other 

economic analyses in this preamble, the 

Department has assumed that, at any 

given time, 5.3 percent of participants 

and beneficiaries in participant directed 

individual account pension plans 

(2,351,000 individuals) will have 

default investments. For purposes of 

this burden analysis, the Department 

has also assumed that plans will receive 

materials that must be passed through 

the participants and beneficiaries on a 

quarterly basis. This assumption takes 

into account that many, although not 

all, plans will receive quarterly account 


rwilkins on PROD1PC63 with PROPOSAL_3
Federal Register / Vol. 71, No. 187 / Wednesday, September 27, 2006 / Proposed Rules 56817 

17 Various surveys estimate the proportion at 50 

percent (48th Annual Survey of Profit Sharing/ 

401(k) Plans, supra note 2, at 37, Table 64), 58 

percent (2004 Annual 401(k) Benchmarking Survey, 

supra note 2, at 7, Exhibit 20), and 81 percent 

(Utkus, supra note 4, at 3). 

18 It should be noted that these estimates pertain 

only to default investments made on behalf of 

default participants under automatic enrollment 

programs. The default investment proposed 

regulation is not so limited. Therefore, these 

estimates are likely to omit some of the direction 

of a larger share of default investments into equity 

that will occur under the proposed regulation. The 

Department lacks data on the amount of default 

investment activity occurring outside the default 

participation context, or any basis for predicting 

whether or how much such activity might increase 

as a result of the proposed regulation. The 

Department invites comments on these questions. 

19Stocks, Bonds, Bills and Inflation 2005 

Yearbook, Ibbotson Assocs., at 117, Table 6–7 

(2005). 

20 Id. 

21 Id. at 38–39, Table 2–5. 

22 Id. at 50–51, Table 2–11. 

23See, e.g., Utkus, supra note 4. 

24Bureau of Labor Statistics, National 

Compensation Survey: Employee Benefits in Private 

Industry in the United States, 2002–2003, Bulletin 

2573, at 109 (2005). 

25EBSA estimate. The proportion of plans in 

various size classes that provide automatic 

enrollment was taken from 48th Annual Survey of 

Profit Sharing/401(k) Plans, supra note 2, at 36, 

Table 61. EBSA took a weighted average of these 

proportions, reflecting the distribution of 401(k) 

participants across the plan size classes, as 

estimated by EBSA based on annual reports filed by 

plans with EBSA. 

26The incidence of automatic enrollment appears 

to be growing, by one estimate from 8.4 percent of 

plans in 2003 to 10.5 percent in 2004 (Id. at 36), 

by another from 14 percent in 2003 to 19 percent 

in 2005 (Survey Findings: Trends and Experiences 

in 401(k) Plans, 2005, supra note 2, at 1, 13). 

Another survey found no growth between 2003 and 

2004. 2004 Annual 401(k) Benchmarking Survey, 

Continued 

statements and prospectuses, and that 

plans will also receive other passthrough materials on occasion. These 

two factors result in an estimate of 

9,405,000 responses (distributions of 

pass-through materials) per year. 

Duplication and packaging of the passthrough material is estimated to require 

1.5 minutes of clerical time per 

distribution, for an annual hour burden 

estimate of 235,000 hours of clerical 

time. The equivalent cost of this hour 

burden is estimated at $3,997,000. 

Additional cost burden for the passthrough of material is estimated to 

include paper cost (40 pages of material 

yearly per participant or beneficiary) 

and postage ($.58 per mailing) at 

$10,157,000 annually for 4 distributions 

per participant or beneficiary with a 

default investment. 

These paperwork burden estimates 

are summarized as follows: 

Type of Review: New collection. 

Agency: Employee Benefits Security 

Administration, Department of Labor. 

Title: Default Investment Alternatives 

under Participant Directed Individual 

Account Plans. 

OMB Number: 1210–NEW. 

Affected Public: Business or other forprofit; not-for-profit institutions. 

Respondents: 417,000. 

Responses: 71,017,000. 

Frequency of Response: Annually; 

occasionally. 

Estimated Total Annual Burden 

Hours: 750,000 (first year). 

Estimated Total Annual Burden Cost: 

$28,875,000. 

Congressional Review Act 

This notice of proposed rulemaking is 

subject to the provisions of the 

Congressional Review Act provisions of 

the Small Business Regulatory 

Enforcement Fairness Act of 1996 (5 

U.S.C. 801 et seq.) and, if finalized, will 

be transmitted to the Congress and the 

Comptroller General for review. 

Unfunded Mandates Reform Act 

Pursuant to provisions of the 

Unfunded Mandates Reform Act of 1995 

(Pub. L. 104–4), this rule does not 

include any Federal mandate that may 

result in expenditures by State, local, or 

tribal governments, or the private sector, 

which may impose an annual burden of 

$100 million or more. 

Discussion of Economic Impacts 

Default Investments 

A majority 17 of 401(k) plans with 

automatic enrollment offer as default 

investment vehicles money market or 

stable value funds or similarlyperforming vehicles. The proposed 

regulation is expected to reduce this 

proportion by encouraging plans to offer 

default investment vehicles that include 

a mix of equity and fixed income 

instruments. 

As a result of this proposed 

regulation, it is estimated that in the 

long run 401(k) plan equity holdings 

expressed at 2005 levels will increase by 

between $27 billion and $48 billion. 

The portion of this estimated increase 

that is attributable directly to the 

direction of a larger share of default 

investments into equity is between $11 

billion and $14 billion.18 The rest is 

attributable to increased contributions, 

which are discussed below under the 

heading ‘‘Participation and Contribution 

Behavior.’’

Account Performance 

Historically, over long time horizons, 

diversified portfolios that include 

equities have tended to outperform 

those consisting only of very low risk, 

short term debt instruments, often by 

large amounts. From 1926 to 2004, large 

company stocks returned 10.4 percent 

annually on average, long-term 

corporate bonds 5.9 percent, and U.S. 

Treasury bills 3.7 percent.19 Stocks are 

also riskier, however: the standard 

deviations in annual returns for these 

three securities classes over this period 

were 20.3 percent, 8.6 percent and 3.1 

percent.20 One-year large company 

stock returns ranged from ¥43 percent 

to 54 percent, long-term corporate bond 

returns from ¥8 percent to 43 percent, 

and U.S. Treasury bill returns from 0 

percent to 15 percent.21 But 20-year 

returns on these classes of securities 

ranged respectively from 3 percent to 18 

percent, 1 percent to 12 percent, and 

from 0.4 percent to 8 percent.22 Based 

on this history, it is widely believed to 

be advantageous for long-term savers, 

such as workers saving for retirement, to 

invest a substantial portion of their 

assets in equity.23

As noted above, this proposed 

regulation is expected to result in the 

direction of default investments from 

very low-risk instruments such as 

money market funds to diversified 

portfolios that include a substantial 

proportion of equities. If historical 

patterns hold, this in turn is expected to 

improve investment results for a large 

majority of affected individuals. As a 

result of this proposed regulation, in the 

long run aggregate 401(k) account 

balances are estimated to increase by 

between $45 billion and $89 billion, 

expressed at 2005 levels. The portion of 

this estimated increase directly 

attributable to direction of default 

investments from very low-risk 

instruments into higher-performing 

portfolios is between $7 billion and $9 

billion; the remainder is attributable to 

expected increases in contributions, 

discussed below under the heading 

‘‘Participation and Contribution 

Behavior.’’

Automatic Enrollment 

Automatic enrollment programs are 

growing in popularity. These programs 

covered only about 5 percent of workers 

eligible for 401(k) plans in 2002,24 but 

the number may have increased to 18 

percent today 25 and could reach 25 

percent in the near future. The 

Department expects and intends that 

this proposed regulation, by alleviating 

some fiduciary concerns that might 

otherwise discourage implementation of 

automatic enrollment programs, will 

promote wider implementation of such 

programs. As a result of the proposed 

regulation, in the near future such 

programs may cover 35 percent to 45 

percent of eligible workers rather than 

25 percent.26


rwilkins on PROD1PC63 with PROPOSAL_3
56818 Federal Register / Vol. 71, No. 187 / Wednesday, September 27, 2006 / Proposed Rules 

supra note 2, at 6. Indicators of future growth are 

mixed. Most point to a potential for large growth, 

but it is unclear how much of this growth will be 

realized. The same survey that found no growth 

between 2003 and 2004 also found that, in 2004, 

14 percent of plan sponsors had not yet 

implemented but were considering implementing 

automatic enrollment. Id. at 6, Exhibit 17. By 

another estimate, in 2005, 28 percent of plan 

sponsors indicated that they were likely to 

implement automatic enrollment over the next year. 

See Survey Findings: Hot Topics in Retirement 

2005, (Hewitt Associates LLC) 2005, at 11. But 53 

percent indicated they were unlikely to implement 

any automatic plan features, including 28 percent 

that cited concern about assuming additional 

fiduciary responsibility. Id. at 12. To estimate the 

impact of this proposed regulation on account 

balances and pension income, EBSA adopted the 

following assumptions. If current trends and 

concerns continued, the incidence of automatic 

enrollment would soon reach 25 percent of eligible 

employees, and then remain at that level. The 

proposed regulation, by relieving fiduciary 

concerns that discourage implementation of 

automatic enrollment, would increase that 

incidence to between 35 percent (low impact 

estimates) and 45 percent (high impact estimates). 

In addition, new provisions for a nondiscrimination 

safe harbor under the Code for ‘‘qualified automatic 

contribution arrangements,’’ added by section 902 

of the Pension Protection Act, are likely to affect the 

future incidence of automatic enrollment. These 

assumptions are highly uncertain and EBSA invites 

comments on their validity and suggestions as to 

how to develop more reliable estimates of the future 

incidence of automatic enrollment programs. 

27However, there is also evidence that automatic 

enrollment programs can have the effect of lowering 

contribution rates for a few employees below the 

level that they would have elected absent automatic 

enrollment. At present, surveys indicate that the 

default contribution rate is usually either 2 percent 

or 3 percent of salary. Some employees who might 

otherwise have enrolled (either at first eligibility or 

later) and elected a higher contribution rate may 

instead permit themselves to be enrolled at the 

default rate. Once contributing at the default rate 

they may continue at that rate for some time. See, 

e.g., James J. Choi, David Laibson, Brigitte C. 

Madrian & Andrew Metrick, Saving for Retirement 

on the Path of Least Resistance, (July 19, 2004); see 

also Choi, Laibson & Madrian, supra note 1. The 

potential for lowering of contribution rates will be 

minimized in plans that provide for automatic 

escalation of default contribution rates, such as will 

be required under new tax nondiscrimination safe 

harbor provisions for ‘‘qualified automatic 

contribution arrangements,’’ added by section 902 

of the Pension Protection Act. 

Participation and Contribution Behavior 

Analyses of automatic enrollment 

programs demonstrate that such 

programs increase participation. The 

increase is most pronounced among 

employees whose participation rates 

otherwise tend to be lowest, namely 

lower-paid, younger and shorter-tenure 

employees. Automatic enrollment 

programs increase many such 

employees’ contribution rates from zero 

to the default rate, often supplemented 

by some employer matching 

contribution. These additional 

contributions tend to come early in the 

employees’ careers and therefore can 

add disproportionately to retirement 

income as investment returns 

accumulate over a long period.27

Plans implementing automatic 

enrollment programs may increase their 

participation rates on average from 

approximately 70 percent to perhaps 90 

percent. Consequently, the Department 

estimates that this proposed regulation 

will increase overall 401(k) 

participation rates from 72 percent to 

between 75 percent and 77 percent. 

Aggregate annual contributions are 

expected to grow on net by between 

$1.9 billion and $3.8 billion, expressed 

at 2005 levels. These and related 

estimates are summarized Table 2 

below. 

Retirement Income From 401(k) Plans 

For all individuals born in 1985 and 

surviving to age 67, holding other 

factors constant, low-impact estimates 

suggest that the proposed regulation 

may increase pension income by an 

average of $2,010 per year (in 2005 

dollars) for 10 percent, but could 

decrease it by $1,120 per year on 

average for 5 percent. Pension income 

would be unchanged for the remaining 

85 percent. High-impact estimates 

suggest that average annual pension 

income may increase by $2,740 for 14 

percent, fall by $1,460 for 6 percent, and 

be unchanged for 80 percent. The 

number of individuals experiencing 

increases in retirement income is 

estimated to be approximately twice the 

number experiencing decreases, and the 

average gains are estimated to be 

approximately twice the size of average 

losses. These estimates are summarized 

Table 3 below. (The incidence and size 

of gains are likely to be larger than 

estimated here, and those of any losses 

are likely to be smaller, if plans provide 

for escalating default contribution rates 

or higher default contribution rates than 

assumed here.) 


rwilkins on PROD1PC63 with PROPOSAL_3EP27SE06.095</GPH>
Federal Register / Vol. 71, No. 187 / Wednesday, September 27, 2006 / Proposed Rules 56819 

Cost 

Plan sponsors may incur some 

administrative cost in order to meet the 

conditions of the proposed regulation. 

The Department generally expects such 

cost to be low. The annual notice 

provision can be satisfied by adding 

information to existing notices and 

disclosures, such as the Summary Plan 

Description, the annual investment 

election form, or by adapting 

information provided to the plan by the 

investment manager of a qualified 

default investment alternative. The 

requirement to pass through investment 

material to participants and 

beneficiaries does not impose extensive 

costs. These revisions may be no more 

extensive than those associated with 

other amendments that plans implement 

from time to time. The boundaries of the 

proposed regulation are sufficiently 

broad to encompass a wide range of 

readily available and competitively 

priced investment products and 

services. It is likely that a large majority 

of participant directed plans already 

offer one or more investment options 

that would fall within the proposed 

regulation. For these reasons, it is likely 

that the administrative cost for a plan 

sponsor to take advantage of the relief 

afforded by the proposed regulation will 

be low. The Department invites 

comments on the administrative cost of 

this proposed regulation, and 

suggestions as to how to minimize that 

cost. 

The proposed regulation may 

indirectly prompt some plan sponsors to 

shoulder additional costs in terms of 

increased retirement benefits paid to 

employees. For example, it is expected 

that the proposed regulation, by 

promoting the adoption of automatic 

enrollment programs, will have the 

indirect affect of increasing aggregate 

employer matching contributions by 

between $700 million and $1.3 billion 

annually (expressed at 2005 levels). 

Adverse consequences are not expected 

because the adoption of automatic 

enrollment programs and the provision 

of matching contributions generally are 

at the discretion of the plan sponsor. 

Use of the proposed regulation and, 

therefore, compliance with its 

provisions are also voluntary on the part 

of the plan sponsor. 

Additional Potential Consequences 

The Department anticipates that this 

proposed regulation will have two major 

economic consequences. Default 

investments will be directed toward 

higher-return instruments boosting 

average account performance, and 

automatic enrollment provisions will 

become more common boosting 

participation. However, it is possible 

that the proposed regulation will have 

additional, indirect consequences, 

which could affect future retirement 

income levels. The Department invites 

public comment on the likelihood and 

implications of any such consequences, 

including comments addressing the 

following questions. 

• Will plan sponsors that direct 

default investments from very low-risk 

instruments into higher-performing 

portfolios make other changes to 

investment options or undertake new 

efforts to inform or influence 

participants’ investment decisions? Will 

those plan sponsors that implement 

automatic enrollment programs change 

other provisions of their plans as well? 

For example, might they change 

matching contribution formulas, 

eligibility or vesting provisions, loan 

programs, or distribution policies? 

• More than one-half of all 

participant directed individual account 

plans recently reported compliance with 

ERISA section 404(c)(1) and associated 

regulations. While the fiduciary 

protections afforded by this proposed 

regulation for default investments are 

intended to be similar to those afforded 

by the regulation under section 404(c)(1) 

of ERISA for participants’ active 

investment elections, it is possible that 

some fiduciaries who are covered by the 

proposed regulation in connection with 


rwilkins on PROD1PC63 with PROPOSAL_3EP27SE06.096</GPH>
56820 Federal Register / Vol. 71, No. 187 / Wednesday, September 27, 2006 / Proposed Rules 

28Holden & VanDerhei, supra note 1, at 15, Figure 

10. 29As noted below, peer reviewers raised 

questions about welfare effects in connection with 

peer review. 30 Insofar as the Department expects contributions 

to increase, the Department expects taxes on 

income to be correspondingly deferred. The 

magnitude of this effect would depend on the 

timing of contributions and withdrawals and the tax 

rates applicable at those times. 

31PENSIM was developed for the Department by 

the Policy Simulation Group as a tool for examining 

the macroeconomic and distributional implications 

of private pension trends and policies. Detailed 

information on PENSIM is available at http:// 

www.polsim.com/PENSIM.html. Examples of 

PENSIM applications include comparisons of 

retirement income prospects for different 

generations contained in U.S. Government 

Accountability Office, Report No. 03–429, 

Retirement Income: Intergenerational Comparisons 

of Wealth and Future Income (2003) and 

comparisons of pension income produced by 

traditional defined benefit pension plans and cash 

balance pension plans contained in U.S. 

Government Accountability Office, Report No. 06–

42, Private Pensions: Information on Cash Balance 

Pension Plans (2005). As noted below, the choice 

of PENSIM as the basis for these estimates was 

questioned in the context of peer review. 

default investments will not be covered 

by the regulation under section 404(c)(1) 

in connection with participant directed 

investments out of default investments. 

If so, how might the proposed 

regulation’s incentives interact with 

those associated with the existing 

ERISA section 404(c) regulation, and to 

what effect? 

• Will employees who make 

additional contributions as a result of 

new automatic enrollment programs 

reduce their current consumption or 

other types of current saving, or some of 

each? Will they be more or less likely 

than otherwise similar participants to 

retain or roll over their accounts, 

preserving them into retirement? 

Changes such as these could either 

augment or offset the effects of this 

proposed regulation on retirement 

saving and pension income. For 

example, by one estimate, among 

employees eligible for a 401(k) plan 

with automatic enrollment and a life 

cycle fund investment default, moving 

the default contribution up from 3 

percent to 6 percent could increase the 

median earnings replacement rate from 

401(k) savings in each of the four 

earnings quartiles by between 6 and 10 

percentage points.28

Cost-Benefit Assessment 

The costs and benefits of the proposed 

regulation are not simple, direct 

functions of the foregoing gross dollar 

estimates. For example, increases in 

retirement savings due to automatic 

enrollment will be offset by either 

decreases in current consumption or 

reductions in other savings. Increases 

due to higher returns will entail 

additional risk. Therefore, net benefits 

will be smaller than the predicted 

increases in retirement savings. The 

Department did not attempt to quantify 

these welfare effects, believing that 

there is insufficient data on the time 

preference for consumption and level of 

risk aversion in the affected 

population.29

The proposed regulation will have 

distributional consequences, the costs 

and benefits of which are open to 

different interpretations. Average 

increases in pension income will be 

larger for individuals with higher career 

earnings, but they will be 

proportionately larger for those with 

lower career earnings (see Table 4 

below). Moreover, while average 

pension incomes will rise in each of the 

four career earnings quarterlies, a small 

minority of individuals in each quartile 

could lose some pension income (see 

Table 3). 

The proposed regulation may also 

have macroeconomic consequences, 

which are likely to be small but 

positive. An increase in retirement 

saving is likely to promote investment 

and long-term economic productivity 

and growth. The increase in retirement 

saving will be very small relative to 

overall market capitalization, and may 

be offset in part by reductions in other 

saving. Therefore macroeconomic 

benefits are likely to be small.30

Based on the foregoing analysis and 

estimates, the Department is confident 

that the proposed regulation will 

increase aggregate retirement savings 

and pension income substantially. The 

Department therefore concludes that the 

benefits of this proposed regulation will 

exceed its costs by a wide margin, and 

invites comments on this conclusion. 

Basis of Estimates 

The Department estimated the effect 

of the proposed regulation on 401(k) 

plan participation, contributions, 

account balances, and investment mix, 

and its effect on pension incomes at age 

67, using a microsimulation model of 

lifetime pension accumulations for a 

birth cohort, known as PENSIM.31 To 

produce the low and high impact 

estimates presented here, PENSIM was 

parameterized and applied as follows. 

First, automatic enrollment was 

assigned randomly to achieve 

incidences of 25 percent (baseline), 35 


rwilkins on PROD1PC63 with PROPOSAL_3EP27SE06.097</GPH> 
Federal Register / Vol. 71, No. 187 / Wednesday, September 27, 2006 / Proposed Rules 56821 

32These findings were drawn from Choi, Laibson 

& Madrian, supra note 1. The overall participation 

rate under automatic enrollment was adjusted 

upward to 90 percent. 

33See, e.g., 2004 Annual 401(k) Benchmarking 

Survey; supra note 2, at 6; see also Survey Findings: 

Trends and Experiences in 401(k) Plans, supra note 

2, at 16;’’ see also 48th Annual Survey of Profit 

Sharing/401(k) Plans, supra note 2, at 36. 

34These estimates assume complete 

correspondence between default participation in 

401(k) plans and default investing. Participants 

contributing by default are assumed to invest by 

default, while those who actively elect to contribute 

or who are in plans without elective contributions 

are assumed to actively invest. In practice neither 

of these assumptions will hold all of the time. Some 

participants contributing by default may actively 

direct their investments. Perhaps more important, 

some active contributors or participants in plans 

without elective contributions may invest by 

default—and this proposed regulation may affect 

the incidence of such default investing. The 

Department did not attempt to estimate the extent 

or effect of default investing not associated with 

default contributing. The Department was unable to 

locate data on the extent of such default investing, 

but believes it is likely to be small relative to that 

of default investing of default contributions. The 

Department is likewise uncertain how much the 

proposed regulation might affect the incidence of 

such default investing, but believes that the 

economic effects of changes in that incidence will 

be modest insofar as the asset allocation of the 

active investments such default investments would 

replace are likely on average and aggregate to not 

differ much from the asset allocation of the defaults. 

The Department also notes that a large majority of 

the estimated economic effects of the proposed 

regulation derive from increased contributions 

rather than increased equity investment, so the 

omission from the estimates of some default 

investment effects may have only a modest effect 

on the total. The Department invites comments on 

its assumptions and estimates relating to the 

incidence of default investments. 

35On the risk return spectrum, Treasury bonds 

generally fall between money market and stable 

value funds on one side and balanced and life cycle 

funds on the other. They serve here as a proxy for 

the current default investments connected with 

automatic enrollment programs, which are mostly 

money market and stable value funds but include 

a substantial proportion of balanced and life cycle 

funds. 

36This is the rate used by the Office of the 

Actuary, U.S. Social Security Administration, to 

estimate returns to proposed personal accounts in 

the Social Security program. 

37This is parallel to volatility assumed by 

Vanguard in illustrating the effects of alternative 

default investments. See Utkus, supra note 4, at 17. 

38Because PENSIM is a birth cohort-based model 

(rather than a panel-based model that simulates the 

experience of an entire population from year to 

year) it does not directly provide point-in-time 

aggregate estimates for the overall population. 

These PENSIM-derived estimates serve as a proxy 

for such panel-derived point-in-time estimates. The 

PENSIM-based estimates in effect blend the 

experience of younger workers in the nearer future 

with that of older workers in the more distant 

future, producing a sort of longitudinal central 

tendency. The estimated participation and 

contribution rates serve as proxies for the average 

across many future years (reflecting nearimmediate, ongoing effects). The estimated account 

balances serve as proxies for some point in the 

distant future (reflecting cumulative effects). Actual 

aggregate participation rates and contribution 

amounts will vary over time because of changes in 

certain population variables such as birth rates, agespecific labor force participation rates, and 

productivity and compensation levels. Any longterm forecasts of such changes are highly uncertain, 

however. The Department therefore did not attempt 

to adjust its estimates for such changes, believing 

such adjustments would be of questionable analytic 

value. Because the PENSIM-derived contribution 

estimates blend experience at different points in 

time and do not represent changes in population 

contributions over time or the timing of those 

changes, they do not lend themselves to 

discounting, conversion to net present values or 

level annuity equivalents. Rather, they can be 

interpreted as proxies for level annuity equivalents, 

albeit proxies which neglect the aforementioned 

changes in population variables. 

39Taking into account individuals’ propensities 

to cash out their accounts prior to retirement. 

40As noted below, other areas of uncertainty, 

including rates of return, the rate of adoption of 

automatic enrollment, participation rates under 

automatic enrollment, and other savings decisions, 

were raised in connection with peer review. 

41Nonetheless, to illustrate the potential impact 

of higher default contribution rates, the Department 

estimated the effect of the proposed regulation 

where the default contribution rate in automatic 

enrollment programs is 5 percent rather than 3 

percent. The estimate holds constant other plan 

characteristics and participants’ default rates and 

elective behaviors. In this scenario, in the very long 

run the proposed regulation is predicted to increase 

aggregate 401(k) plan account balances by between 

3 percent and 6 percent, or approximately $60 

billion and $114 billion if represented at 2005 

levels. For individuals born in 1985 and surviving 

to age 67, holding other factors constant, lowimpact estimates suggest that the proposed 

regulation will increase pension income by an 

average of $2,200 per year (in 2005 dollars) for 11 

percent, and decrease it by $810 per year on average 

for 4 percent. Pension income would be unchanged 

for the remaining 85 percent. High-impact estimates 

suggest that average annual pension income will 

increase by $2,880 for 15 percent, fall by $1,040 for 

5 percent, and be unchanged for 80 percent. 

percent (low impact) and 45 percent 

(high impact) of 401(k) plan eligible 

employees. Next, participation and 

default participation rates were adjusted 

to reflect available research findings on 

these rates at various tenures in the 

presence and absence of automatic 

enrollment programs.32 The default 

contribution rate was assumed to be 3 

percent, which surveys indicate is the 

most common rate currently in use.33

The investment of contributions made 

by default was directed as follows:34 in 

the baseline estimates, to U.S. Treasury 

bonds;35 in the low- and high-impact 

estimates, to a mix resembling a life 

cycle fund, with 100 percent minus the 

participant’s age in equity and the 

remainder in U.S. Treasury bonds. 

Returns to equity were determined 

stochastically. The distribution was 

lognormal with a nominal mean of 9.48 

percent 36 and standard deviation of 

16.54 percent.37

To estimate the effects of the 

proposed regulation, the Department 

compared the baseline estimates with 

the low- and high-impact estimates. 

Because the proposed regulation’s 

effects will be cumulative and gradual, 

estimates were prepared for the 1985 

birth cohort, whose working lives would 

almost entirely follow implementation 

of the proposed regulation. To estimate 

participation rates, contributions, 

account balances and investment mixes, 

the cohort was sampled at random ages 

from 21 to 65, and results for 

individuals participating in 401(k) plans 

when sampled were aggregated, with all 

dollar amounts adjusted to 2005 levels. 

This roughly illustrates a point-in-time 

snapshot of plans in the future.38 To 

estimate effects on pension incomes, 

account balances available at 

retirement 39 were converted into 

lifetime annuities, and pension incomes 

of cohort members surviving to age 67 

were measured and compared. 

The estimates are highly uncertain. 

The long time horizon compounds the 

uncertainty. One of the greatest 

uncertainties relates to the default 

contribution rate, which is assumed to 

be fixed at 3 percent.40 Higher initial 

default contribution rates, or default 

provisions that increase contribution 

rates as tenure and/or pay increases, 

might enlarge the positive effects on 

pension income and reduce the negative 

effects. But it is unclear whether plan 

sponsors will adopt such approaches, or 

if they do, whether they might make 

other changes to their plans or whether 

more eligible employees might decline 

automatic participation. The 

Department therefore has no reliable 

basis for estimating the effects of such 

changes in automatic enrollment 

programs.41 The Department invites 

comments on this and other areas of 

uncertainty in its estimates. 

Peer Review 

The ‘‘Final Information Quality 

Bulletin for Peer Review’’ issued by the 

Office of Management and Budget on 

December 16, 2004 (the Bulletin) 

establishes that important scientific 

information shall be peer reviewed by 

qualified specialists before it is 

disseminated by the federal government. 

Collectively, the PENSIM model, the 

data and methods underlying it, the 

surveys and literature used to 

parameterize it, and the Department’s 

interpretation of these and application 

of them to produce the estimates 

presented in this regulatory impact 

analysis (RIA) constitute a ‘‘highly 

influential scientific assessment’’ under 

the Bulletin. Therefore, pursuant to the 

Bulletin, the Department arranged for 

review of this assessment by three 

highly qualified independent reviewers. 

The Department provided each reviewer 

with instructions for review pursuant to 

the Bulletin, a draft of the Notice of 


rwilkins on PROD1PC63 with PROPOSAL_3
56822 Federal Register / Vol. 71, No. 187 / Wednesday, September 27, 2006 / Proposed Rules 

Proposed Rulemaking (NPRM) 

including a draft RIA, technical 

documentation of PENSIM and its 

application in support of the RIA, and 

detailed tables of related PENSIM 

estimates. The instructions directed the 

reviewers to focus on the technical and 

scientific issues in the assessment rather 

than the policy proposed in the NPRM. 

Each reviewer separately reviewed the 

assessment embodied in these materials 

and submitted to the Department a peer 

review report. All of the aforementioned 

materials are being published together 

with the Department’s written response 

to the peer reviews on the Department’s 

Web site, concurrent with the 

publication of this NPRM, at http:// 

www.dol.gov/ebsa. 

The reviews offer both praise for and 

criticism of the assessment. They 

question numerous specific modeling 

assumptions and identify potential 

indirect effects that were not estimated. 

They note that welfare effects (as 

distinguished from simple dollar 

impacts on retirement saving), which 

the Department did not estimate, may be 

negative if consumers are risk averse or 

prefer current to future consumption. 

One review criticizes PENSIM’s reduced 

form modeling approach as lacking the 

structural, behavioral foundation 

necessary to predict results and evaluate 

welfare effects, finds the PENSIM 

estimates ‘‘unconvincing,’’ and 

concludes that the Department has 

failed to provide a scientific rationale 

for the policy initiative contained in the 

NPRM. 

While many of the reviews’ criticisms 

have merit, the Department does not 

believe that they cast serious doubt on 

the RIA’s primary conclusions: that the 

proposed rule on net will increase 

retirement savings and thereby benefit 

consumers. The Department’s written 

response to the reviews qualifies and 

tempers some of the RIA’s conclusions. 

It answers, to the extent possible, major 

questions raised in the reviews, 

including questions about welfare 

effects. It defends the Department’s 

reliance on PENSIM as a basis for its 

estimates and explains why the 

Department did not estimate net welfare 

effects but believes such effects to be 

positive. It also offers a tentative, 

prioritized plan for conducting 

sensitivity tests and otherwise refining 

its assessment and RIA in connection 

with a possible final rulemaking. 

Federalism Statement. Executive 

Order 13132 (August 4, 1999) outlines 

fundamental principles of federalism 

and requires federal agencies to adhere 

to specific criteria in the process of their 

formulation and implementation of 

policies that have substantial direct 

effects on the States, the relationship 

between the national government and 

the States, or on the distribution of 

power and responsibilities among the 

various levels of government. The 

proposed rule does not have federalism 

implications because it has no 

substantial direct effect on the States, on 

the relationship between the national 

government and the States, or on the 

distribution of power and 

responsibilities among the various 

levels of government. Section 514 of 

ERISA provides, with certain exceptions 

specifically enumerated, that the 

provisions of Titles I and IV of ERISA 

supersede any and all laws of the States 

as they relate to any employee benefit 

plan covered under ERISA. The 

requirements implemented in the 

proposed rule do not alter the 

fundamental provisions of the statute 

with respect to employee benefit plans, 

and as such would have no implications 

for the States or the relationship or 

distribution of power between the 

national government and the States. 

List of Subjects in 29 CFR Part 2550 

Employee benefit plans, Exemptions, 

Fiduciaries, Investments, Pensions, 

Prohibited transactions, Real estate, 

Securities, Surety bonds, Trusts and 

trustees. 

For the reasons set forth in the 

preamble, the Department proposes to 

amend Chapter XXV, Subchapter F, Part 

2550 of Title 29 of the Code of Federal 

Regulations as follows: 

Subchapter F—Fiduciary 

Responsibility Under the Employee 

Retirement Income Security Act of 1974 

PART 2550—RULES AND 

REGULATIONS FOR FIDUCIARY 

RESPONSIBILITY 

1. The authority citation for part 2550 

is revised to read as follows: 

Authority: 29 U.S.C. 1135; sec. 657, Pub. 

L. 107–16, 115 Stat. 38; and Secretary of 

Labor’s Order No. 1–2003, 68 FR 5374 (Feb. 

3, 2003). Sec. 2550.401b–1 also issued under 

sec. 102, Reorganization Plan No. 4 of 1978, 

43 FR 47713 (Oct. 17, 1978), 3 CFR, 1978 

Comp. 332, effective Dec. 31, 1978, 44 FR 

1065 (Jan. 3, 1978), 3 CFR, 1978 Comp. 332. 

Sec. 2550.401c–1 also issued under 29 U.S.C. 

1101. Sections 2550.404c–1 and 2550.404c–

5 also issued under 29 U.S.C. 1104. Sec. 

2550.407c–3 also issued under 29 U.S.C. 

1107. Sec. 2550.408b–1 also issued under 29 

U.S.C. 1108(b)(1) and sec. 102, 

Reorganization Plan No. 4 of 1978, 3 CFR, 

1978 Comp. p. 332, effective Dec. 31, 1978, 

44 FR 1065 (Jan. 3, 1978), and 3 CFR, 1978 

Comp. 332. Sec. 2550.412–1 also issued 

under 29 U.S.C. 1112. 

2. Add § 2550.404c–5 to read as 

follows: 

§ 2550.404c–5 Fiduciary relief for 

investments in qualified default investment 

alternatives. 

(a) In general. (1) This section 

implements the fiduciary relief 

provided under section 404(c)(5) of the 

Employee Retirement Income Security 

Act of 1974, as amended (ERISA or the 

Act), 29 U.S.C. 1001 et seq., under 

which a participant or beneficiary in an 

individual account plan will be treated 

as exercising control over the assets in 

his or her account for purposes of 

ERISA section 404(c)(1) with respect to 

the amount of contributions and 

earnings that, in the absence of an 

investment election by the participant, 

are invested by the plan in accordance 

with this regulation. If a participant or 

beneficiary is treated as exercising 

control over the assets in his or her 

account in accordance with ERISA 

section 404(c)(1) no person who is 

otherwise a fiduciary shall be liable 

under part 4 of title I of ERISA for any 

loss or by reason of any breach which 

results from such participant’s or 

beneficiary’s exercise of control. Except 

as specifically provided in paragraph 

(c)(6) of this section a plan need not 

meet the requirements for an ERISA 

section 404(c) plan under 29 CFR 

2550.404c–1 in order for a plan 

fiduciary to obtain the relief under this 

section. 

(2) The standards set forth in this 

section apply solely for purposes of 

determining whether a fiduciary meets 

the requirements of this proposed 

regulation. Such standards are not 

intended to be the exclusive means by 

which a fiduciary might satisfy his or 

her responsibilities under the Act with 

respect to the investment of assets in the 

individual account of a participant or 

beneficiary. 

(b) Fiduciary relief. (1) Except as 

provided in paragraphs (b)(2), (3), and 

(4) of this section, a fiduciary of an 

individual account plan that permits 

participants or beneficiaries to direct the 

investment of assets in their accounts 

and that meets the conditions of 

paragraph (c) of this section shall not be 

liable for any loss, or by reason of any 

breach under part 4 of title I of ERISA, 

that is the direct and necessary result 

of—

(i) Investing all or part of a 

participant’s or beneficiary’s account in 

a qualified default investment 

alternative, or 

(ii) Investment decisions made by the 

entity described in paragraph (e)(3) of 

this section in connection with the 

management of a qualified default 

investment alternative. 

(2) Nothing in this section shall 

relieve a fiduciary from his or her duties 


rwilkins on PROD1PC63 with PROPOSAL_3
Federal Register / Vol. 71, No. 187 / Wednesday, September 27, 2006 / Proposed Rules 56823 

under part 4 of title I of ERISA to 

prudently select and monitor any 

qualified default investment alternative 

under the plan or from any liability that 

results from a failure to satisfy these 

duties, including liability for any 

resulting losses. 

(3) Nothing in this section shall 

relieve an investment manager 

described in paragraph (e)(3)(i) from its 

fiduciary duties under part 4 of title I of 

ERISA or from any liability that results 

from a failure to satisfy these duties, 

including liability for any resulting 

losses. 

(4) Nothing in this section shall 

provide relief from the prohibited 

transaction provisions of section 406 of 

ERISA, or from any liability that results 

from a violation of those provisions, 

including liability for any resulting 

losses. 

(c) Conditions. With respect to the 

investment of assets in the individual 

account of a participant or beneficiary, 

a fiduciary shall qualify for the relief 

described in paragraph (b)(1) of this 

section if: 

(1) Assets are invested in a ‘‘qualified 

default investment alternative’’ within 

the meaning of paragraph (e) of this 

section; 

(2) The participant or beneficiary on 

whose behalf the investment is made 

had the opportunity to direct the 

investment of the assets in his or her 

account but did not direct the 

investment of the assets; 

(3) The participant or beneficiary on 

whose behalf an investment in a 

qualified default investment alternative 

may be made is furnished within a 

reasonable period of time of at least 30 

days in advance of the first such 

investment and within a reasonable 

period of time of at least 30 days in 

advance of each subsequent plan year, 

a summary plan description, summary 

of material modification, or other notice 

that meets the requirements of 

paragraph (d) of this section; 

(4) Under the terms of the plan any 

material provided to the plan relating to 

a participant’s or beneficiary’s 

investment in a qualified default 

investment alternative (e.g., account 

statements, prospectuses, proxy voting 

material) will be provided to the 

participant or beneficiary; 

(5) Any participant or beneficiary on 

whose behalf assets are invested in a 

qualified default investment alternative 

may, consistent with the terms of the 

plan (but in no event less frequently 

than once within any three month 

period), transfer, in whole or in part, 

such assets to any other investment 

alternative available under the plan 

without financial penalty; and 

(6) The plan offers a ‘‘broad range of 

investment alternatives’’ within the 

meaning of 29 CFR 2550.404c—1(b)(3). 

(d) Notice. The notice required by 

paragraph (c)(3) of this section shall be 

written in a manner calculated to be 

understood by the average plan 

participant and contain the following: 

(1) A description of the circumstances 

under which assets in the individual 

account of a participant or beneficiary 

may be invested on behalf of the 

participant and beneficiary in a 

qualified default investment alternative; 

(2) A description of the qualified 

default investment alternative, 

including a description of the 

investment objectives, risk and return 

characteristics (if applicable), and fees 

and expenses attendant to the 

investment alternative; 

(3) A description of the right of the 

participants and beneficiaries on whose 

behalf assets are invested in a qualified 

default investment alternative to direct 

the investment of those assets to any 

other investment alternative under the 

plan, without financial penalty; and 

(4) An explanation of where the 

participants and beneficiaries can obtain 

investment information concerning the 

other investment alternatives available 

under the plan. 

(e) Qualified default investment 

alternative. For purposes of this section, 

a qualified default investment 

alternative means an investment 

alternative that: 

(1)(i) Does not hold or permit the 

acquisition of employer securities, 

except as provided in paragraph 

(e)(1)(ii) of this section. 

(ii) Paragraph (e)(1)(i) of this section 

shall not apply to: 

(A) Employer securities held or 

acquired by an investment company 

registered under the Investment 

Company Act of 1940 or a similar 

pooled investment vehicle regulated 

and subject to periodic examination by 

a State or Federal agency and with 

respect to which investment in such 

securities is made in accordance with 

the stated investment objectives of the 

investment vehicle and independent of 

the plan sponsor or an affiliate thereof; 

or 

(B) With respect to a qualified default 

investment alternative described in 

paragraph (e)(5)(iii) of this section, 

employer securities acquired as a 

matching contribution from the 

employer/plan sponsor, or employer 

securities acquired prior to management 

by the investment management service; 

(2) Except as otherwise provided in 

paragraph (c)(5) of this section, does not 

impose financial penalties or otherwise 

restrict the ability of a participant or 

beneficiary to transfer, in whole or in 

part, his or her investment from the 

qualified default investment alternative 

to any other investment alternative 

available under the plan; 

(3) Is: 

(i) Managed by an investment 

manager, as defined in section 3(38) of 

the Act, or 

(ii) An investment company registered 

under the Investment Company Act of 

1940; 

(4) Is diversified so as to minimize the 

risk of large losses; and 

(5) Constitutes one of the following: 

(i) An investment fund product or 

model portfolio that is designed to 

provide varying degrees of long-term 

appreciation and capital preservation 

through a mix of equity and fixed 

income exposures based on the 

participant’s age, target retirement date 

(such as normal retirement age under 

the plan) or life expectancy. Such 

products and portfolios change their 

asset allocations and associated risk 

levels over time with the objective of 

becoming more conservative (i.e., 

decreasing risk of losses) with 

increasing age. For purposes of this 

paragraph (e)(5)(i), asset allocation 

decisions for such products and 

portfolios are not required to take into 

account risk tolerances, investments or 

other preferences of an individual 

participant. An example of such a fund 

or portfolio may be a ‘‘life-cycle’’ or 

‘‘targeted-retirement-date’’ fund or 

account. 

(ii) An investment fund product or 

model portfolio that is designed to 

provide long-term appreciation and 

capital preservation through a mix of 

equity and fixed income exposures 

consistent with a target level of risk 

appropriate for participants of the plan 

as a whole. For purposes of this 

paragraph (e)(5)(ii), asset allocation 

decisions for such products and 

portfolios are not required to take into 

account the age, risk tolerances, 

investments or other preferences of an 

individual participant. An example of 

such a fund or portfolio may be a 

‘‘balanced’’ fund. 

(iii) An investment management 

service with respect to which an 

investment manager allocates the assets 

of a participant’s individual account to 

achieve varying degrees of long-term 

appreciation and capital preservation 

through a mix of equity and fixed 

income exposures, offered through 

investment alternatives available under 

the plan, based on the participant’s age, 

target retirement date (such as normal 

retirement age under the plan) or life 

expectancy. Such portfolios change 

their asset allocations and associated 


rwilkins on PROD1PC63 with PROPOSAL_3
56824 Federal Register / Vol. 71, No. 187 / Wednesday, September 27, 2006 / Proposed Rules 

risk levels for an individual account 

over time with the objective of 

becoming more conservative (i.e., 

decreasing risk of losses) with 

increasing age. For purposes of this 

paragraph (e)(5)(iii), asset allocation 

decisions are not required to take into 

account risk tolerances, investments or 

other preferences of an individual 

participant. An example of such a 

service may be a ‘‘managed account.’’

Signed at Washington, DC, this 22nd day 

of September. 

Ann L. Combs, 

Assistant Secretary, Employee Benefits 

Security Administration, Department of 

Labor. 

[FR Doc. 06–8282 Filed 9–26–06; 8:45 am] 

BILLING CODE 4510–29–P 


rwilkins on PROD1PC63 with PROPOSAL_3