60452 Federal Register / Vol. 72, No. 205 / Wednesday, October 24, 2007 / Rules and Regulations 

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. 

ACTION: Final rule. 

SUMMARY: This document contains a 

final regulation that implements 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 in 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 final regulation will not be liable for 

any loss, or by reason of any breach, that 

occurs as a result of such investments. 

This regulation describes the types of 

investments that qualify as default 

investment alternatives under section 

404(c)(5) of ERISA. Plan fiduciaries 

remain responsible for the prudent 

selection and monitoring of the 

qualified default investment alternative. 

The regulation conditions relief upon 

advance notice to participants and 

beneficiaries describing 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 qualified 

default investment alternative, and the 

right of participants and beneficiaries to 

direct investments out of the qualified 

default investment alternative. This 

regulation 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: This final rule is effective on 

December 24, 2007. 

FOR FURTHER INFORMATION CONTACT: Lisa 

M. Alexander, Kristen L. Zarenko, or 

Katherine D. Lewis, Office of 

Regulations and Interpretations, 

Employee Benefits Security 

Administration, (202) 693–8500. This is 

not a toll-free number. 

SUPPLEMENTARY INFORMATION: 

A. Background 

With the enactment of the Pension 

Protection Act of 2006 (Pension 

Protection Act), section 404(c) of ERISA 

was amended to provide relief afforded 

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 regulation under section 

404(c)(5) of ERISA. The relief afforded 

by section 404(c)(5), 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. The 

amendments made by section 624 of the 

Pension Protection Act apply to plan 

years beginning after December 31, 

2006. 

On September 27, 2006, the 

Department, exercising its authority 

under section 505 of ERISA and 

consistent with section 624 of the 

Pension Protection Act, published a 

notice of proposed rulemaking in the 

Federal Register (71 FR 56806) that, 

upon adoption, would implement the 

provisions of ERISA section 404(c)(5). 

The notice included an invitation to 

interested persons to comment on the 

proposal. In response to this invitation, 

the Department received over 120 

written comments from a variety of 

parties, including plan sponsors and 

fiduciaries, plan service providers, 

financial institutions, and employee 

benefit plan industry representatives. 

Submissions are available for review 

under Public Comments on the Laws & 

Regulations page of the Department’s 

Employee Benefits Security 

Administration Web site at http:// 

www.dol.gov/ebsa. 

Set forth below is an overview of the 

final regulation, along with a discussion 

of the public comments received on the 

proposal. 

B. Overview of Final Rule 

Scope of the Fiduciary Relief 

Paragraph (a)(1) of § 2550.404c–5, like 

the proposal, generally describes the 

scope of the regulation and 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. 

Paragraph (a)(2) of § 2550.404c–5, also 

like the proposal, makes clear that the 

standards set forth in the regulation 

apply solely for purposes of determining 

whether a fiduciary meets the 

requirements of the regulation. These 

standards are not intended to be the 

exclusive means by which a fiduciary 

might satisfy his or her responsibilities 

under ERISA with respect to the 

investment of assets on behalf of a 

participant or beneficiary in an 

individual account plan who fails to 

give investment directions. As 

recognized by the Department in the 

preamble to the proposal, investments 

in money market funds, stable value 

products and other capital preservation 

investment vehicles may be prudent for 

some participants or beneficiaries even 

though such investments themselves 

may not generally constitute qualified 

default investment alternatives for 

purposes of the regulation. The 

Department further notes that such 

investments, while not themselves 

qualified default investment alternatives 

for purposes of investments made 

following the effective date of this 

regulation, may nonetheless constitute 

part of the investment portfolio of a 

qualified default investment alternative. 

Paragraph (b) of § 2550.404c–5 defines 

the scope of the fiduciary relief 

provided. Paragraph (b)(1) of the 

proposal provided 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, or by reason of 

any breach under part 4 of title I of 

ERISA, that is the direct and necessary 

result of investing all or part of a 


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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 Department 

has revised paragraph (b)(1) of the final 

regulation to clarify that 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 any qualified 

default investment alternative within 

the meaning of paragraph (e), 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 phrase ‘‘any qualified default 

investment alternative’’ in the final 

regulation is intended to make clear that 

a fiduciary will be afforded relief 

without regard to which type of 

qualified default investment alternative 

the fiduciary selects, provided that the 

fiduciary prudently selects the 

particular product, portfolio or service, 

and meets the other conditions of the 

regulation. 

Some commenters asked whether the 

relief provided by the final regulation 

covers a plan fiduciary’s decision 

regarding which of the qualified default 

investment alternatives will be available 

to a plan’s participants and beneficiaries 

who fail to direct their investments. As 

long as a plan fiduciary selects any of 

the qualified default investment 

alternatives, and otherwise complies 

with the conditions of the rule, the plan 

fiduciary will obtain the fiduciary relief 

described in the rule. The Department 

believes that each of these qualified 

default investment alternatives is 

appropriate for participants and 

beneficiaries who fail to provide 

investment direction; accordingly, the 

rule does not require a plan fiduciary to 

undertake an evaluation as to which of 

the qualified default investment 

alternatives provided for in the 

regulation is the most prudent for a 

participant or the plan. However, the 

plan fiduciary must prudently select 

and monitor an investment fund, model 

portfolio, or investment management 

service within any category of qualified 

default investment alternatives in 

accordance with ERISA’s general 

fiduciary rules. For example, a plan 

fiduciary that chooses an investment 

management service that is intended to 

comply with paragraph (e)(4)(iii) of the 

final regulation must undertake a 

careful evaluation to prudently select 

among different investment 

management services. 

Application of General Fiduciary 

Standards 

The scope of fiduciary relief provided 

by this regulation 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 regulation. As 

with section 404(c)(1) of the Act and the 

regulation issued thereunder (29 CFR 

2550.404c–1), the final regulation does 

not provide relief from the general 

fiduciary rules applicable to the 

selection and monitoring of a particular 

qualified 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. 

Several commenters asked the 

Department to provide additional 

guidance concerning the general 

fiduciary obligations of these plan 

fiduciaries in selecting a qualified 

default investment alternative. The 

selection of a particular qualified 

default investment alternative (i.e. a 

specific product, portfolio or service) is 

a fiduciary act and, therefore, ERISA 

obligates fiduciaries to act prudently 

and solely in the interest of the plan’s 

participants and beneficiaries. A 

fiduciary must engage in an objective, 

thorough, and analytical process that 

involves consideration of the quality of 

competing providers and investment 

products, as appropriate. As with other 

investment alternatives made available 

under the plan, fiduciaries must 

carefully consider investment fees and 

expenses when choosing a qualified 

default investment alternative. See 

paragraph (b)(2) of § 2550.404c–5. 

Paragraph (b)(3) of the final regulation 

has been modified to reflect changes to 

paragraph (e)(3)(i) regarding persons 

responsible for the management of a 

qualified default investment 

alternative’s assets. Paragraph (b)(3) of 

§ 2550.404c–5 makes clear that nothing 

in the regulation relieves any such 

fiduciaries from their general fiduciary 

duties or from any liability that results 

from a failure to satisfy these duties, 

including liability for any resulting 

losses. As proposed, paragraph (b)(3) 

was limited to investment managers. 

The final regulation, at paragraph 

(e)(3)(i) of § 2550.404c–5, broadens the 

category of persons who can manage the 

assets of a qualified default investment 

alternative, thereby requiring a 

conforming change to paragraph (b)(3). 

The changes to paragraph (e)(3)(i) are 

discussed in detail below. 

Finally, the regulation also 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. 

Therefore, plan fiduciaries must avoid 

self-dealing, conflicts of interest, and 

other improper influences when 

selecting a qualified default investment 

alternative. See paragraph (b)(4) of 

§ 2550.404c–5. 

Application of Final Rule to 

Circumstances Other Than Automatic 

Enrollment 

Several commenters requested 

clarification on the extent to which the 

fiduciary relief provided by the final 

regulation will be available to plan 

fiduciaries for assets that are invested in 

a qualified default investment 

alternative on behalf of participants and 

beneficiaries in circumstances other 

than automatic enrollment. Consistent 

with the views expressed concerning 

the scope of the relief provided by the 

proposed regulation, it is the view of the 

Department that nothing in the final 

regulation limits the application of the 

fiduciary relief to investments made 

only on behalf of participants who are 

automatically enrolled in their plan. 

Like the proposal, the final regulation 

applies to situations beyond automatic 

enrollment. Examples of such situations 

include: The failure of a participant or 

beneficiary to provide investment 

direction following the elimination of 

an investment alternative or a change in 

service provider, the failure of a 

participant or beneficiary to provide 

investment instruction following a 

rollover from another plan, and any 

other failure of a participant to provide 

investment instruction. Whenever a 

participant or beneficiary has the 

opportunity to direct the investment of 

assets in his or her account, but does not 

direct the investment of such assets, 

plan fiduciaries may avail themselves of 

the relief provided by this final 

regulation, so long as all of its 

conditions have been satisfied. 

Conditions for the Fiduciary Relief 

Like the proposal, the final regulation 

contains six conditions for relief. These 


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conditions are set forth in paragraph (c) 

of the regulation. 

The first condition of the final 

regulation, consistent with the 

Department’s proposal, requires that 

assets invested on behalf of participants 

or beneficiaries under the final 

regulation be invested in a ‘‘qualified 

default investment alternative.’’ See 

§ 2550.404c–5(c)(1). This condition is 

unchanged from the proposal. 

The second condition also is 

unchanged from the proposal. The 

participant or beneficiary on whose 

behalf assets are being invested in a 

qualified default investment alternative 

must have had the opportunity to direct 

the investment of assets in his or her 

account but did not direct the 

investment of 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 continues to 

require that participants or beneficiaries 

receive information concerning the 

investments that may be made on their 

behalf. As in the proposal, the final 

regulation requires both an initial notice 

and an annual notice. The proposed 

regulation required an initial notice 

within a reasonable period of time of at 

least 30 days in advance of the first 

investment. A number of commenters 

explained that requiring 30 days’

advance notice would preclude plans 

with immediate eligibility and 

automatic enrollment from withholding 

of contributions as of the first pay 

period. Commenters argued that plan 

sponsors should not be discouraged 

from enrolling employees in their plan 

on the earliest possible date. 

The Department agrees that plan 

sponsors should not be discouraged 

from enrolling employees on the earliest 

possible date. To address this issue, the 

Department has modified the advance 

notice requirements that appeared in the 

proposed regulation. For purposes of the 

initial notification requirement, the final 

regulation, at paragraph (c)(3)(i), 

provides that the notice must be 

provided (A) at least 30 days in advance 

of the date of plan eligibility, or at least 

30 days in advance of any first 

investment in a qualified default 

investment alternative on behalf of a 

participant or beneficiary described in 

paragraph (c)(2), or (B) on or before the 

date of plan eligibility, provided the 

participant has the opportunity to make 

a permissible withdrawal (as 

determined under section 414(w) of the 

Internal Revenue Code of 1986 (Code)). 

With regard to the foregoing, the 

Department notes that, unlike the 

proposal, the final regulation measures 

the time period for the 30-day advance 

notice requirement from the date of plan 

eligibility to better coordinate the notice 

requirements with the Code provisions 

governing permissible withdrawals. The 

Department also notes that if a fiduciary 

fails to comply with the final regulation 

for a participant’s first elective 

contribution because a notice is not 

provided at least 30 days in advance of 

plan eligibility, the fiduciary may obtain 

relief for later contributions with respect 

to which the 30-day advance notice 

requirement is satisfied. 

In addition, while retaining the 

general 30-day advance notice 

requirement, the final regulation also 

permits notice ‘‘on or before’’ the date 

of plan eligibility if the participant is 

permitted to make a permissible 

withdrawal in accordance with 414(w) 

of the Code. In this regard, the 

Department believes that if participants 

are not going to be afforded the option 

of withdrawing their contributions 

without additional tax, such 

participants should be given notice 

sufficiently in advance of the 

contribution to enable them to opt out 

of plan participation. 

The Department notes that the phrase 

in paragraph (c)(3)(i)—‘‘or at least 30 

days in advance of any first investment 

in a qualified default investment 

alternative’’—is intended to 

accommodate circumstances other than 

elective contributions. For example, 

although fiduciary relief would not be 

available with respect to a fiduciary’s 

investment of a participant or 

beneficiary’s rollover amount from 

another plan into a qualified default 

investment alternative if the 30-day 

advance notice requirement is not 

satisfied, relief may be available when a 

fiduciary invests the rollover amount 

into a qualified default investment 

alternative after satisfying the notice 

requirement in paragraph (c)(3)(i)(A) as 

well as the regulation’s other 

conditions. 

Finally, the phrase—‘‘in advance of 

the date of plan eligibility * * * or any 

first investment in a qualified default 

investment alternative’’—is not 

intended to foreclose availability of 

relief to fiduciaries that, prior to the 

adoption of the 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 date of plan 

eligibility * * * or any first 

investment’’—should be read to mean 

the first investment with respect to 

which relief under the final regulation 

is intended to apply after the effective 

date of the regulation. 

The timing of the annual notice 

requirement contained in the final 

regulation has not changed from the 

proposal. Notice must be provided 

within a reasonable period of time of at 

least 30 days in advance of each 

subsequent plan year. See § 2550.404c–

5(c)(3)(ii). One commenter requested 

that the Department eliminate the 

annual notice requirement. The 

Department retained the annual notice 

requirement because the Pension 

Protection Act specifically amended 

ERISA to require an annual notice. 

Further, the Department believes that it 

is important to provide regular and 

ongoing notice to participants and 

beneficiaries whose assets are invested 

in a qualified default investment 

alternative to ensure that they are in a 

position to make informed decisions 

concerning their participation in their 

employer’s plan. Several commenters 

supported the furnishing of an annual 

reminder to participants and 

beneficiaries that their assets have been 

invested in a qualified default 

investment alternative and that 

participants and beneficiaries may 

direct their contributions into other 

investment alternatives available under 

the plan. 

Paragraph (c)(3), as proposed, 

provided that the required disclosures 

could be included in a summary plan 

description, summary of material 

modification or other notice meeting the 

requirements of paragraph (d), which 

described the content required in the 

notice. Some commenters expressed 

concern that permitting the notice 

requirement to be satisfied though a 

plan’s summary plan description or 

summary of material modification may 

result in participants overlooking or 

ignoring information relating to their 

participation and the investment of 

contributions on their behalf. The 

Department is persuaded that, given the 

potential length and complexity of 

summary plan descriptions and 

summaries of material modifications, 

the furnishing of the required 

disclosures through a separate notice 

will reduce the likelihood of a 

participant or beneficiary missing or 

ignoring information about his or her 

plan participation and the investment of 

the assets in his or her account in a 

qualified default investment alternative. 

Accordingly, the final regulation, at 

paragraph (c)(3), has been modified to 

eliminate references to providing notice 

through a summary plan description or 


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summary of material modifications. The 

Department notes that the notice 

requirements of ERISA section 

404(c)(5)(B) and this regulation, and the 

notice requirements of sections 

401(k)(13)(E) and 414(w)(4) of the Code, 

as amended by the Pension Protection 

Act, are similar. Accordingly, while the 

final regulation provides for disclosure 

through a separate notice, the 

Department anticipates that the notice 

requirements of this final regulation and 

the notice requirements of sections 

401(k)(13)(E) and 414(w)(4) of the Code 

could be satisfied in a single disclosure 

document. Further, the Department 

notes that nothing in the regulation 

should be construed to preclude the 

distribution of the initial or annual 

notices with other materials being 

furnished to participants and 

beneficiaries. In this regard, the 

Department recognizes that there may 

be cost savings that result from 

distributing multiple disclosures 

simultaneously and, to the extent that 

distribution costs may be charged to the 

accounts of individual participants and 

beneficiaries, efforts to minimize such 

costs should be encouraged. 

The fourth condition of the proposed 

regulation required that, 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) would be provided to 

the participant or beneficiary. See 

proposed regulation § 2550.404c–5(c)(4). 

Several commenters asked the 

Department to clarify whether the 

phrase ‘‘under the terms of the plan’’

would require plan amendments to 

explicitly incorporate the proposed 

rule’s disclosure provision. Commenters 

suggested that paragraph (c)(4) of the 

proposal could be read to require that 

the disclosure provisions be described 

in the formal plan document, and the 

commenters suggested that it is unclear 

what documents would suffice to meet 

this condition. The phrase ‘‘under the 

terms of the plan’’ was merely intended 

to ensure that plans provide for the 

required pass-through of information. 

Taking into account both the fact that a 

pass-through of information is a specific 

condition of the regulation and the 

comments on this provision, the 

Department has concluded that the 

phrase is confusing and not necessary. 

Accordingly, the phrase ‘‘under the 

terms of the plan’’ has been removed 

from paragraph (c)(4) of the final 

regulation. See § 2550.404c–5(c)(4). 

Commenters also requested 

clarification as to the material intended 

to be included in the reference to 

‘‘material provided to the plan’’ in 

paragraph (c)(4). Specifically, 

commenters inquired whether material 

provided to the plan includes 

information within the custody of a plan 

service provider or the fiduciary 

responsible for selecting a qualified 

default investment alternative, and 

whether ‘‘material provided to the plan’’

includes aggregate, plan-level 

information received by the plan. 

Commenters also asked for clarification 

regarding the manner in which 

information shall be ‘‘provided to the 

participant or beneficiary’’ in paragraph 

(c)(4) of the proposed regulation. A 

number of commenters suggested that 

the final regulation permit disclosure of 

information upon request; others 

recommended that the disclosure 

requirement should be satisfied by 

including a statement in the notice 

required by paragraph (c)(3) of the 

proposed regulation that provides 

direction to a participant or beneficiary 

regarding where he or she can find 

information about the qualified default 

investment alternatives. Other 

commenters asked whether plans could 

make materials available to a participant 

or beneficiary instead of affirmatively 

providing materials to them. 

Other commenters suggested that a 

participant or beneficiary on whose 

behalf assets are invested in a qualified 

default investment alternative should 

not be required to be furnished more 

material than is required to be furnished 

to those individuals who direct their 

investments. In this regard, commenters 

recommended that the Department 

apply the same standard set forth in the 

section 404(c) regulation for the passthrough of information to both 

participants who fail to direct their 

investments and participants who elect 

to direct their investments. 

The Department believes that 

participants who fail to direct their 

investments should be furnished no less 

information than is required to be 

passed through to participants who elect 

to direct their investments under the 

plan. The Department also believes 

there is little, if any, basis for requiring 

defaulted participants to be furnished 

more information than is required to be 

passed through to other participants. 

For this reason, the Department has 

adopted the recommendation of those 

commenters that the pass-through 

disclosure requirements applicable to 

section 404(c) plans be applied to the 

pass-through of information under the 

final regulation. The Department, 

therefore, has modified paragraph (c)(4) 

to provide that a fiduciary shall qualify 

for the relief described in paragraph 

(b)(1) of the final regulation if a 

fiduciary provides material to 

participants and beneficiaries as set 

forth in paragraphs (b)(2)(i)(B)(1)(viii) 

and (ix), and paragraph (b)(2)(i)(B)(2) of 

the 404(c) regulation, relating to a 

participant’s or beneficiary’s investment 

in a qualified default investment 

alternative. The Department notes that, 

as part of a separate regulatory 

initiative, it is reviewing the disclosure 

requirements applicable to participants 

and beneficiaries in participant-directed 

individual account plans and that, to 

the extent that the pass-through 

disclosure requirements contained in 

§ 2550.404c–1 are amended, the 

language of paragraph (c)(4), as 

modified, will ensure such amendments 

automatically extend to § 2550.404c–5. 

The Department notes, in responding to 

one commenter’s request for 

clarification, that the plan’s obligation 

to pass through information to 

participants or beneficiaries would be 

considered satisfied if the required 

information is furnished directly to the 

participant or beneficiary by the 

provider of the investment alternative or 

other third-party. 

The fifth condition of the proposal 

required 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 

proposed regulation § 2550.404c–5(c)(5). 

This provision was intended to ensure 

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 was not 

intended to confer greater rights on 

participants or beneficiaries whose 

accounts the plan invests in qualified 

default investment alternatives than are 

otherwise available under the plan. 

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 


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investments on a quarterly basis. 

Similarly, if a plan permits daily 

investment direction, participants and 

beneficiaries with investments in a 

qualified default investment alternative 

must be permitted to direct their 

investments on a daily basis. 

The Department received many 

comments requesting clarification on 

this requirement, most often concerning 

what the Department considers to be a 

financial penalty. Commenters asked 

whether investment-level fees and 

restrictions, as opposed to fees or other 

restrictions that are imposed by the plan 

or the plan sponsor, would be 

considered impermissible restrictions or 

‘‘financial penalties.’’ Commenters 

explained that fees and limitations that 

are part of the investment product are 

beyond the control of the plan sponsor 

and should not be considered financial 

penalties for purposes of the final 

regulation. The comment letters 

provided many examples of investmentlevel fees or restrictions that 

commenters believed should not be 

considered punitive, including 

redemption fees, back-end sales loads, 

reinvestment timing restrictions, market 

value adjustments, equity ‘‘wash’’

restrictions, and surrender charges. 

In response to these and other 

comments, the Department has modified 

and restructured paragraph (c)(5) of the 

final regulation to provide more clarity 

with respect to limitations that may or 

may not be imposed on participants and 

beneficiaries who are defaulted into a 

qualified default investment alternative. 

As modified and restructured, 

paragraph (c)(5) of the final regulation 

includes three conditions applicable to 

a defaulted participant’s or beneficiary’s 

ability to move assets out of a qualified 

default investment alternative. 

The first condition, as in the proposal, 

is intended to ensure that defaulted 

participants and beneficiaries have the 

same rights as other participants and 

beneficiaries under the plan regarding 

the frequency with which they may 

direct an investment out of a qualified 

default investment alternative. In this 

regard, paragraph (c)(5)(i) provides that 

any participant or beneficiary on whose 

behalf assets are invested in a qualified 

default investment alternative must be 

able to transfer, in whole or in part, 

such assets to any other investment 

alternative available under the plan 

with a frequency consistent with that 

afforded participants and beneficiaries 

who elect to invest in the qualified 

default investment alternative, but not 

less frequently than once within any 

three month period. The Department 

received no substantive comments on 

this provision and it is being adopted 

unchanged from the proposal. 

The second and third conditions, at 

paragraphs (c)(5)(ii) and (iii), relate to 

limitations (i.e., restrictions, fees, etc.) 

other than those relating to the 

frequency with which participants may 

direct their investment out of a qualified 

default investment alternative, which 

are addressed in paragraph (c)(5)(i). 

Unlike the proposal, which limited the 

imposition of financial penalties for the 

period of a defaulted participant’s or 

beneficiary’s investment, the regulation, 

as modified, precludes the imposition of 

any restrictions, fees or expenses (other 

than investment management and 

similar types of fees and expenses) 

during the first 90 days of a defaulted 

participant’s or beneficiary’s investment 

in the qualified default investment 

alternative. At the end of the 90-day 

period, defaulted participants and 

beneficiaries may be subject to the 

restrictions, fees or expenses that are 

otherwise applicable to participants and 

beneficiaries under the plan who 

elected to invest in that qualified default 

investment alternative. While the 

condition on restrictions, fees and 

expenses is limited to 90 days, the 

condition, as explained below, is broad 

in its application, thereby providing 

defaulted participants and beneficiaries 

an opportunity to redirect or withdraw 

their contributions. Also, the 

Department believes that restrictions or 

fees on qualified default investment 

alternatives are more likely to be waived 

if this period is shortened to 90 days. 

The 90-day period is defined by 

reference to the participant’s first 

elective contribution as determined 

under section 414(w)(2)(B) of the Code, 

thereby enabling participants, if their 

plan permits, to make a permissible 

withdrawal without being subject to the 

10 percent additional tax under section 

72(t) of the Code. 

Specifically, paragraph (c)(5)(ii) of the 

regulation provides that any transfer or 

permissible withdrawal described in 

paragraph (c)(5) resulting from a 

participant’s or beneficiary’s election to 

make such a transfer or withdrawal 

during the 90-day period beginning on 

the date of the participant’s first elective 

contribution as determined under 

section 414(w)(2)(B) of the Code, or 

other first investment in a qualified 

default investment alternative on behalf 

of a participant or beneficiary described 

in paragraph (c)(2), shall not be subject 

to any restrictions, fees or expenses 

(except those fees and expenses that are 

charged on an ongoing basis for the 

investment itself, such as investment 

management and similar fees, and are 

not imposed, or do not vary, based on 

a participant’s or beneficiary’s decision 

to withdraw, sell or transfer assets out 

of the investment alternative). 

Accordingly, no restriction, fee, or 

expense may be imposed on any transfer 

or permissible withdrawal of assets, 

whether assessed by the plan, the plan 

sponsor, or as part of an underlying 

investment product or portfolio, and 

regardless of whether or not the 

restriction, fee, or expense is considered 

to be a ‘‘penalty.’’ This provision, 

therefore, would prevent the imposition 

of any surrender charge, liquidation or 

exchange fee, or redemption fee. It also 

would prohibit any market value 

adjustment or ‘‘round-trip’’ restriction 

on the ability of the participant or 

beneficiary to reinvest within a defined 

period of time. As long as the 

participant’s or beneficiary’s election is 

made within the applicable 90-day 

period, no such charges may be imposed 

even if, due to administrative or other 

delays, the actual transfer or withdrawal 

does not take place until after the 90- 

day period. 

Paragraph (c)(5)(ii)(B) makes clear that 

the limitations of paragraph (c)(5)(ii)(A) 

do not apply to fees and expenses that 

are charged on an ongoing basis for the 

operation of the investment itself, such 

as investment management fees, 

distribution and/or service fees (‘‘12b–

1’’ fees), and administrative-type fees 

(legal, accounting, transfer agent 

expenses, etc.), and are not imposed, or 

do not vary, based on a participant’s or 

beneficiary’s decision to withdraw, sell 

or transfer assets out of the investment 

alternative. In response to a request for 

a clarification, the Department further 

notes that to the extent that a participant 

or beneficiary loses the right to elect an 

annuity as a result of a transfer out of 

a qualified default investment 

alternative with an annuity feature, such 

loss would not constitute an 

impermissible restriction for purposes 

of paragraph (c)(5)(ii) inasmuch as the 

annuity feature is a component of the 

investment alternative itself. 

Paragraph (c)(5)(iii) of the final 

regulation provides that, following the 

end of the 90-day period described in 

paragraph (c)(5)(ii)(A), any transfer or 

permissible withdrawal described in 

paragraph (c)(5) shall not be subject to 

any restrictions, fees or expenses not 

otherwise applicable to a participant or 

beneficiary who elected to invest in that 

qualified default investment alternative. 

This provision is intended to ensure 

that defaulted participants and 

beneficiaries are not subject to 

restrictions, fees or penalties that would 

serve to create a greater disincentive for 

defaulted participants and beneficiaries, 

than for other participants and 


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Federal Register / Vol. 72, No. 205 / Wednesday, October 24, 2007 / Rules and Regulations 60457 

1 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; * * *’’

beneficiaries under the plan, to 

withdraw or transfer assets from a 

qualified default investment alternative. 

The Department notes that the final 

rule does not otherwise 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 of paragraph (c) of 

the regulation adopts, without 

modification from the proposal, the 

requirement that plans 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).1 See 

§ 2550.404c–5(c)(6). 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. The Department received 

no substantive objections to this 

provision and, as indicated, is adopting 

the provision without change. 

Notices 

As discussed above, relief under the 

final 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. 

As proposed, paragraph (d) of 

§ 2550.404c–5 required 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, including a description of any 

applicable restrictions, fees, or expenses 

in connection with such transfer; and 

(4) an explanation of where the 

participants and beneficiaries can obtain 

investment information concerning the 

other investment alternatives available 

under the plan. 

A few commenters suggested 

expanding the content of the notice to 

include procedures for electing other 

investment options, a description of the 

right to request additional information, 

a description of any right to obtain 

investment advice (if available), a 

description of fees associated with the 

qualified default investment 

alternatives, information about other 

investment options under the plan, etc. 

While the Department did not adopt all 

of the changes suggested by the 

commenters, the Department has 

modified the notice content 

requirements to broaden the required 

disclosures. As modified, the 

Department intends that the furnishing 

of a notice in accordance with the 

timing and content requirements of this 

regulation will not only satisfy the 

notice requirements of section 

404(c)(5)(B) of ERISA but also the notice 

requirements under the preemption 

provisions of ERISA section 514 

applicable to an ‘‘automatic 

contribution arrangement,’’ within the 

meaning of ERISA section 514(e)(2). 

ERISA section 404(c)(5)(B)(i)(I) 

provides for the furnishing of 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.’’ ERISA section 514(e)(1) 

provides for the preemption of State 

laws that would directly or indirectly 

prohibit or restrict the inclusion in any 

plan of an automatic contribution 

arrangement. Section 514(e)(3) provides 

that a plan administrator of an 

automatic contribution arrangement 

shall provide a notice describing the 

rights and obligations of participants 

under the arrangement and such notice 

shall include ‘‘an explanation of the 

participant’s right under the 

arrangement not to have elective 

contributions made on the participant’s 

behalf (or to elect to have such 

contributions made at a different 

percentage)’’ and an explanation of 

‘‘how contributions made under the 

arrangement will be invested in the 

absence of any investment election by 

the participant.’’

In addition to broadening the required 

disclosures, the Department revised the 

disclosures relating to restrictions, fees 

and expenses to conform the notice 

requirements to the changes in 

paragraph (c)(5) relating to restrictions, 

fees or expenses. As modified, 

paragraph (d) of the final regulation 

provides that the notices required by 

paragraph (c)(3) shall include: (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 or 

beneficiary in a qualified default 

investment alternative; and, if 

applicable, an explanation of the 

circumstances under which elective 

contributions will be made on behalf of 

a participant, the percentage of such 

contribution, and the right of the 

participant to elect not to have such 

contributions made on his or her behalf 

(or to elect to have such contributions 

made at a different percentage); (2) an 

explanation of the right of participants 

and beneficiaries to direct the 

investment of assets in their individual 

accounts; (3) 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; (4) 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, 

including a description of any 

applicable restrictions, fees or expenses 

in connection with such transfer; and 

(5) an explanation of where the 

participants and beneficiaries can obtain 

investment information concerning the 

other investment alternatives available 

under the plan. 

Other commenters suggested that the 

Department provide a model notice. 


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60458 Federal Register / Vol. 72, No. 205 / Wednesday, October 24, 2007 / Rules and Regulations 

Because applicable plan provisions and 

qualified default investment alternatives 

may vary considerably from plan to 

plan, the Department believes it would 

be difficult to provide model language 

that is general enough to accommodate 

different plans and different investment 

products and portfolios and that would 

allow sufficient flexibility to plan 

sponsors. Accordingly, the final 

regulation does not include model 

language for plan sponsors. However, 

the Department will explore this 

concept in the future in coordination 

with the Department of Treasury 

concerning the similar notice 

requirements contained in sections 

401(k)(13)(E) and 414(w) of the Code. 

Commenters also requested guidance 

concerning the extent to which the final 

regulation’s notice requirements could 

be satisfied by electronic distribution. 

The Department currently is reviewing 

its rules relating to the use of electronic 

media for disclosures under title I of 

ERISA. In the absence of guidance to the 

contrary, it is the view of the 

Department that plans that wish to use 

electronic means by which to satisfy 

their notice requirements may rely on 

either guidance issued by the 

Department of Labor at 29 CFR 

2520.104b–1(c) or the guidance issued 

by the Department of the Treasury and 

Internal Revenue Service at 26 CFR 

1.401(a)–21 relating to the use of 

electronic media. 

Qualified Default Investment 

Alternatives 

Under the final regulation, as in 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 four 

requirements for a ‘‘qualified default 

investment alternative.’’

The first requirement, at paragraph 

(e)(1), addresses investments in 

employer securities. As indicated in the 

preamble to the proposal, 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 be 

unnecessarily limiting and complicated. 

Accordingly, the proposal, in addition 

to establishing a general prohibition 

against qualified default investment 

alternatives holding or permitting 

acquisition of employer securities, 

provided two exceptions to the rule. 

While, as discussed below, the 

Department did receive comments 

generally requesting different or 

expanded exceptions to the general 

prohibition, the Department has 

determined it appropriate to adopt 

paragraph (e)(1) without modification 

from the proposal. 

The two exceptions to the general 

prohibition are set forth in paragraph 

(e)(1)(ii). The first exception applies 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 (e.g., 

a common or collective trust fund or 

pooled investment fund) 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. 

Several commenters suggested that 

the exception to investments in 

employer securities should extend to 

circumstances when the plan sponsor 

delegates investment responsibilities to 

an ERISA section 3(38) investment 

manager and with respect to which the 

plan sponsor has no discretion 

regarding the acquisition or holding of 

employer securities. The Department 

did not adopt this suggestion because in 

such instances the investment manager 

may be following the investment 

policies established by the plan sponsor, 

and, while the plan sponsor may not be 

directly exercising discretion with 

respect to the acquisition or holding of 

employer securities, the plan sponsor 

might indirectly be influencing such 

decision through an investment policy 

that requires the investment manager to 

acquire or hold various amounts of 

employer securities. In the Department’s 

view, limiting the exception to regulated 

financial institutions avoids this type of 

problem. 

Another commenter suggested that 

the Department limit qualified default 

investment alternatives to a 10% 

investment in employer securities. The 

Department did not adopt this 

suggestion because it believes that a 

percentage limit test would effectively 

require that a plan sponsor or other 

fiduciary monitor on a daily, if not more 

frequent, basis the specific holdings of 

the qualified default investment 

alternative and fluctuations in the value 

of the assets in the qualified default 

investment alternative to determine 

compliance with a percentage limit. 

Such a test would, in the Department’s 

view, result in considerable uncertainty 

as to whether at any given time the 

intended designated qualified default 

investment alternative actually met the 

requirements of the regulation. The 

Department believes that the approach it 

has taken to limiting employer 

securities provides both flexibility and 

certainty. 

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)(4)(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; however, an 

investment management service will be 

considered to be serving as a qualified 

default investment alternative only with 

respect to assets of a participant’s or 

beneficiary’s account over which the 

investment management service has 

authority to exercise discretion. 

In the case of employer securities 

acquired as matching contributions that 

are subject to a restriction on 

transferability, relief would not be 

available with respect to such securities 

until the investment management 

service has an unrestricted right to 

transfer the securities. 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 

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 qualified default 

investment alternative, the final 

regulation continues to permit an 

investment management service to hold 

and manage those employer securities 

in the absence of participant or 

beneficiary direction. Although the 

investment management service may 

not acquire additional employer 

securities using participant 


yshivers on PROD1PC62 with RULES3
Federal Register / Vol. 72, No. 205 / Wednesday, October 24, 2007 / Rules and Regulations 60459 

2Section 402(a)(2) of ERISA provides that the 

term ‘‘named fiduciary’’ means a fiduciary who is 

named in the plan instrument, or who, pursuant to 

a procedure specified in the plan, is identified as 

a fiduciary by a person who is an employer or 

employee organization with respect to the plan, or 

by such an employer and such an employee 

organization acting jointly. 

3Section 3(38) defines the term ‘‘investment 

manager’’ to mean any fiduciary (other than a 

trustee or named fiduciary, as defined in section 

402(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 [15 U.S.C. 80b–

3a(a)], 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; 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. 

contributions, the investment 

management service may reduce the 

amount of employer securities held by 

the account of the participant or 

beneficiary. 

One commenter suggested that the 

exception be extended to qualified 

default investment alternatives other 

than the investment management 

service described in paragraph (e)(4)(iii). 

An employer securities match can only 

constitute part of a qualified default 

investment alternative if the fiduciary 

selects an investment management 

service as the qualified default 

investment alternative, because only in 

the investment management service 

context is the responsible fiduciary 

undertaking the duty to evaluate the 

appropriate exposure to employer 

securities for a particular participant or 

beneficiary and undertaking the 

obligation to sell employer securities 

until the participant’s or beneficiary’s 

account reflects that appropriate 

exposure. Accordingly, the Department 

declines to adopt the commenter’s 

suggestion to expand the second 

employer securities exception to other 

qualified default investment 

alternatives. The Department further 

notes that this regulation does not 

provide relief for the acquisition of 

employer securities by an investment 

service. 

The second requirement, at paragraph 

(e)(2), is intended to ensure that the 

qualified default investment alternative 

itself does not impose any restrictions, 

fees or expenses inconsistent with the 

requirements of paragraph (c)(5) of 

§ 2550.404c–5. While the provision has 

been redrafted for clarity, it is 

substantively the same as in the 

proposal and, therefore, is being 

adopted without substantive change. 

The third requirement, at paragraph 

(e)(3), addresses the management of a 

qualified default investment option. As 

proposed, the regulation required 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. Several 

commenters suggested that requiring a 

qualified default investment alternative 

to be managed by an investment 

manager, or to be an investment 

company, is too restrictive. 

A number of commenters noted that 

section 3(38) of ERISA excludes from 

the definition of the term ‘‘investment 

manager’’ named fiduciaries, as defined 

in section 402(a)(2) of ERISA 2 and 

trustees.3 With regard to named 

fiduciaries, commenters pointed out 

that a number of employers serve as 

named fiduciaries and manage their 

plan investments in-house, resulting in 

reduced administrative and investment 

management costs. Commenters also 

noted that implementation of the 

requirement as proposed would 

eliminate the ability of plan sponsors 

who are named fiduciaries to directly 

manage a qualified default investment 

alternative, use asset allocation models, 

develop asset allocations themselves, or 

engage investment consultants (who 

may or may not be fiduciaries) to assist 

in the development of asset allocations. 

Other commenters, however, suggested 

that the final regulation retain the 

requirement that only investment 

managers within the meaning of section 

3(38) of ERISA or registered investment 

companies be permitted to manage 

qualified default investment 

alternatives. Commenters suggested that 

investment management decisions 

should be made by investment 

professionals who are investment 

managers within the meaning of section 

3(38) of ERISA; they asserted that 

requiring a 3(38) manager is safer and 

more prudent than other alternatives, 

and such requirement is 

administratively feasible. 

With regard to permitting plan 

sponsors to manage a qualified default 

investment alternative, the Department 

is persuaded that a plan sponsor’s 

willingness to serve as a named 

fiduciary responsible for the 

management of the plan’s investment 

options in conjunction with the 

potential cost savings to plan 

participants that can result from such 

management, is a sufficient basis to 

expand the regulation to permit plan 

sponsors that are named fiduciaries to 

manage a qualified default investment 

alternative. This modification is 

reflected in paragraph (e)(3)(i)(C). 

A number of commenters also 

indicated that, under the proposal, 

investment consultants engaged by plan 

sponsors would have to assume 

fiduciary responsibility for asset 

allocations in order to obtain relief 

under the proposal. These commenters 

suggested that requiring an investment 

consultant to assume fiduciary 

responsibility for asset allocation would 

increase costs for the provision of such 

consulting services, and that these costs 

inevitably would be passed along to 

participants. Commenters also asserted 

that the use of asset allocation models 

is well-established and is often an 

effective way to lower costs and to 

provide a clean structure and process 

for the formation, selection and 

monitoring of all elements of a prudent 

default investment alternative. The 

commenters also noted that many plan 

sponsors develop generic asset 

allocations and select particular funds, 

tailored to a particular plan, with the 

input of an investment consultant who 

may be an investment adviser under the 

Investment Advisers Act of 1940. With 

regard to these comments, the 

Department continues to believe 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 fiduciaries and those fiduciaries 

must acknowledge their fiduciary 

responsibility and liability under the 

ERISA. The Department notes, however, 

that plan sponsors who serve as named 

fiduciaries of a qualified default 

investment alternative may, to the 

extent they consider it prudent, engage 

investment consultants, utilize asset 

allocation models (computer-based or 

otherwise), etc. to carry out their 

investment management/asset allocation 

responsibilities. Accordingly, the 

Department does not believe the 

regulation in this regard should to any 

significant degree alter the availability 

or cost of such services. 

With regard to the exclusion of 

trustees from the ‘‘investment manager’’

definition, commenters suggested that 

the final regulation make clear that bank 

trustees of collective investment funds 

are permitted to manage a qualified 

default investment alternative. In this 

regard, commenters noted that the 

definition of ‘‘investment managers’’

recognizes that banks and other 


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60460 Federal Register / Vol. 72, No. 205 / Wednesday, October 24, 2007 / Rules and Regulations 

4This position is consistent with the 

Department’s long-held view that the parenthetical 

language of section 3(38) was merely intended to 

indicate that in order for a person to be an 

investment manager for a plan, that person must be 

more than a mere trustee or named fiduciary. See 

Advisory Opinion No. 77–69/70A 

institutions can be investment 

managers, citing ERISA section 

3(38)(B)(ii) and (iii), and should not be 

foreclosed from managing a qualified 

default investment alternative solely on 

the basis that the institution might 

otherwise serve as a trustee. These 

commenters noted that, similar to 

investment managers, banks as trustees 

of collective funds have fiduciary 

responsibility and liability under ERISA 

with respect to the funds they maintain. 

The Department is persuaded that an 

entity that meets the requirements of 

section 3(38)(A), (B) and (C) should not 

be precluded from assuming fiduciary 

responsibility and liability for the 

underlying investment management/ 

asset allocation decisions of a qualified 

default investment alternative solely 

because that entity serves in a trustee 

capacity for the plan.4 The Department 

has modified the final regulation 

accordingly. This modification is 

reflected in paragraph (e)(3)(i)(B). 

In response to a request from one 

commenter, the Department confirms 

that the provisions of the regulation do 

not preclude a qualified default 

investment alternative from having 

more than one fiduciary (e.g., 

investment manager) responsible for the 

investment management/asset allocation 

decisions of the investment alternative, 

as would be the case in an arrangement 

utilizing a ‘‘fund of funds’’ approach to 

designing a qualified default investment 

alternative. 

As with the proposal, the regulation 

permits a qualified default investment 

alternative to be an investment company 

registered under the Investment 

Company Act of 1940. See paragraph 

(e)(3)(ii) of § 2550.404c–5. 

In addition to the foregoing, 

paragraph (e)(3) has been expanded to 

include certain capital preservation 

products and funds described in 

paragraph (e)(4)(iv) and (v) of 

§ 2550.404c–5. These products and 

funds are discussed below. 

The last requirement for a qualified 

default investment alternative 

conditions relief on the use of specified 

types of investment fund products, 

model portfolios or services. See 

§ 2550.404c–5(e)(4). In the proposal, the 

Department identified three categories 

of investment alternatives that it 

determined appropriate for achieving 

meaningful retirement savings over the 

long-term for those participants and 

beneficiaries who, for one reason or 

another, do not elect to direct the 

investment of their pension plan assets. 

After careful consideration of all the 

comments concerning the nature and 

type of the investment alternatives that 

should be included as qualified default 

investment alternatives under the 

regulation, the Department, as discussed 

below, has decided to retain the three 

proposed categories of investment 

alternatives, essentially unchanged from 

the proposal, as the type of alternatives 

appropriate for default investments 

under the regulation. However, in 

recognition of the fact that some plan 

sponsors may find it desirable to reduce 

investment risks for all or part of their 

workforce following employees’ initial 

enrollment in the plan, the Department 

has added a limited capital preservation 

option that would constitute a qualified 

default investment alternative under the 

regulation for purposes of contributions 

made on behalf of a participant for a 

120-day period following the date of the 

participant’s first elective contribution. 

See paragraph (e)(4)(iv). In addition, the 

Department has modified the regulation 

to include a ‘‘grandfather’’-like 

provision pursuant to which stable 

value products and funds will constitute 

a qualified default investment 

alternative under the regulation for 

purposes of investments made prior to 

the effective date of the regulation. See 

paragraph (e)(4)(v). 

As noted above, the three categories of 

investment alternatives set forth in the 

proposal are being adopted essentially 

unchanged from the proposal. One 

organizational change appearing in the 

final regulation involves the inclusion 

of diversification language in each of 

three categories, rather than as a 

separate requirement of general 

applicability as in the proposal (see 

paragraph (e)(4) of proposed regulation 

§ 2550.404c–5). This change 

accommodates the addition of the 

capital preservation investment 

alternatives mentioned above that may 

not, given the nature of the investment, 

satisfy a diversification standard. 

Some commenters expressed concern 

that the Department’s approach to 

defining qualified default investment 

alternatives takes into account only 

products currently available in the 

marketplace and that the defining of 

qualified default investment alternatives 

should be based on more general 

criteria. These commenters emphasized 

that the regulation should not stifle 

creativity in the development of the 

next generation of retirement products. 

While the Department does provide 

examples of products, portfolios and 

services that would fall within the 

framework of the various definitions of 

products, portfolios and services set 

forth in the regulation, these examples 

are provided solely for the purpose of 

providing the benefits community with 

guidance as to what might be included 

within the defined categories and are 

not intended in any way to limit the 

application of the definitions to such 

vehicles. The Department believes that, 

on the basis of the information it has at 

this time and the comments on the 

proposal generally, the approach it is 

taking to defining qualified default 

investment alternatives for purposes of 

the regulation is sufficiently flexible to 

accommodate future innovations and 

developments in retirement products. 

A number of commenters requested 

clarification concerning application of 

the regulation to possible qualified 

default investment alternatives that are 

offered through variable annuity 

contracts. Commenters explained that 

variable annuity contracts typically 

permit participants to invest in a variety 

of investments through one or more 

separate accounts (or sub-accounts 

within the separate account) that would 

qualify as qualified default investment 

alternatives under the regulation. 

Commenters also requested 

confirmation that the availability of 

annuity purchase rights, death benefit 

guarantees, investment guarantees or 

other features common to variable 

annuity contracts would not themselves 

affect the status of a variable annuity 

contract that otherwise met the 

requirements for a qualified default 

investment alternative. Consistent with 

providing flexibility and encouraging 

innovation in the development and 

offering of retirement products, model 

portfolios or services, the Department 

intends that the definition of ‘‘qualified 

default investment alternative’’ be 

construed to include products and 

portfolios offered through variable 

annuity and similar contracts, as well as 

through common and collective trust 

funds or other pooled investment funds, 

where the qualified default investment 

alternative satisfies all of the conditions 

of the regulation. For purposes of 

identifying the entity responsible for the 

management of the qualified default 

investment alternative in such 

arrangements pursuant to paragraph 

(e)(3) of § 2550.404c–5, it is the view of 

the Department that such a 

determination is made by reference to 

the entity (e.g., separate account, subaccount, or similar entity) that is 

responsible for carrying out the day-today investment management/asset 

allocation responsibilities. Finally, with 

regard to such products and portfolios, 


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it is the view of the Department that the 

availability of annuity purchase rights, 

death benefit guarantees, investment 

guarantees or other features common to 

variable annuity contracts will not 

themselves affect the status of a fund, 

product or portfolio as a qualified 

default investment alternative when the 

conditions of the regulation are 

satisfied. A new paragraph (e)(4)(vi) was 

added to the regulation to clarify these 

principles. 

A number of commenters submitted 

questions or comments concerning the 

specific investment alternatives 

described in the regulation. 

The first investment alternative set 

forth in the regulation, at paragraph 

(e)(4)(i), is an investment fund, product 

or model portfolio that applies generally 

accepted investment theories, is 

diversified so as to minimize the risk of 

large losses, and 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. Consistent 

with the proposal, the description 

provides that 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. Also like the 

proposal, the description makes clear 

that 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 ‘‘life-cycle’’ or ‘‘targetedretirement-date’’ fund or account. 

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. As noted in the proposal, 

the Department believes that, 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 fixedincome exposures. 

Several commenters asked the 

Department to clarify whether a plan 

fiduciary must, or may, consider 

demographic or other factors in addition 

to a participant’s age or target retirement 

date when selecting an investment 

product intended to satisfy the first 

category of qualified default investment 

alternatives. For example, commenters 

suggested that a plan fiduciary may 

wish to take into account an employerprovided defined benefit plan or an 

employer stock contribution when 

selecting the plan’s default investment 

product. Although the final regulation 

does not preclude consideration of 

factors other than a participant’s age or 

target retirement date in these 

circumstances, the regulation is clear 

that such considerations are neither 

required nor necessary as a condition to 

a fiduciary obtaining relief under the 

regulation. The Department intended to 

provide plan fiduciaries with certainty 

that they have complied with the 

requirements of the regulation; 

accordingly, as long as a plan fiduciary 

satisfies its general obligations under 

ERISA when selecting any qualified 

default investment alternative, the 

fiduciary will not lose the relief 

provided by the regulation if he or she 

selects a product, portfolio or service 

described in the regulation. 

One commenter requested 

clarification concerning the status of 

‘‘lifestyle’’ funds. ‘‘Lifestyle’’ funds were 

defined as being similar to ‘‘lifecycle’’

funds, except that the allocation in a 

given lifestyle fund does not change 

over time to become more conservative. 

That is, the investment manager of a 

lifestyle fund invests the fund’s assets to 

achieve a predetermined level of risk, 

such as ‘‘conservative,’’ ‘‘moderate,’’ or 

‘‘aggressive.’’ While it does not appear 

that a lifestyle fund, as defined by the 

commenter, would by itself satisfy the 

requirements for a product or portfolio 

within the meaning of paragraph 

(e)(4)(i), such a fund could, in the 

Department’s view, constitute part of a 

qualified default investment alternative 

within the meaning of paragraph 

(e)(4)(i). Similarly, nothing in the final 

regulation precludes an investment 

manager from allocating a portion of a 

participant’s assets to such a fund as 

part of a qualified default investment 

alternative within the meaning of 

paragraph (e)(4)(iii). It is also possible 

that a lifestyle fund, as defined by the 

commenter, might be able to constitute 

an investment within the meaning of 

paragraph (e)(4)(ii), an example of 

which is a ‘‘balanced’’ fund. 

With respect to the language requiring 

that the investment fund, product or 

model portfolio provide varying degrees 

of long-term appreciation and capital 

preservation through ‘‘a mix of equity 

and fixed income exposures,’’ one 

commenter inquired whether the 

Department intended to exclude funds 

that had no fixed income exposure, 

which, according to the commenter, 

might be appropriate for young 

individuals many years away from 

retirement. While the Department 

believes that such an investment option 

may be appropriate for individuals 

actively electing to direct their own 

investments, the Department believes 

that when an investment is a default 

investment, the investment should 

provide for some level of capital 

preservation through fixed income 

investments. Accordingly, the final 

regulation, like the proposal, continues 

to require that the qualified default 

investment alternatives, defined in 

paragraph (e)(4)(i), (ii) and (iii), be 

designed to provide degrees of longterm appreciation and capital 

preservation through a mix of equity 

and fixed income exposures. 

The second investment alternative set 

forth in the regulation, at paragraph 

(e)(4)(ii), is an investment fund product 

or model portfolio that applies generally 

accepted investment theories, is 

diversified so as to minimize the risk of 

large losses, and 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 

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. 

Although commenters generally 

supported inclusion of a balanced 

investment option as a qualified default 

investment alternative, a number of 

commenters had questions or expressed 

concern regarding the requirement that 

the investment alternative define its 

investment objectives by reference to ‘‘a 

target level of risk appropriate for 

participants of the plan as a whole.’’

Commenters indicated that having to 

take into account the ‘‘participants of 

the plan as a whole’’ would result in 

uncertainty as to whether the plan 

sponsor properly matched the chosen 

fund to its participant population. In 


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5 Investment Company Institute, Quarterly 

Supplementary Data for Quarter Ending June 30, 

2006. 

6See paragraph (b)(2) of 29 CFR 2550.404c–5. 

7See 29 CFR 2550.404a–(b). 

8Although investment management services are 

included within the scope of relief, the Department 

notes that relief similar to that provided by this 

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 the 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)(1) 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. 

addition, commenters asserted that the 

on-going monitoring necessary for the 

plan fiduciary to ensure the continued 

appropriateness of the match would 

likely result in unnecessary burdens and 

costs. One commenter explained that 

balanced funds as a group hold 

approximately 60–65% percent of their 

portfolios in equity investments,5 and 

that the typical balanced fund would be 

somewhat more conservatively invested 

than most targeted-retirement-date 

funds; hence, the commenter argued 

that balanced funds are an appropriate 

default for all workers. The commenter 

further noted that periodic monitoring, 

while adding unnecessary costs, will 

likely never produce an impetus for 

changing to a different balanced fund 

option. After careful consideration of 

the comments, the Department has 

decided to retain the requirement that, 

for purposes of paragraph (e)(4)(ii), the 

selected qualified default investment 

alternative reflect ‘‘a target level of risk 

appropriate for participants of the plan 

as a whole.’’ The Department recognizes 

that, to the extent that a particular 

investment fund product or model 

portfolio does not itself consider or 

adjust its balance of fixed income and 

equity exposures to take into account a 

target level of risk appropriate for the 

participants of the plan as a whole, plan 

fiduciaries will retain that 

responsibility. The Department believes 

that, as a practical matter, this 

responsibility would be discharged by 

the fiduciary in connection with the 

prudent selection and monitoring of the 

investment fund product.6 Specifically, 

fiduciaries would take into account the 

diversification of the portfolio, the 

liquidity and current return of the 

portfolio relative to the anticipated cash 

flow requirements of the plan, the 

projected return of the portfolio relative 

to funding objectives of the plan, and 

the fees and expenses attendant to the 

investment.7

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, and would be 

similar to the considerations a fiduciary 

would take into account in managing an 

individual account plan that does not 

provide for participant direction. A 

number of commenters asked the 

Department to clarify the demographic 

factors that should be considered by the 

fiduciary. The Department understands 

that the only information a plan 

fiduciary may know about its 

participant population is age. Thus, 

when determining a target level of risk 

appropriate for participants of a plan as 

a whole, a plan fiduciary is required to 

consider the age of the participant 

population. However, a plan fiduciary is 

not foreclosed from considering other 

factors relevant to the participant 

population, if the fiduciary so chooses. 

The third alternative set forth in the 

regulation, at paragraph (e)(4)(iii), 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.8 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. Similar to 

the first two alternatives, these 

portfolios must be structured in 

accordance with generally accepted 

investment theories and diversified so 

as to minimize the risk of large losses. 

The final regulation also clarifies 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.’’

One commenter requested 

clarification that, with regard to a 

participant’s account holding employer 

securities with restrictions on 

transferability, the investment 

management service could serve as 

qualified default investment alternative 

for purposes of all other assets in the 

participant’s account with respect to 

which the managed account has 

investment discretion. As discussed 

earlier, the mere fact that 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, will not 

preclude an investment management 

service from serving as a qualified 

default investment alternative. 

However, an investment management 

service will be considered to be serving 

as a qualified default investment 

alternative only with respect to the 

assets of a participant’s or beneficiary’s 

account over which the investment 

management service has authority to 

exercise discretion. If the investment 

management service does not have the 

authority to exercise discretion over 

investments in employer securities, the 

investment management service will not 

be a qualified default investment 

alternative with respect to those 

securities. See discussion of paragraph 

(e)(1)(ii) of § 2550.404c–5, above. 

Another commenter expressed 

concern that requiring the manager of a 

managed account qualified default 

investment alternative to be an 

investment manager may prevent plan 

sponsors from using existing managed 

account programs, such as that 

addressed in Advisory Opinion 2001–

09A (the ‘‘SunAmerica Opinion’’). The 

Department believes these concerns are 

addressed by the modifications to 

paragraph (e)(3)(i)(C), pursuant to which 

plan sponsors who are named 

fiduciaries may manage qualified 

default investment alternatives. 

Many commenters expressed concern 

that the Department did not include 

capital preservation, in particular stable 

value, products as qualified default 

investment alternatives on a stand alone 

basis. These commenters pointed out 

that stable value funds are utilized by a 

large number of plans as default 

investment funds. These funds are often 

chosen by plan sponsors because they 

provide: Safety of principal; bond-like 

returns without the volatility associated 

with bonds; stability and steady growth 

of principal and earned income; and 

benefit-responsive liquidity, so that plan 

participants may transact at ‘‘book 

value.’’ Commenters supporting stable 

value funds argued that stable value 

funds are superior to money market 


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funds and other cash-equivalent 

products because stable value 

investments earn higher rates of return 

than money market funds and other 

cash-equivalent products. A number of 

these commenters also suggested that 

stable value funds are appropriate for 

plans with different demographics, 

including, for example, plans that cover 

younger, higher turnover employees 

who are likely to elect lump sum 

payments, or plans that cover older, 

near-retirement employees. 

Commenters in support of the 

inclusion of stable value products also 

indicated that stable value funds have 

relatively low costs compared to lifecycle, targeted-retirement-date and 

balanced funds, particularly those that 

use a ‘‘fund of funds’’ structure. These 

commenters expressed the view that, 

because stable value returns are 

comparable to intermediate corporate 

bond returns, the premium, if any, of 

equity investments over stable value 

investments has been overstated. Many 

of the commenters argued that the 

exclusion of stable value funds would 

unduly discourage plan sponsors from 

using stable value funds as a default 

option, to the detriment of plan 

participants. These commenters argued 

that limiting default investment 

alternative choices discourages plans 

from implementing automatic 

enrollment. In addition, some 

commenters suggest that if participants 

whose account balances are invested in 

qualified default investment alternatives 

react negatively to volatile equity 

performance by opting out of plan 

participation when losses occur, the 

regulation may ultimately decrease 

retirement savings, and the potential 

gains expected from funds with higher 

historical long-term performance 

records will not materialize. Some of the 

comments supporting the inclusion of 

capital preservation products also 

argued that the Congress, in referencing 

‘‘a mix of asset classes consistent with 

capital preservation or long-term capital 

appreciation, or a blend of both’’ in 

section 624 of the Pension Protection 

Act, intended the Department to include 

capital preservation products as a 

separate stand alone qualified default 

investment alternative. 

The Department also received 

comments in support of its 

determination that capital preservation 

products, such as money market funds, 

stable value funds and similarly 

performing investment vehicles, should 

not themselves constitute qualified 

default investment alternatives under 

the regulation. 

After careful consideration of the 

comments addressing this issue and 

assessment of related economic impacts, 

the Department has determined, except 

as otherwise discussed below, not to 

include capital preservation products, 

such as money market or stable value 

funds, as a separate long-term 

investment option under the regulation. 

As a short-term investment, money 

market or stable value funds may not, in 

the Department’s view, significantly 

affect retirement savings. The 

Department recognizes, however, that 

such investments can, and in many 

instances will, play an important role as 

a component of a diversified portfolio 

that constitutes a qualified default 

investment alternative. It is the view of 

the Department that investments made 

on behalf of defaulted participants 

ought to and often will be long-term 

investments and that investment of 

defaulted participants’ contributions 

and earnings in money market and 

stable value funds will not over the 

long-term produce rates of return as 

favorable as those generated by 

products, portfolios and services 

included as qualified default investment 

alternatives, thereby decreasing the 

likelihood that participants invested in 

capital preservation products will have 

adequate retirement savings. 

The Department also is concerned 

that including capital preservation and 

stable value products as a qualified 

default investment alternative for future 

contributions on behalf of defaulted 

participants may impede, or even 

reverse, the current trend away from the 

use of such products as default 

investments. The Department 

understands that, because account 

balances invested in capital 

preservation products are unlikely to 

show a nominal loss, a number of 

employers, if given a choice between 

capital preservation products and more 

diversified investment options, may be 

more likely to opt for capital 

preservation products because they are 

perceived as presenting less litigation 

risk for employers. If so, inclusion of a 

capital preservation option without 

limitation may increase utilization of 

capital preservation products as default 

investments and, thereby, increase the 

number of participants likely to have 

inadequate retirement savings, as 

compared with savings that would be 

generated through investments in the 

established qualified default investment 

alternatives. 

Lastly, the Department is concerned 

that inclusion of a capital preservation 

product as a qualified default 

investment alternative, without 

limitation, may be perceived by 

participants and beneficiaries as an 

endorsement by the government, by 

virtue of its inclusion in the regulation, 

or as an endorsement by the employer, 

by virtue of its selection as the qualified 

default investment alternative, as an 

appropriate investment for long-term 

retirement savings. Although the 

Department recognizes that such 

perceptions on the part of some 

participants and beneficiaries might be 

addressed with investment education 

and investment advice, the Department 

nonetheless is concerned that, overall, 

the potentially adverse effect on longterm retirement savings may be 

significant. 

In light of these concerns, the 

Department, as indicated above, has not 

included a capital preservation 

investment alternative as a long-term 

stand alone investment option for future 

contributions under the final regulation. 

The Department, however, has added 

two exceptions to the regulation that 

accommodate limited investments in 

capital preservation products as 

qualified default investment 

alternatives. The first exception is at 

paragraph (e)(4)(iv). In general, this 

exception treats investments in capital 

preservation products or funds as an 

investment in a qualified default 

investment alternative for a 120-day 

period following a participant’s first 

elective contribution (as determined 

under section 414(w)(2)(B) of the Code). 

Specifically, paragraph (e)(4)(iv)(A) 

recognizes, subject to the limitations of 

paragraph (e)(4)(iv)(B), as a qualified 

default investment alternative an 

investment product that is designed to 

preserve principal and provide a 

reasonable rate of return, whether or not 

guaranteed, consistent with liquidity. 

The product description and applicable 

standards are similar to the standards 

adopted for purposes of automatic 

rollovers of mandatory distributions at 

29 CFR 2550.404a–2. The Department 

believes it is appropriate to include 

capital preservation products as a 

limited-duration qualified default 

investment alternative to afford plan 

sponsors the flexibility of utilizing a 

near risk-free investment alternative for 

the investment of contributions during 

the period of time when employees are 

most likely to opt out of plan 

participation. The use of capital 

preservation products in these 

circumstances will enable plan sponsors 

to return contributed amounts to 

participants who opt out without 

concern about loss of principal. In this 

regard, the limitation set forth in 

paragraph (e)(4)(iv)(B) provides that 

capital preservation products described 

in paragraph (e)(4)(iv)(A) shall, with 

respect to any given participant, be 

treated as a qualified default investment 


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alternative for a 120-day period 

following the participant’s first elective 

contribution (as determined under 

section 414(w)(2)(B) of the Code). At the 

end of the 120-day period, capital 

preservation products would cease to be 

a qualified default investment 

alternative with respect to any assets of 

the participant that continue to be 

invested in such products. In order to 

avail itself of the relief afforded by the 

regulation, the plan fiduciary must 

redirect the participant’s investment in 

the capital preservation product to 

another qualified default investment 

alternative prior to the end of the 120- 

day period. As previously stated, such 

alternative may include an appropriate 

capital preservation component in the 

context of a diversified portfolio. 

The 120-day time frame is intended to 

provide plans that allow an employee to 

elect to make a permissible withdrawal, 

consistent with section 414(w) of the 

Code, a reasonable amount of time 

following the end of the 90-day period 

provided in section 414(w)(2)(B) (i.e., 

the period during which employees may 

elect to make a permissible withdrawal) 

to effectuate a transfer of a participant’s 

assets to another qualified default 

investment alternative. 

The second exception relating to 

capital preservation products and funds 

is at paragraph (e)(4)(v). This exception, 

unlike the first, is intended to be limited 

to stable value products and funds with 

respect to which plan sponsors are 

typically limited by the terms of the 

investment contracts from unilaterally 

reinvesting assets on behalf of 

participants who fail to give investment 

direction without triggering a surrender 

charge or other fees that could directly 

and adversely affect participant account 

balances. Under the exception, stable 

value products and funds will be treated 

as a qualified default investment 

alternative solely for purposes of 

investments in such products or funds 

made prior to the effective date of this 

regulation. The Department believes 

that this ‘‘grandfather’’-type provision 

accommodates the concerns of 

commenters regarding the utilization of 

stable value products and funds by plan 

sponsors as their default investment 

option in the absence of guidance 

concerning fiduciary responsibilities 

attendant to default investments 

generally, guidance like that provided 

by this regulation. At the same time, by 

limiting the exception to pre-effective 

date contributions, plan sponsors are 

encouraged to assess whether and under 

what circumstances they wish to avail 

themselves of the relief provided under 

the regulation by utilizing a qualified 

default investment alternative that 

extends to participant contributions 

made after the effective date of this 

regulation. It is important to note, 

however, that, as indicated in the 

regulation itself, the standards 

applicable to qualified default 

investment alternatives set forth in the 

regulation 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. 

Accordingly, fiduciaries may, without 

regard to this regulation, conclude that 

a stable value product or fund is an 

appropriate default investment for their 

employees and use such product or 

fund for contributions on behalf of 

defaulted employees after the effective 

date of this regulation. 

It also is important to note with regard 

to both of the exceptions discussed 

above that the relief afforded by the 

regulation for investments in the 

covered products or funds on behalf of 

defaulted participants is contingent on 

compliance with all the requirements of 

the regulation. 

Finally, the Department disagrees 

with commenters’ assertion that the 

Department’s decision not to include 

capital preservation products as a 

qualified default investment alternative 

is inconsistent with Congressional 

intent. The Department believes that 

Congress, in enacting section 624 of the 

Pension Protection Act, provided the 

Department broad discretion in framing 

a regulation that would permit the 

Department to include or exclude 

capital preservation products as a 

separate qualified default investment 

alternative. The Department also notes 

that, pursuant to section 505 of ERISA, 

the Secretary may prescribe such 

regulations as are necessary or 

appropriate to carry out the provisions 

title I of ERISA. 

C. Miscellaneous Issues 

Transition Issues 

A number of commenters raised 

issues concerning the status of existing 

default investments and transfers to 

default investments that would meet the 

requirements of the regulation. 

Specifically, commenters requested 

guidance on what steps should be taken 

to ensure that a plan’s current default 

investments, which also meet the 

requirements of the regulation, will be 

treated as qualified default investment 

alternatives after the effective date of the 

regulation. Other commenters requested 

guidance on what steps should be taken 

when a plan is moving from default 

investments that do not meet the 

requirements of the regulation to 

qualified default investment 

alternatives. In both scenarios, 

commenters noted that plans often will 

not have the records necessary to 

distinguish participants who were 

defaulted into a default investment from 

those who affirmatively elected to invest 

in that investment. Some commenters 

requested retroactive relief for 

investments that would not otherwise 

constitute qualified default investment 

alternatives because a plan’s 

determination to transfer assets out of 

such investments could trigger a market 

value adjustment or similar withdrawal 

penalty. 

To ensure that an existing or a new 

default investment constitutes a 

qualified default investment alternative 

with respect to both existing assets and 

new contributions of participants or 

beneficiaries, plan fiduciaries must 

comply with the notice requirements of 

the regulation. It is the view of the 

Department that any participant or 

beneficiary, following receipt of a notice 

in accordance with the requirements of 

this regulation, may be treated as failing 

to give investment direction for 

purposes of paragraph (c)(2) of 

§ 2550.404c–5, without regard to 

whether the participant or beneficiary 

was defaulted into or elected to invest 

in the original default investment 

vehicle of the plan. Under such 

circumstances, and assuming all other 

conditions of the regulation are 

satisfied, fiduciaries would obtain relief 

with respect to investments on behalf of 

those participants and beneficiaries in 

existing or new default investments that 

constitute qualified default investment 

alternatives. 

Several commenters requested 

guidance on the effective date of the 

regulation. While section 404(c)(5) of 

ERISA is effective for plan years 

beginning after December 31, 2006, 

relief under section 404(c)(5) is 

conditioned on, among other things, the 

investment of a participant’s 

contributions and earnings ‘‘in 

accordance with regulations issued by 

the Secretary.’’ See section 404(c)(5)(A). 

Accordingly, relief under section 

404(c)(5) is conditioned on compliance 

with the provisions of this final 

regulation, which provide relief only for 

investments on behalf of participants 

and beneficiaries who were furnished a 

notice in accordance with paragraphs 

(c)(3) and (d) of § 2550.404c–5 and who 

did not give investment directions to the 

plan after the effective date of the 

regulation. Although the regulation only 

provides relief for investments in 

qualified default investment alternatives 

when participants and beneficiaries do 


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Federal Register / Vol. 72, No. 205 / Wednesday, October 24, 2007 / Rules and Regulations 60465 

9This interpretation of section 514(e) is 

consistent with the Technical Explanation of H.R. 

4, the ‘‘Pension Protection Act of 2006,’’ as Passed 

by the House on July 28, 2006, and as Considered 

by the Senate on August 3, 2006, a document 

prepared by the staff of the Joint Committee on 

Taxation. That document states, on page 230: ‘‘The 

State preemption rules under the bill are not 

limited to arrangements that meet the requirements 

of a qualified enrollment feature.’’

not give investment directions after the 

effective date of the regulation, 

compliance with the notice 

requirements may be achieved by 

providing notice in accordance with the 

regulation before its effective date. 

With regard to the possible 

assessment of market value adjustments 

or similar withdrawal penalties that 

may result from a fiduciary’s decision to 

move assets to a qualified default 

investment alternative, the Department 

reminds fiduciaries that such decisions 

must be made in compliance with 

ERISA’s prudence and exclusive 

purpose requirements. These decisions 

cannot be based solely on a fiduciary’s 

desire to take advantage of the limited 

liability afforded by this regulation, 

without regard to the financial 

consequences to the plan’s participants 

and beneficiaries. In this regard, the 

Department notes that the final 

regulation does not change the status of 

an otherwise prudent default 

investment into an imprudent default 

investment. The Department has 

attempted to make clear in both the 

preamble and the operative language of 

the final regulation that the standards 

set forth therein are not intended to be 

the exclusive means by which 

fiduciaries might satisfy their 

responsibilities under the Act with 

respect to the investment of assets on 

behalf of participants and beneficiaries 

who do not give investment directions. 

Further, as discussed above under 

Qualified Default Investment 

Alternatives, the Department modified 

the regulation to provide relief for 

investments made in stable value 

products or funds prior to the effective 

date of the regulation. This modification 

is intended to assist plan fiduciaries 

who may be limited by the terms of 

investment contracts for such products 

or funds from unilaterally reinvesting 

assets on behalf of participants who fail 

to direct their investments. 

One commenter requested that the 

Department make clear that once a 

participant or beneficiary directs any 

portion of his or her account balance, 

the participant or beneficiary is 

considered to have directed the 

investment of the entire account. The 

Department agrees that investment 

direction by a participant or beneficiary 

with respect to a portion of his or her 

account balance may be treated as a 

decision to retain the remainder of the 

account balance as currently invested, 

thus permitting the responsible 

fiduciary to consider the entire account 

balance as directed by the participant or 

beneficiary. 

A number of commenters requested 

that the Department clarify the 

interrelationship between ERISA section 

404(c)(4)(A)—the ‘‘mapping’’

provisions—and section 404(c)(5) and 

this regulation. The most obvious 

difference between the two sections is 

the circumstances under which relief is 

available. The relief provided by section 

404(c)(4) is limited to circumstances 

when a plan undertakes a ‘‘qualified 

change in investment options’’ within 

the meaning of section 404(c)(4)(B). In 

contrast, section 404(c)(5) and this 

regulation can apply to changes in 

investment options and to the selection 

of initial plan investments when 

participants or beneficiaries do not give 

investment directions. Section 404(c)(4) 

applies only when the investment 

option from which assets are being 

transferred was chosen by the 

participant or beneficiary (see section 

404(c)(4)(C)(iii)). Section 404(c)(5), 

unlike 404(c)(4), can apply to the 

selection of an investment alternative by 

the plan fiduciary in the absence of any 

affirmative direction by the participant 

or beneficiary. While the fiduciary relief 

afforded by section 404(c)(4) and section 

404(c)(5) is similar, relief under section 

404(c)(4) requires that new investments 

be reasonably similar to the investments 

of the participant or beneficiary 

immediately before the change, whereas 

relief under section 404(c)(5) requires 

investment to be made in qualified 

default investment alternatives. In the 

context of changing investment options 

under the plan, ERISA sections 404(c)(4) 

and 404(c)(5) provide fiduciaries 

flexibility in implementing such 

changes. 

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. In the preamble to 

the proposed regulation, the Department 

specifically invited comment on 

whether, and to what extent, regulations 

would be helpful in addressing the 

preemption provision of section 514(e). 

In response to the Department’s 

invitation, commenters indicated that, 

while the application of the preemption 

provisions should be clarified, they did 

not believe it was necessary at this time 

for the Department to prescribe 

regulations establishing minimum 

standards for automatic contribution 

arrangements. Commenters also argued 

that ERISA preemption should extend to 

all prudent investments under an 

automatic contribution arrangement, not 

just those determined to be qualified 

default investment alternatives under 

the Department’s regulation. In 

addition, commenters argued that 

preemption should not depend on 

compliance with all the requirements of 

the regulation under section 404(c)(5), 

noting that section 514(e) has an 

independent notice requirement. See 

section 514(e)(3). 

In an effort to clarify the application 

of the preemption provisions of section 

514(e), the final regulation includes a 

new paragraph (f). As set forth in the 

regulation, section 514(e) broadly 

preempts any State law that would 

restrict the use of an automatic 

contribution arrangement. After 

reviewing the text and purpose of 

section 514(e), the Department 

concluded that Congress intended to 

supersede the application of such laws 

to any pension plan that provides for an 

automatic contribution arrangement, 

regardless of whether such plan 

includes an automatic contribution 

arrangement as defined in the 

regulation. This conclusion is reflected 

in paragraph (f)(2) of the final 

regulation. 

With the enactment of section 514(e), 

Congress intended to occupy the field 

with respect to automatic contribution 

arrangements.9 Thus, section 514(e) of 

ERISA does not merely supersede State 

laws ‘‘insofar’’ as any particular plan 

complies with this final regulation, but 

rather generally supersedes any law 

‘‘which would directly or indirectly 


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60466 Federal Register / Vol. 72, No. 205 / Wednesday, October 24, 2007 / Rules and Regulations 

10Section 514(a) of ERISA provides, in pertinent 

part, that ‘‘the provisions of this title and title IV 

shall supersede any and all State laws insofar as 

they may now or hereafter relate to any employee 

benefit plan * * *.’’ Emphasis added. 

prohibit or restrict the inclusion in any 

plan of an automatic contribution 

arrangement.’’ This language stands in 

marked contrast to the familiar language 

of section 514(a) of ERISA, which 

supersedes State laws only ‘‘insofar’’ as 

they satisfy the ‘‘relates to’’ standard set 

forth in that section.10

Additionally, Congress gave the 

Department discretion in section 

514(e)(1) to determine whether and to 

what extent preemption should be 

conditioned on plan compliance with 

minimum standards, stating that ‘‘[t]he 

Secretary may prescribe regulations 

which would establish minimum 

standards that such an arrangement 

would be required to satisfy in order for 

this subsection [on preemption] to apply 

in the case of such arrangement.’’

Pursuant to this grant of discretionary 

authority, the Department has 

concluded, at this time, that it should 

not tie preemption to minimum 

standards for default investments. The 

Department, therefore, specifically 

provides in paragraph (f)(4) that nothing 

in the final regulation precludes a 

pension plan from including an 

automatic contribution arrangement that 

does not meet the conditions of 

paragraph (a) through (e) of the 

regulation. While relief under ERISA 

section 404(c)(5) is available only to 

plans that comply with the regulation, 

the Department has determined that it 

would be inappropriate to discourage 

plan fiduciaries from selecting default 

investments that are not identified in 

the regulation. State laws that hinder 

the use of any other default investments 

would be inconsistent with this 

determination, and with the 

discretionary authority Congress vested 

in the Department over the scope of 

ERISA preemption. 

Finally, in an effort to eliminate the 

need for multiple notices by plan 

administrators of automatic contribution 

arrangements, paragraph (f)(3) of the 

final regulation specifically provides 

that the administrator of an automatic 

contribution arrangement within the 

meaning of paragraph (f)(1) shall be 

considered to have satisfied the notice 

requirements of section 514(e)(3) if 

notices are furnished in accordance 

with paragraphs (c)(3) and (d) of the 

regulation. Accordingly, satisfaction of 

the notice requirements under section 

404(c)(5) and this regulation also will 

serve to satisfy the separate notice 

requirements set forth in section 

514(e)(3) for automatic contribution 

arrangements. 

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 for each violation of section 

514(e)(3) of ERISA. Implementing 

regulations will be developed in a 

separate rulemaking. 

D. Effective Date 

This final regulation will be effective 

60 days after the date of its publication 

in the Federal Register. 

E. Regulatory Impact Analysis 

Summary 

This regulation is expected to have 

two major economic consequences. 

Default investments will be directed 

more toward higher-return portfolios, 

boosting average investment returns, 

and automatic enrollment provisions 

will become more common, boosting 

participation. Both of these effects will 

increase average retirement savings, 

especially among workers who are 

younger, have lower earnings and/or 

more frequent job changes. A substantial 

number of individuals will enjoy 

significant increases in retirement 

income, while a few may experience 

decreases if the introduction of 

automatic enrollment slows their saving 

or if their default investment returns are 

particularly poor. The magnitude of 

these effects will be large in absolute 

terms and proportionately large for 

many directly affected individuals. 

The regulation’s effects will be 

cumulative and gradual, and their 

magnitude will depend on plan sponsor 

and participant choices. The 

Department has developed low- and 

high-impact estimates to illustrate a 

range of potential long-term effects. 

By 2034 the regulation (together with 

the automatic enrollment provisions of 

the Pension Protection Act) is predicted 

to increase aggregate annual 401(k) plan 

contributions by between 2.6 percent 

and 5.1 percent, or by $5.7 billion to 

$11.3 billion (expressed in 2006 

dollars). It is predicted to increase 

aggregate account balances by between 

2.8 percent and 5.4 percent, or by $70 

billion to $134 billion. Between 83 

percent and 77 percent of net new 

401(k) accumulations will be preserved 

for retirement rather than cashed out 

early. 

Low-impact estimates indicate that 

the regulation will increase pension 

income by $1.3 billion per year on 

aggregate for 1.6 million individuals age 

65 and older in 2034, but decrease it by 

$0.3 billion per year for 0.6 million. 

High-impact estimates suggest that 

pension income will increase by $2.5 

billion for 2.5 million and fall by $0.6 

billion for 0.9 million. Impacts on 

retirement income will be larger farther 

in the future, reflecting the fact that 

automatic enrollment and default 

investing disproportionately affect 

young workers. 

A substantial portion of the increase 

in retirement savings will be attributable 

directly to the movement of default 

investments away from stand-alone, 

fixed income capital preservation 

vehicles and toward qualified default 

investment alternatives that provide for 

capital appreciation as well as capital 

preservation. The majority of the 

increase, however, will be attributable 

to the proliferation of automatic 

enrollment. 

The Department believes that the net 

increase in retirement savings will 

translate into a net improvement in 

welfare. There is substantial risk that 

savings will fall short relative to many 

workers’ retirement income 

expectations, especially in light of 

increasing health costs and stresses on 

defined benefit pension plans and the 

Social Security program. The regulation 

will help reduce that risk. An increase 

in retirement savings additionally is 

likely to promote investment and longterm economic productivity and growth. 

The Department therefore concludes 

that the benefits of this regulation will 

justify its costs. 

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). Section 3(f) of the 

Executive Order defines a ‘‘significant 

regulatory action’’ as 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 

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 


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Federal Register / Vol. 72, No. 205 / Wednesday, October 24, 2007 / Rules and Regulations 60467 

11On Nov. 20, 2006, OMB issued a notice (ICR 

Reference No. 200608–1210–003) that it would not 

approve the Department’s request for approval of 

the information collection provisions until after 

consideration of public comment on the proposed 

regulation and promulgation of a final rule, 

describing any changes. 

mandates, the President’s priorities, or 

the principles set forth in the Executive 

Order. 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 regulation. The 

Department believes that the 

regulation’s benefits justify its costs. 

Regulatory Flexibility Act 

The Department certified that the 

proposed regulation, if adopted, would 

not have a significant economic impact 

on a substantial number of small 

entities. 71 FR 56806, 56815 (Sept. 27, 

2006). In explaining the basis for this 

certification, the Department noted that 

10 to 20 percent of small participant 

directed defined contribution plans 

(28,000 to 56,000 plans) might adopt 

automatic enrollment programs as a 

result of the regulation. Consequently, 

some of the employers sponsoring such 

plans may have to make additional 

matching contributions (up to $100 

million to $300 million annually). The 

Department expects that the amount of 

such additional contributions to small 

plans would be proportionately similar 

to those to large plans. The Department 

did not expect the proposed regulation 

to have any adverse consequences for 

small plans or their sponsors because all 

the factors at issue, including the 

payment of matching contributions, the 

adoption of automatic enrollment 

programs, and compliance with the 

regulation are voluntary on the part of 

the plan sponsor. 

The Department received one 

comment regarding the proposed 

regulation’s potential effect on small 

entities. The commenter believes that 

certain types of mutual funds that 

would be qualified default investment 

alternatives under paragraph (e)(4)(i) 

(e.g., life-cycle or target-retirement date 

funds) sometimes invest in other types 

of mutual funds. According to the 

commenter, the investment advisers for 

the life-cycle or target-retirement-date 

funds may have an incentive to skew 

the fund’s allocation toward sub funds 

that generate higher fees than to funds 

that would be most appropriate for the 

age or expected retirement date of the 

affected participants. The commenter 

stated that fiduciaries of small plans 

wishing to use the safe harbor would 

need to expend disproportionately more 

resources than large plan fiduciaries in 

making sure that the asset allocations 

(and thus, the corresponding fee 

structures) are not tainted by conflicts of 

interest. Specifically, the commenter 

was concerned that unlike larger plans 

which could conduct analyses of the 

neutrality of asset allocations in-house, 

small plans would have to expend 

resources on using outside consultants 

to conduct such analyses or face 

potential liability for a failure to do so. 

The commenter mentioned that some 

funds are willing to indemnify 

fiduciaries of large plans from any 

liability associated with choosing such 

funds. The commenter suggested that 

the Department add measures to 

mitigate the likelihood of conflicts, such 

as requiring that such funds allocate 

assets pursuant to independent 

algorithms and require equal treatment 

for small plan fiduciaries with regard to 

indemnification. 

Plan fiduciaries must take into 

account potential conflicts of interest 

and the reasonableness of fees in 

choosing and monitoring any 

investment option for a plan, whether 

covered under the safe harbor or not. 

This obligation flows from the fiduciary 

duties of prudence and loyalty to the 

participants set out in ERISA section 

404(a)(1). The regulation imposes no 

new requirements for selecting qualified 

default investment alternatives. For 

large or small plans, the duty to evaluate 

a plan investment option exists 

regardless of whether the plan includes 

an automatic enrollment feature or 

whether the fiduciary is seeking to 

comply with this regulation. Thus, the 

Department continues to believe that 

this regulation would not have a 

significant effect on a substantial 

number of small entities. 

The Department considered the 

commenter’s suggestions. Adopting 

them, however, could limit plans’

choices or increase the cost of qualified 

default investment alternatives. The 

regulation does not prevent plan 

fiduciaries from taking features such as 

independent algorithms into account in 

choosing qualified default investment 

alternatives. If it determines that a 

widespread need for such assistance 

exists, the Department may consider 

providing guidance for small plans 

regarding prudent selection of qualified 

default investment alternatives. 

The Department has also considered 

the changes made in this document 

from the proposed regulation. These 

changes, including the modified notice 

requirement, allowing trustees and 

certain plan sponsors to manage 

qualified default investment 

alternatives, and the addition of a 

temporary qualified default investment 

alternative are discussed more fully 

earlier in this document. They do not 

affect the Department’s determination 

regarding the regulation’s impact on 

small entities. Therefore, the 

Department recertifies its earlier 

conclusion that this regulation will not 

have a significant economic impact on 

a substantial number of small entities. 

Paperwork Reduction Act 

In accordance with the requirements 

of the Paperwork Reduction Act of 1995 

(PRA) (44 U.S.C. 3506(c)(2)), the 

proposed regulation solicited comments 

on the information collections included 

in the proposed regulation. The 

Department also submitted an 

information collection request (ICR) to 

OMB in accordance with 44 U.S.C. 

3507(d), contemporaneously with the 

publication of the proposed regulation, 

for OMB’s review.11 Although no public 

comments were received that 

specifically addressed the paperwork 

burden analysis of the information 

collections, the comments that were 

submitted, and which are described 

earlier in this preamble, contained 

information relevant to the costs and 

administrative burdens attendant to the 

proposals. The Department took into 

account such public comments in 

connection with making changes to the 

proposal, analyzing the economic 

impact of the proposals, and developing 

the revised paperwork burden analysis 

summarized below. 

In connection with publication of this 

final rule, the Department has submitted 

an ICR to OMB for its request of a new 

collection. The public is advised that an 

agency may not conduct or sponsor, and 

a person is not required to respond to, 

a collection of information unless it 

displays a currently valid OMB control 

number. The Department intends to 

publish a notice announcing OMB’s 

decision upon review of the 

Department’s ICR. 

A copy of the ICR may be obtained by 

contacting the PRA addressee shown 

below or at http://www.RegInfo.gov. 

PRA ADDRESSEE: Gerald B. Lindrew, 

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) 

219–4745. These are not toll-free 

numbers. 

The regulation provides certain 

specified relief from fiduciary liability 

for fiduciaries who make investment 

decisions on behalf of participants and 

beneficiaries in individual account 


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60468 Federal Register / Vol. 72, No. 205 / Wednesday, October 24, 2007 / Rules and Regulations 

12The Department does not anticipate an increase 

in the number of Form 5500 filings merely due to 

the changes to the Form 5500 for 2007 to 2009. 

13All numbers used in this paperwork burden 

estimate have been rounded to the nearest 

thousand. 

14EBSA estimates based on the Bureau of Labor 

Statistics, National Occupational Employment 

Survey (May 2005) and the Bureau of Labor 

Statistics, Employment Cost Index (Sept. 2006). 

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 or beneficiary 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 regulation requires that the 

assets of non-directing participants or 

beneficiaries be invested in one of the 

qualified default investment alternatives 

described in the regulation and that 

certain other specified conditions be 

met. 

The regulation imposes two separate 

disclosure requirements to participants 

and beneficiaries that are conditions to 

the relief created by the final regulation, 

as follows: (1) The plan must provide an 

initial notice containing specified 

information to any individual whose 

assets may be invested in a qualified 

default investment alternative generally 

at least 30 days prior to the date of plan 

eligibility (or on or before the date of 

plan eligibility if the participant is 

permitted to make a withdrawal under 

Code section 414(w)) and thereafter 

annually at least 30 days before the 

beginning of each plan year; and (2) the 

plan must provide certain materials that 

it receives relating to participants’ and 

beneficiaries’ investments in a qualified 

default investment alternative. The 

‘‘pass-through’’ materials that must be 

provided are those specified in the 

Department’s regulation under ERISA 

section 404(c) at 29 CFR 2550.404c–

1(b)(2)(i)(B)(1)(viii) and (ix) and 29 CFR 

404c–1(b)(2)(i)(B)(2). The information 

collection provisions of this 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 on which the Department’s 

burden analysis is based are derived 

primarily from the Form 5500 Series 

filings for the 2004 plan year, which are 

the most recent reliable data available to 

the Department.12 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 

the initial and 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 regulation requires that 

notice be provided initially, before any 

portion of a participant’s or 

beneficiary’s account balance is 

invested in a qualified default 

investment alternative, and annually 

thereafter. The notice generally must 

describe: (1) The circumstances under 

which assets in the individual account 

of a participant or beneficiary may be 

invested on behalf of the participant or 

beneficiary in a qualified default 

investment alternative; and, if 

applicable, an explanation of the 

circumstances under which elective 

contributions will be made on behalf of 

a participant, the percentage of such 

contributions, and the right of the 

participant to elect not to have such 

contributions made on the participant’s 

behalf (or to elect to have such 

contributions made at a different 

percentage); (2) the right of participants 

and beneficiaries to direct the 

investment of assets in their accounts; 

(3) the qualified default investment 

alternative, including its investment 

objectives, risk and return 

characteristics (if applicable), and fees 

and expenses; (4) the participants’ and 

beneficiaries’ right to direct the 

investment of the assets to any other 

investment alternative offered under the 

plan, including a description of any 

applicable restrictions, fees or expenses 

in connection with such a transfer; and 

(5) where participants and beneficiaries 

can obtain information about the other 

investment alternatives available under 

the plan. 

The Department estimates that 

424,00013 participant directed 

individual account pension plans will 

prepare and distribute notices to 

62,544,000 eligible workers, participants 

and beneficiaries in the first year in 

which this regulation becomes 

applicable. Preparation of the notice in 

the first year is estimated to require onehalf hour of legal professional time for 

each plan, for a total aggregate estimate 

of 212,000 burden hours. For the 62 

percent of participants and beneficiaries 

who will receive the notice by mail 

(38,777,000 individuals), distribution of 

the notice is estimated to require an 

additional 310,000 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 notice to the 

remaining 38 percent of participants 

and beneficiaries who will receive this 

notice electronically (23,767,000 

individuals). The total annual burden 

hours estimated for the notice in the 

first year, therefore, are 522,000. The 

equivalent cost for this burden hour 

estimate is $30,232,000 (legal 

professional time is valued at $106 per 

hour, and clerical time is valued at $25 

per hour).14

In addition to burden hours, the 

Department has estimated annual costs 

attributable to the notice for the first 

year, based on materials and postage, at 

$19,776,000. This comprises the 

material cost for a two-page notice ($.10 

per notice) to 38,777,000 participants 

and beneficiaries (62 percent of 

62,544000 participants and 

beneficiaries), which equals $3,878,000, 

plus postage at $0.41 per mailing, which 

equals $15,899,000. Total annual costs 

for the notice in the first year are 

therefore estimated at $19,776,000. 

In years subsequent to the first year of 

applicability, the Department estimates 

that notices will be prepared only by 

newly established participant directed 

individual account pension plans and 

plans that change 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 (141,000 

plans) will prepare and distribute new 

or updated notices to all participants 

and beneficiaries, requiring 24 minutes 

of legal professional time per notice. 

The preparation of these notices in each 

subsequent year is estimated to require 

57,000 hours. However, the number of 

participants receiving 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 notice by mail 

(38,777,000 individuals) will require 

310,000 hours and $19,776,000 

additional materials and postage cost. 

(As for the first year, the Department has 

assumed that electronic distribution of 

the notice in subsequent years will not 

add any significant additional 

paperwork burden.) 

Based on those assumptions, the 

Department estimates that the total 


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Federal Register / Vol. 72, No. 205 / Wednesday, October 24, 2007 / Rules and Regulations 60469 

15See 71 FR 64564 (Nov. 2, 2006). The paperwork 

burden as calculated for section 404(c) plans 

assumes that plans send pass-through disclosures to 

all participants and beneficiaries in section 404(c) 

plans, not only to the ones that are actively 

directing their investments. 

16The burden arising from these disclosure 

requirements will be the same in subsequent years. 

17 Various surveys estimate the proportion at 40 

percent (Profit Sharing/401(k) Council of America, 

49th Annual Survey of Profit Sharing and 401(k) 

Plans (2006) at 39), 41 percent (Deloitte Consulting, 

Annual 401(k) Benchmarking Survey, 2005/2006 

Edition (2006) at 7), and 21 percent (Vanguard, How 

America Saves 2006 (Sept. 2006) at 26 ). Surveys 

also reveal a trend away from capital preservation 

defaults toward investment vehicles like those 

included as qualified default investment 

alternatives for future contributions under this 

regulation. 

18These estimates pertain only to default 

investments made on behalf of defaulted 

participants under automatic enrollment programs. 

The default investment regulation is not so limited. 

Therefore, these estimates are likely to omit some 

of the redirection of default investments that will 

occur under the regulation. 

burden hours for notices under this 

regulation in each year after the first 

year of applicability will fall to 367,000 

hours. The equivalent cost of such an 

hour burden (using the same 

assumptions as for the first year) is 

$13,749,000. The total cost burden 

estimated for subsequent years for the 

notice will remain at $19,776,000. 

Pass-through Material—29 CFR 

2550.404c–5(c)(4). Under the regulation, 

the fiduciary shall qualify for the relief 

described in paragraph (b)(1) of the final 

regulation if a fiduciary provides 

material to participants and 

beneficiaries as set forth in paragraphs 

(b)(2)(i)(B)(1)(viii) and (ix), and 

paragraph (b)(2)(i)(B)(2) of the 404(c) 

regulation. In addition, plans must be 

prepared to provide certain information 

on request and must therefore maintain 

such information in updated form in 

order to comply. The paperwork burden 

for the pass-through disclosure 

requirements calculated here does not 

include pass-through disclosure burden 

for section 404(c) plans, as these 

disclosures for section 404(c) plans were 

considered in the renewal to OMB 

Control No. 1210–0090.15

The 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 

(3,794,000 individuals) will have 

default investments. Of these, 1,072,000 

individuals are invested in participant 

directed individual account pension 

plans that are not section 404(c) plans. 

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 financial statements 

and prospectuses, and that plans will 

also receive other pass-through 

materials on occasion. These two factors 

result in an estimate of 4,286,000 

responses (distributions of pass-through 

materials) per year. Duplication and 

packaging of the pass-through material 

is estimated to require 1.5 minutes of 

clerical time per distribution, for an 

annual hour burden estimate of 107,000 

hours of clerical time. The equivalent 

cost of this hour burden is estimated at 

$2,679,000. Additional cost burden for 

the pass-through of material is estimated 

to include paper cost (40 pages of 

material yearly per participant or 

beneficiary) and postage ($.58 per 

mailing) at $4,629,000 annually for 4 

distributions per participant or 

beneficiary with a default investment. 

Plans also need to maintain 

information in order to provide certain 

information on request. This 

preparation is estimated to require one 

hour of clerical time for each of the 

162,000 newly affected plans, for a total 

of 162,000 burden hours. The 

Department assumes that, on average, 

plans will make one disclosure upon 

request every year and that it takes onehalf minute of clerical time per 

disclosure to send out the materials, 

requiring about 4,000 hours of clerical 

time. In total, the preparation and 

sending of information upon request 

requires 166,000 burden hours with 

equivalent costs of $4,145,000. 

Additional cost burden for the material 

is estimated to include paper cost (20 

pages of material yearly per information 

request) and postage ($0.89 per mailing) 

at $306,000.16

In total, the Department estimates that 

providing pass-through disclosures to 

non-directing participants and 

beneficiaries under this regulation will 

require annual burden hours of 

approximately 273,000 hours (with 

equivalent costs of $6,824,000) and total 

costs of $4,935,000. 

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–AB10. 

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

Respondents: 424,000. 

Responses: 66,991,000. 

Frequency of Response: Annually; 

occasionally. 

Estimated Total Annual Burden 

Hours: 795,000 (first year). 

Estimated Total Annual Burden Cost: 

$24,711,000 (first year). 

Congressional Review Act 

This notice of final rulemaking is 

subject to the Congressional Review Act 

provisions of the Small Business 

Regulatory Enforcement Fairness Act of 

1996 (5 U.S.C. 801 et seq.) and therefore 

has been transmitted to the Congress 

and the Comptroller General for review. 

Unfunded Mandates Reform Act 

Pursuant to the 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, 

that may impose an annual burden of 

$100 million or more, adjusted for 

inflation. 

Economic Impacts 

By 2034 the regulation (together with 

the automatic enrollment provisions of 

the Pension Protection Act) is predicted 

to increase aggregate account balances 

by between 2.8 percent and 5.4 percent, 

or by $70 billion to $134 billion. 

Investment Mix 

A large but declining proportion 17 of 

401(k) plans currently direct default 

investments exclusively to fixed income 

capital preservation vehicles such as 

money market or stable value funds. By 

reducing risks attendant to fiduciary 

responsibility and liability, this 

regulation is expected to encourage 

more plans to direct default investments 

to vehicles that include a mix of equity 

and fixed income instruments and 

thereby provide the potential for capital 

appreciation as well as capital 

preservation. 

As a result of this regulation, it is 

estimated that in 2034, 401(k) plan 

investments in qualified default 

investment alternative-type vehicles 

(expressed in 2006 dollars) will increase 

by between $65 billion and $116 billion. 

The portion of this estimated increase 

that is attributable directly to the 

redirection of default investments is 

between $18 billion and $24 billion. 

The rest is attributable to increased 

contributions, which are discussed 

below.18


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19See, e.g., Ibbotson Associates, Stocks, Bonds, 

Bills and Inflation, 2006 Yearbook (2006). 

20See, e.g., U.S. Securities and Exchange 

Commission, Beginners’ Guide to Asset Allocation, 

Diversification, and Rebalancing (May 2007), at 

http://www.sec.gov/investor/pubs/ 

assetallocation.htm; and Stephen P. Utkus, 

Selecting a Default Fund for a Defined Contribution 

Plan, Vanguard Center for Retirement Research, 

Volume 14 (June 2005) at 6. 

21U.S. Bureau of Labor Statistics, National 

Compensation Survey: Employee Benefits in Private 

Industry in the United States, 2002–2003, Bulletin 

2573 (Jan. 2005). 

22EBSA estimate. The proportion of plans in 

various size classes that provide automatic 

enrollment was taken from Profit Sharing/401(k) 

Council of America, 49th Annual Survey of Profit 

Sharing and 401(k) Plans (2006) at 38. 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. 

23The incidence of automatic enrollment appears 

to be growing. According to one series of surveys 

automatic enrollment spread from 8.4 percent of 

plans in 2003 to 16.9 percent in 2005 (Profit 

Sharing/401(k) Council of America, 49th Annual 

Survey of Profit Sharing and 401(k) Plans (2006) at 

38). Another found that automatic enrollment 

spread from 15 percent of plans in 2003 to 23 

percent in 2005 with an additional 29 percent 

considering it for the future (Deloitte Consulting, 

2003 Annual 401(k) Benchmarking Survey (2004) at 

25 and Deloitte Consulting, Annual 401(k) 

Benchmarking Survey 2005/2006 Edition (2006) at 

7). According to yet another, it grew from 14 

percent in 2003 to 24 percent in 2006, with 23 

percent of the remainder ‘‘very likely’’ and 25 

percent ‘‘somewhat likely’’ to begin automatic 

enrollment within the year (Hewitt Associates LLC, 

Survey Findings: Trends and Experiences in 401(k) 

Plans, 2005 (2005) at 13, and Hewitt Associates 

LLC, Survey Findings: Hot Topics in Retirement, 

2006 (2006) at 3). 

24The Department believes these figures 

reasonably illustrate a range of possible outcomes. 

The Department is confident that the regulation will 

increase the incidence of automatic enrollment. 

According to one survey, among plans that 

currently are somewhat or very unlikely to offer 

automatic enrollment in the future, 36 percent cite 

the need for the Department to identify appropriate 

default investments, 33 percent cite the need for 

preemption of unfriendly state laws, and 30 percent 

cite the need for relief from nondiscrimination 

requirements (Hewitt Associates LLC, Survey 

Findings: Hot Topics in Retirement, 2006 (2006) at 

5). 

25According to the Department’s low- and highimpact estimates (respectively), under the 

regulation, active (non-defaulted) participants will 

number between 32 million and 33 million in 2034. 

Their ages will average between 44.2 and 44.1 

years, and their pay will average between 160 

percent and 158 percent of average earnings 

calculated by the Social Security Administration. 

Defaulted participants will number between 4.2 

million and 5.4 million. In contrast to active 

participants, their ages will average between 34.0 

and 34.1 years, and their pay will average between 

109 percent and 108 percent of average pay in 

Social Security covered employment. 

26 It is possible that in the future more plans will 

provide for higher or escalating default contribution 

rates. The Pension Protection Act waives certain 

bars against discrimination in favor of highly 

compensated employees for 401(k) plans with 

automatic enrollment that satisfy certain 

conditions. One such condition generally provides 

that a participant’s default contribution rate must 

escalate to at least 6 percent not later than his 

fourth year of participation. 

27See, e.g., James J. Choi, David Laibson, Brigette 

C. Madrian and Andrew Metrick, Saving for 

Retirement on the Path of Least Resistance (updated 

draft analysis, July 19, 2004) at 56–57, Figures 2A–

2D; and James J. Choi, David Laibson and Brigitte 

C. Madrian, Plan Design and 401(k) Savings 

Outcomes (written for the National Tax Journal 

Forum on Pensions, June 2004) at 11. 

28These numbers are rounded to the nearest 

percentage point. 

Investment Performance 

Historically, over long time horizons, 

diversified portfolios that include 

equities have tended to deliver higher 

returns than those consisting only of 

lower risk debt instruments.19 It 

therefore is widely believed to be 

advantageous to invest retirement 

savings in diversified portfolios that 

include equity.20

As noted above, this regulation is 

expected to encourage the redirection of 

default investments from stand-alone, 

low-risk capital preservation 

instruments to diversified portfolios that 

include equities. This in turn is 

expected to improve investment results 

for a large majority of affected 

individuals, increasing aggregate 

account balances by an estimated $5 

billion to $7 billion in 2034. 

In deriving these estimates, in 

response to public and peer reviewer 

comments, the Department refined its 

assumptions regarding investment 

performance relative to those relied on 

in its estimates of the proposed 

regulation’s effects. This is explained 

further below under headings ‘‘Basis of 

Estimates’’ and ‘‘Peer Review.’’

Automatic Enrollment 

Automatic enrollment programs are 

growing in popularity. These programs 

covered only about 5 percent of workers 

eligible for 401(k) plans in 2002,21 but 

the number may now be as high as 24 

percent 22 and could reach 35 percent in 

the near future, absent this final rule.23

The Department expects and intends 

that this regulation, together with the 

automatic enrollment provisions of the 

Pension Protection Act, will promote 

wider implementation of automatic 

enrollment programs. The regulation 

will help alleviate fiduciary concerns 

that might otherwise discourage 

implementation of automatic enrollment 

programs. It will also make it possible 

for plan sponsors to take advantage of 

Pension Protection Act provisions that 

waive certain Internal Revenue Code 

bars against discrimination in favor of 

highly compensated employees and that 

preempt state laws unfriendly to 

automatic enrollment programs. As a 

result of the regulation, in the near 

future automatic enrollment programs 

may cover 50 percent to 65 percent of 

401(k)-eligible workers rather than 35 

percent.24

Participation 

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.25 Automatic enrollment 

programs increase many such 

employees’ contribution rates from zero 

to the default rate, often supplemented 

by some employer matching 

contributions. 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. 

However, there is also evidence that 

automatic enrollment programs can 

have the effect of lowering contribution 

rates for some employees below the 

level that they would have elected 

absent automatic enrollment. Current 

surveys indicate that the default 

contribution rates are typically set at 3 

percent of salary.26 Some employees 

who might otherwise have actively 

enrolled in a plan (either at first 

eligibility or later) and elected a higher 

contribution rate may instead permit 

themselves to be enrolled at the default 

rate. 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 regulation will 

increase overall 401(k) participation 

rates from 73 percent to between 77 

percent and 80 percent.28 Aggregate 

annual contributions in 2034 are 

expected to grow on net by between 

$5.7 billion and $11.3 billion (expressed 

in 2006 dollars). These and related 

estimates are summarized in Table 1 

below. 


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29There will be other, smaller effects. Because 

larger accounts are more likely to be preserved, any 

effect of the regulation on account balances may 

also affect the preservation rate. As noted below, 

while automatic enrollment increases contributions 

for many workers, it may decrease them for a few. 

Likewise, while movement from capital 

preservation investments to qualified default 

investment alternatives will boost investment 

returns for many, it may reduce returns for a few. 

All of these effects in turn affect account balances 

and preservation rates. The Department’s estimates 

account for all of these effects. 

Preservation 

New employee contributions 

attributable to automatic enrollment 

will be attributable disproportionately 

to younger, lower-paid, shorter-tenure 

workers. 

Some such workers, who absent 

automatic enrollment would have 

delayed participation, will begin 

contributing earlier and thereby 

accumulate larger balances. The 

investment of these contributions in 

qualified default investment 

alternatives, rather than in capital 

preservation vehicles, will further 

enlarge account balances on average. 

Larger balances are more likely to be 

preserved for retirement. Therefore it is 

possible that the regulation will increase 

the proportion of 401(k) accounts that 

are preserved.29

On the other hand, other such 

workers may accumulate only small 

accounts before leaving their jobs. 

Historically, younger, lower-paid 

workers with small accounts have 

tended disproportionately to cash out 

their accounts upon job change rather 

than preserve them in tax-deferred 

retirement accounts. It is therefore also 

possible that, by encouraging automatic 

enrollment, the proportion (but not the 

total amount) of 401(k) accounts 

preserved for retirement could decrease. 

The Department estimates that these 

effects will nearly offset one another. 

Workers will leave an estimated 4.3 

million 401(k)-eligible jobs in 2033. As 

a result of this regulation (together with 

the automatic enrollment provisions of 

the Pension Protection Act), the number 

leaving with positive account balances 

will grow from 2.30 million to between 

2.45 million and 2.61 million. The 

proportion of those leaving with 

positive accounts that preserve their 

accounts for retirement will fall slightly 

from 61.0 percent to between 60.4 

percent and 59.7 percent, and the 

proportion of the account balances 

preserved will fall from 85.9 percent to 

between 85.8 percent and 85.4 percent. 

The regulation’s marginal effect on the 

preservation of account balances can be 

illustrated by comparing estimated net 

increases in account-holding job leavers 

and their account balances with 

estimated net increases in preserved 

accounts. The proportion of net new job 

leavers with account balances that 

preserve their accounts is estimated to 

be approximately 50 percent, while the 

proportion of net new job-leaver 

accounts that is preserved is estimated 

to be 83 percent to 77 percent. 

Retirement Income 

Low-impact estimates suggest that the 

regulation will increase pension income 

by $1.3 billion per year on aggregate for 

1.6 million individuals age 65 and older 

in 2034 (expressed in 2006 dollars), but 

decrease it by $0.3 billion per year for 

0.6 million. High-impact estimates 

suggest that average annual pension 

income will increase by $2.5 billion for 

2.5 million and fall by $0.6 million for 

0.9 million. These estimates are 

summarized in Table 2 below. Impacts 

on retirement income will be larger 

farther in the future, reflecting the fact 

that automatic enrollment and default 

investing disproportionately affect 

young workers. 


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The regulation is estimated to have 

distributional consequences, narrowing 

somewhat the distribution of pension 

income across earnings groups. Among 

all individuals age 65 or older in 2034, 

for example, those in the lowest lifetime 

earnings quartile would receive just 5 

percent of pension income absent the 

regulation, but they will receive 9 

percent of net gains from the regulation. 

The amount they gain will exceed the 

amount lost by a factor of five or six (see 

Table 3 below). 

Administrative Cost 

Plan sponsors may incur some 

administrative costs in order to meet the 

conditions of the regulation. The 

Department generally expects such costs 

to be low. Any changes to plan 

provisions or procedures necessary to 

satisfy the regulation’s conditions are 

likely to be no more extensive than 

those associated with changes that plans 

implement from time to time in the 

normal course of business. The 

boundaries of the 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 safe harbor. Costs attendant 

to the regulation’s notice provisions can 

be mitigated by furnishing the notices 

together with other plan disclosures 

and/or through the use of electronic 

media. The requirement to pass through 

certain investment materials to 

participants and beneficiaries is the 

same as that already applicable to 

participant directed individual account 

plans operating in accordance with 

ERISA section 404(c). The Department’s 

estimates of these costs are presented 

above under the heading Paperwork 

Reduction Act. 

The regulation may indirectly prompt 

some plan sponsors to shoulder 

additional benefit costs. For example, it 

is expected that the regulation, by 

promoting the adoption of automatic 

enrollment programs, will have the 

indirect effect of increasing aggregate 

employer matching contributions in 

2034 by between $1.7 billion and $3.4 


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30See generally U.S. Council of Economic 

Advisors, Economic Report of the President, 

February 2006 (2006). 

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, Retirement Income: 

Intergenerational Comparisons of Wealth and 

Future Income, GAO–03–429 (Apr. 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, Pension Plans: 

Information on Cash Balance Pension Plans, GAO–

06–42 (Oct. 2006). 

32These findings were drawn from James J. Choi, 

David Laibson and Brigitte C. Madrian, Plan Design 

and 401(k) Savings Outcomes (written for the 

National Tax Journal Forum on Pensions, June 

2004). The overall participation rate under 

automatic enrollment was adjusted upward to 90 

percent. 

33See e.g., Vanguard, How America Saves 2006 

(Sept. 2006 ) at 26, Deloitte Consulting, Annual 

401(k) Benchmarking Survey, 2005/2006 Edition 

(2006) at 7; Hewitt Associates LLC, Survey 

Findings: Trends and Experiences in 401(k) Plans, 

2005 (2005) at 16; and Profit Sharing/401(k) Council 

of America, 49th Annual Survey of Profit Sharing 

and 401(k) Plans (2006) at 38. 

34These estimates assume complete 

correspondence between automatic enrollment in 

401(k) plans and default investing. Participants 

contributing by automatic enrollment are assumed 

to invest in the plan’s default investment, 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 who are automatically enrolled may 

nonetheless actively direct their investments. Some 

active contributors or participants in plans without 

elective contributions may choose to invest in the 

plan’s default investment ‘‘ and this 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 

automatic enrollment. 

35Some comments on the proposed regulation 

suggested that money market funds may not 

accurately represent the range of capital 

preservation instruments that might serve as default 

investments. In particular, according to some 

comments, stable value funds, relative to money 

market funds, offer higher returns with similarly 

low risk. The Department’s estimates of the effects 

of the proposed regulation did not reflect this 

possibility. The Department agrees that stable value 

funds, if they perform as projected by their 

proponents, would outperform money market funds 

and thereby narrow (but not eliminate) the gains in 

average account balances and retirement income 

estimated to result from the shift toward qualified 

default investment alternatives. However, the 

Department believes that this possibility should be 

assessed with caution. Economic theory suggests 

that if financial markets are efficient, financial 

instruments with similar risk characteristics will 

provide similar returns. It therefore seems likely 

that there are important differences between money 

market and stable value funds beyond any 

difference in average returns. The Department 

understands that stable value products may come 

with a variety of features that may sometimes erode 

actual returns in response, for example, to certain 

plan sponsor actions that have the effect of shifting 

participant account allocations away from such 

products. Such stable value product features may 

sometimes dissuade plans or participants from 

making investment changes that they otherwise 

would, thereby imposing opportunity costs. The 

Department also understands that stable value 

products may expose investors to the credit risk of 

the fund vendor in ways that money market funds 

do not. This credit risk may be sensitive to changes 

in interest rates. In light of these considerations the 

Department continues to believe that, for purposes 

of assessing the impact of this regulation, money 

market funds reasonably represent available near 

risk-free investment instruments. 

Nonetheless, in an effort to fully consider the 

potential implications of representations made in 

the comments, the Department tested the sensitivity 

of its low-impact estimates to representations 

regarding the investment performance of stable 

value products and assuming stable value products 

would be a substantial part of qualified default 

investments in the future. The sensitivity test puts 

aside the above considerations, and replaces money 

market fund performance with stylized stable value 

performance that is 200 basis points higher and 

equally variable. Under this test scenario, the 

regulation would increase aggregate account 

balances in 2034 by $68 billion (for comparison the 

Department’s primary estimate is $70 billion), of 

which $3 billion (compared with $5 billon) is 

attributable to the shift of default investments from 

near risk-free instruments to qualified default 

investment alternatives. Among individuals age 65 

and older in 2034, the number gaining retirement 

income would exceed the number losing by a ratio 

of 2.2 to 1 (compared with 2.7 to 1) and the 

aggregate amount gained would exceed that lost by 

a ratio of 3.8 to 1 (compared with 4.1 to 1). 

36The qualified default investment alternative is 

represented by a portfolio resembling a life cycle 

fund, with 100 percent minus the participant’s age 

in equity and the remainder in U.S. Treasury bonds. 

billion (expressed in 2006 dollars). 

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. 

Reliance on the regulation and, 

therefore, compliance with its 

provisions are also voluntary on the part 

of the plan sponsor. 

Cost-Benefit Assessment 

The Department believes that, by 

increasing average retirement income, 

the regulation will improve overall 

social welfare. There is mounting 

concern that many Americans have been 

preparing inadequately for retirement. 

Most workers are on track to have more 

retirement wealth than most current 

retirees, and recent declines in reported 

savings rates may not be cause for alarm 

in light of offsetting capital gains. 

Nonetheless, savings may fall short 

relative to workers’ retirement income 

expectations, especially in light of 

increasing health costs and stresses on 

defined benefit pension plans and the 

Social Security program.30 Because of 

these real risks, the Department believes 

that policies that increase retirement 

savings can increase welfare by helping 

workers secure retirement living 

standards that meet their expectations. 

The regulation may also have 

macroeconomic consequences, which 

are likely to be small but positive. An 

increase in retirement savings is likely 

to promote investment and long-term 

economic productivity and growth. The 

increase in retirement savings will be 

very small relative to overall market 

capitalization. Therefore 

macroeconomic benefits are likely to be 

small. Based on the foregoing analysis 

and estimates, the Department believes 

that the benefits of this regulation will 

justify its costs. 

Basis of Estimates 

The Department estimated the effect 

of the regulation on 401(k) plan 

participation, contributions, account 

balances, investment mix, and early 

cash outs, and its effect on pension 

incomes in retirement, using a 

microsimulation model of lifetime 

pension accumulations 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 401(k) plan 

eligible employees to achieve 

incidences of 35 percent (baseline), 50 

percent (low impact) and 65 percent. 

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

Defaulted participants were assumed 

to invest their contributions as 

follows:34 in the baseline estimates, 

either in a money market fund 35 (50 

percent) or a qualified default 

investment alternative (50 percent); in 

the low- and high-impact estimates of 

the regulation’s effects, all entirely to a 

qualified default investment 

alternative.36 Active contributors were 

assumed to invest their contributions 

either in a qualified default investment 

alternative (75 percent), a U.S. Treasury 

bond fund (15 percent), or an even mix 

of the two (10 percent). Some employer 

contributions were assumed to be 

invested in company stock. Price 

inflation and real returns were 

estimated stochastically. Mean price 

inflation was assumed to be 2.8 percent, 

and mean real returns to money market 

funds, Treasury bond funds, and equity 

funds, respectively, were assumed to be 

1.3 percent, 2.9 percent, and 4.9 

percent. Deducted respectively from 


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37According to one survey, 24 percent of 

employers with automatic enrollment programs 

extended initial automatic enrollment beyond new 

hires to include the entire eligible population 

(Deloitte Consulting, Annual 401(k) Benchmarking 

Survey, 2005/2006 Edition (2006) at 8). 

38According to one survey, 14 percent of plans 

with automatic enrollment provided for escalating 

default contributions in 2005, up from 7 percent in 

2004 (Profit Sharing/401(k) Council of America, 

49th Annual Survey of Profit Sharing and 401(k) 

Plans (2006) at 39). According to another, among 

the 24 percent of surveyed employers offering 

automatic enrollment in 2006, 17 percent planned 

to introduce escalating default contributions and 6 

percent intended to increase the default 

contribution rate; none planned to lower it (Hewitt 

Associates LLC, Survey Findings: Hot Topics in 

Retirement, 2006 (2006) at 4). 

39A number of factors may diminish this 

possibility. First, participants who contribute and 

invest by default may also tend to handle account 

distribution opportunities by default. Laws 

governing plans’ default distribution provisions 

provide for the preservation of all but the smallest 

accounts. Absent participant direction to the 

contrary, accounts of $5,000 or more must remain 

in the plan, and smaller accounts of $1,000 or more 

must either remain in the plan or be rolled directly 

into an IRA. Second, some 401(k) plan sponsors 

reserve eligibility and automatic enrollment for 

employees who complete a specified period of 

service, such as one year. It is possible that 

sponsors with higher-turnover work forces and/or 

those offering automatic enrollment are or will be 

more likely to provide for such waiting periods for 

eligibility, perhaps in order to avoid the expense of 

churning very small accounts. Third, it is possible 

that the small fraction of employees who decline 

automatic enrollment (perhaps 10 percent) may be 

largely the same ones who would decline to 

preserve their accounts. In that case, participants 

added by automatic enrollment might be more 

likely to preserve them. 

these returns were assumed fees of 45, 

45 and 75 basis points. 

To estimate the effects of the 

regulation, the Department compared 

the baseline estimates to the low- and 

high-impact estimates. 

For a more detailed explanation of the 

basis of these estimates, see Martin R. 

Holmer, ‘‘PENSIM Analysis of Impact of 

Final Regulation on Defined—

Contribution Default Investments’’

(Policy Simulation Group, February 12, 

2007). For additional estimation results, 

see Holmer, ‘‘EBSA Automatic 

Enrollment RIA: Final Estimates’’

(Policy Simulation Group, February 7, 

2007). Both are available as part of the 

public docket associated with this 

regulation. Additional information on 

the Department’s use of PENSIM in 

connection with this regulation is 

provided below, under the heading 

‘‘Peer Review.’’

Sensitivity Tests 

As noted above, the Department 

anticipates that this regulation (together 

with the automatic enrollment 

provisions of the Pension Protection 

Act) will have two major, beneficial 

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. In reaching its conclusion 

that the regulation will increase 

retirement income and improve social 

welfare, the Department took into 

account the potential sensitivity of its 

estimates to important economic and 

behavioral variables. 

One variable involves the future 

incidence of automatic enrollment 

programs. As noted above the 

Department assessed this variable by 

comparing both low- and high-impact 

estimates with a common baseline. This 

variable affects the magnitude but not 

the net positive direction of the 

regulation’s estimated effects. 

The specific characteristics of future 

automatic enrollment programs 

constitute additional variables. For 

example, will new automatic enrollment 

programs cover only new employees, or 

existing non-participating employees as 

well? 37 The Department’s estimates 

reflect automatic enrollment of new 

employees only. If plan sponsors 

automatically enroll existing employees 

the regulation’s effects will be larger 

than estimated, especially in the near 

term. What default contribution rates 

will prevail? 38 The Department’s 

primary estimates assume a uniform 3 

percent default contribution rate. Higher 

contribution rates would increase the 

size of default participants’

contributions, but might also discourage 

some from participating. To illustrate 

these potential effects the Department 

produced two alternative low-impact 

estimates substituting a 4.5-percent 

default contribution rate. One estimate 

assumed that the impact of automatic 

enrollment on participation was 

undiminished by the higher default 

contribution rate, the other that it was 

diminished by half. These were 

compared with the primary baseline 

estimate. Where the Department’s 

primary low-impact estimate placed the 

increase in aggregate account balances 

in 2034 at $70 billion, the first 

alternative placed it at $123 billion, the 

second at $40 billion. 

Additional variables concern what 

other changes plan sponsors might make 

to their plans. Plan sponsors 

implementing qualified default 

investment alternatives may make other 

changes to investment options or 

undertake new efforts to inform or 

influence participants’ investment 

decisions. Plan sponsors that maintain 

or begin automatic enrollment programs 

may change other provisions of their 

plans, such as matching contribution 

formulas, eligibility or vesting 

provisions, loan programs, or 

distribution policies. Changes such as 

these could either augment or offset the 

effects of this regulation. 

The investment advice and automatic 

enrollment provisions of the Pension 

Protection Act will promote activities 

and plan designs that are likely to 

augment the regulation’s positive effects 

on retirement savings. Those provisions 

will help make investment advice 

available to more participants and will 

promote automatic enrollment programs 

with escalating default contribution 

rates, generous employer matching 

contributions and short vesting periods. 

Default participants may make other 

changes in their savings behavior. 

Default participation might foster 

financial literacy or a taste for saving, 

which could augment the regulation’s 

effect. Alternatively, default participants 

might offset their default savings by 

reducing other savings or taking on 

debt. In particular, they may be less 

likely than active participants to 

preserve their accounts for retirement 

when leaving a job.39 To assess the 

implications of this possibility the 

Department produced alternative 

baseline and low-impact estimates, 

which assume that participants who 

leave their jobs while in default status 

never preserve their accounts. (Default 

participants who become active 

participants before leaving their jobs are 

assumed to preserve their accounts at 

the same rate as other active 

participants.) The alternative estimates 

represent a worst case outer bound. As 

noted above, comparing its primary 

baseline and low-impact estimates, the 

Department found that in 2033, 50 

percent of net new job leavers with 

account balances preserve 83 percent of 

all net new job-leaver account balances. 

Comparing the respective alternative 

estimates, the Department found that 

the corresponding figures are 25 percent 

and 72 percent. Based on the 

Department’s primary baseline and lowimpact estimates, the regulation is 

expected to reduce the proportion of 

account holding job leavers that 

preserve their accounts from 61.0 

percent to 60.4 percent and the 

proportion of their accounts that is 

preserved from 85.9 percent to 85.8 

percent. Based on the alternative 

estimates, the corresponding reductions 

are from 56.9 percent to 54.7 percent 

and from 85.3 percent to 84.9 percent. 

Both the primary and alternative 

estimates strongly suggest that most new 

retirement saving resulting from this 

regulation (together with the automatic 

enrollment provisions of the Pension 


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40There is some evidence to suggest that qualified 

default investment alternatives, once established as 

plan defaults, may claim a disproportionate share 

of active investments as well. There is some 

evidence that participants may gravitate toward 

investment options that appear to be endorsed by 

their employers, such as by responding to 

employers’ directing of matching contributions into 

company stock by investing more participantdirected funds in company stock as well (see, e.g., 

Jeffrey R. Brown, Nellie Liang and Scott 

Weisbenner, Individual Account Investment 

Options and Portfolio Choice: Behavioral Lessons 

from 401(k) Plans, (Sept. 2006) at 18). This paper 

summarizes some prior evidence and provides 

some new evidence of this effect, but also raises the 

possibility that this effect may be attributable 

instead to other factors. Participants have been 

found to exhibit inertia in their investment choices, 

being slow to rebalance or to respond to changes 

in the investment options offered to them (see, e.g., 

Olivia S. Mitchell, Gary R. Mottola, Stephen P. 

Utkus, and Takeshi Yamaguchi, The Inattentive 

Participant: Portfolio Trading Behavior in 401(k) 

Plans, Pension Research Council Working Paper 

2006–5 (2006) at 16, which finds a lack of 

rebalancing; see also Jeffrey R. Brown and Scott 

Weisbenner, Individual Account Investment 

Options and Portfolio Choice: Behavioral Lessons 

from 401(k) Plans (Dec. 2004) at 23, 37, Tables 8a, 

8b, which finds inertia in participant response to 

the addition of new funds). Most on point, some 

early experience with automatic enrollment 

programs suggests that a previously available 

investment alternative, once established as a default 

in an automatic enrollment program, may attract an 

increased proportion of actively directed 

participant accounts (see, e.g, John Beshears, James 

J. Choi, David Laibson and Brigitte C. Madrian, The 

Importance of Default Options for Retirement 

Savings Outcomes: Evidence from the United 

States, National Bureau of Economic Research 

Working Paper 12009 (Jan. 2006), which provides 

some evidence of such an endorsement effect; see 

also Fidelity Investments, Building Futures Volume 

VII: How Workplace Savings are Shaping the Future 

of Retirement, (2006) at 124–138, for data on the 

concentration of participant accounts in default 

investment alternatives). To assess the potential 

implications of an endorsement effect for the 

impact of this regulation, the Department carried 

out a sensitivity test of its low-impact estimates of 

the regulation’s effects. Where the Department’s 

primary estimates take into account the default 

investment of defaulted participants’ accounts only 

(no endorsement effect), the sensitivity test 

additionally assumes that 20 percent of actively 

directed accounts in plans with automatic 

enrollment will be directed to default investment 

alternatives (20 percent endorsement effect). 

Compared with the primary estimates, the 

sensitivity test indicates that regulation will 

increase aggregate account balances in 2034, 

expressed in 2006 dollars, by $87 billion (rather 

than $70 billion), of which $26 billion (rather than 

$5 billion) will be directly attributable to the 

allocation of more assets to qualified default 

investment alternatives (the rest will be attributable 

to growth in automatic enrollment). 

41The Department’s estimates illustrate some of 

this as variation in results across individuals. 

42Please see http://www.dol.gov/ebsa/regs/ 

peerreview.html. 

43The Department’s estimate of the effect of the 

proposed regulation assigned uniform cash out 

probabilities (derived from an industry survey) to 

accounts within certain arbitrary size categories. 

For example, all accounts smaller than 

approximately $11,000 (expressed at 2005 levels) 

were assigned the same cash out probability. This 

may have understated the propensity to cash out 

very small accounts. The Department has since 

refined its estimation of cash out probabilities. 

These probabilities are now estimated as a 

continuous function of account size, based on 

household survey data. 

44 In its estimates of the effects of the proposed 

regulation the Department had assumed a real 

average equity return of 6.5 percent, which was 

consistent with long-term historical performance. 

The estimates presented here assume a real average 

return of 4.9 percent, which is more in line with 

recent performance and commenters’ expectations 

of the future. 

Protection Act) will be preserved for 

retirement. While one effect of the 

regulation will be to create many very 

small and short-lived accounts that 

participants never actively manage and 

may be unlikely to preserve, the 

Department expects that the larger effect 

will be to spur new, early default 

contributions by participants who later 

actively manage their accounts and are 

likely to preserve them. 

The regulation may encourage active 

(in addition to default) investments in 

qualified default investment 

alternatives—a phenomenon sometimes 

referred to as an endorsement effect. If 

so, the impact of the regulation on asset 

allocation, and the attendant net 

positive effect on account balances and 

retirement income, will be amplified.40

Because the regulation’s effects will 

be cumulative and gradual, they will be 

fully realized only in the very long run, 

generally when workers beginning 

careers today have long since retired. 

This long time horizon introduces 

additional, longer-term variables, but 

most of these implicate less the 

regulation’s effects than the baseline. 

For example, future investment results 

may vary.41 Other variables, which the 

Department did not attempt to quantify, 

include future career patterns and 

compensation levels and mixes. 

Peer Review 

OMB’s ‘‘Final Information Quality 

Bulletin for Peer Review’’ (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 estimate the effects of this 

regulation and the proposed regulation 

constitute a ‘‘highly influential 

scientific assessment’’ under the 

Bulletin. Pursuant to the Bulletin, the 

Department therefore subjected this 

assessment to peer review. All materials 

associated with that review, including 

the Department’s full response to the 

peer review, are available to the public 

as part of the docket associated with this 

regulation.42

The analysis presented here has been 

refined in several ways in response to 

the peer review. 

The review questioned whether 

default participants would cash out 

their accounts rather than preserve them 

for retirement. The Department’s 

primary estimates assume that default 

accounts will be cashed out or 

preserved at the same rates as other 

similarly-sized accounts.43 The results, 

as reported above, suggest that balances 

attributable to new default contributions 

will be nearly as likely as other balances 

to be preserved. It is possible, however, 

that default participants will be less 

likely to preserve their accounts than 

active participants with similar-sized 

accounts. The Department therefore 

prepared alternative estimates that 

account for this possibility. The results 

appear under the heading ‘‘Sensitivity 

Testing’’ above. 

The review questioned whether 

lower-paid workers might be more risk 

averse and might therefore be 

susceptible to welfare losses if their 

default investments are redirected from 

capital preservation vehicles to 

qualified default investment 

alternatives. In response the Department 

more closely examined the regulation’s 

impact on lower-paid workers, finding 

disproportionate gains in pension 

income, as described above. These gains 

may help offset any welfare losses due 

to sub-optimal risk exposure. In 

addition, the Department believes the 

required notice to participants regarding 

default investments will facilitate the 

ability of workers to easily choose to 

actively change their risk exposure if the 

qualified default investment alternatives 

do not meet their risk preferences. 

The reviews questioned the 

Department’s assumptions regarding 

investment returns, saying they 

exaggerated the equity premium, 

neglected fees, and neglected variation 

in inflation and returns to debt 

instruments. In response the 

Department has moderated its 

assumption regarding the equity 

premium,44 accounted for fees, and 

incorporated stochastic variation in 

inflation and debt returns. 

Alternatives Considered 

Capital Preservation Products 

In defining the types of investment 

products, portfolios or services that may 

be used as a long-term qualified default 

investment alternative, the Department, 

after careful consideration of the many 

comments supporting capital 

preservation products, and assessment 

of related economic impacts, 

determined not to include capital 


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45According to one survey, in 2006, 17 percent 

of sponsors with automatic enrollment programs 

were likely to change their default from such 

instruments to qualified default investment 

alternative-type instruments, while just 4 percent 

were likely to do the opposite (Hewitt Associates 

LLC, Survey Findings: Hot Topics in Retirement 

2006 (2006) at 4). According to another, between 

1999 and 2005 the proportion designating such 

instruments as defaults decreased from 69 percent 

to 56 percent, while the proportion designating 

qualified default investment alternative-type 

instruments as defaults increased from 28 percent 

to 39 percent (Hewitt Associates LLC, Survey 

Findings: Trends and Experiences in 401(k) Plans 

2005, (2005) at 15). 

46Might a risk-averse participant, enrolled and 

invested by default, terminate participation in 

response to news that their account had suffered 

principal losses? Perhaps not. The same inertia that 

leads some participants to enroll and invest by 

default might also prevent them from terminating 

participation. The Department also observes that an 

early principal loss usually will not translate into 

a decline in the account balance reported in a 

quarterly statement, since quarterly contributions 

are likely to more than offset such losses during at 

least the first few years of participation. 

47Such potential benefits would additionally be 

offset by reduced average returns to default 

investors who do not cash out early. As noted 

above, the Department estimates that most default 

contributions will be preserved for retirement. As 

discussed above, even the subset of short term 

workers who cash out their accounts will 

experience an overall aggregate increase in wealth 

from this regulation. Thus, the concern for fostering 

preservation of retirement accounts is not being 

weighed against aggregate losses to this subset of 

workers, but is instead being weighed against the 

added volatility their accounts might experience. In 

weighing these interests, the Department kept in 

mind that short term employees concerned about 

this volatility are always free to choose a different 

investment option. 

48 In theory individuals can optimize their 

investment mix over time to match their personal 

taste for risk and return. The regulation’s provisions 

that establish participants’ right to direct their 

investments out of qualified default alternatives 

give participants the opportunity to so do. But in 

practice investors sometimes do not optimize their 

investment alternatives. Some may lack clear, fixed 

and rational preferences for risk and return. Some 

investors’ tastes for risky assets may be distorted by 

imperfect information, or by irrational and 

ineffectual behavioral phenomena such as naive 

diversification (a tendency to divide assets equally 

across available options), sub-optimal excessive 

concentration in company stock, market timing, 

mental accounting and framing, and reliance on 

peer examples (see, e.g., Richard H. Thaler and 

Shlomo Benartzi, The Behavioral Economics of 

Retirement Savings Behavior, AARP Public Policy 

Institute white paper #2007–02 (Jan. 2007) at 6–16), 

or inertia. This regulation promotes default 

investments that can enhance such investors’

retirement savings prospects. 

49One commenter on the proposed regulation 

called the Department’s attention to a study of 

optimal investment mixes for investors with 

different levels of risk aversion. The study 

employed techniques known as stochastic 

dominance analysis of asset class performance and 

multi-period investor utility optimization, 

explaining that these techniques are in some ways 

superior to alternatives such as mean-variance 

analysis of asset class performance and singleperiod utility optimization. The commenter 

criticized the Department’s use of the latter, 

potentially inferior techniques to assess the 

question of what mix of asset classes best matches 

investors’ tastes. But in fact the Department did not 

assess this question, focusing instead on how 

different asset class mixes affect retirement savings 

accumulations. Interestingly the study, which 

utilized stable value product performance data 

supplied by the industry, concluded that for most 

investors most of the time, the optimal portfolio 

will include a mix of equity and stable value 

products rather than stable value products alone. 

This suggests to the Department that the qualified 

default investment alternatives included in this 

regulation encompass most investors’ levels of risk 

tolerance. The Department also notes that most 

401(k) plan participants who actively direct their 

investments include equity in their portfolios (see, 

e.g., Sarah Holden and Jack VanDerhei, 401(k) Plan 

Asset Allocation, Account Balances, and Loan 

Activity in 2005, EBRI Issue Brief No. 296 (Aug. 

2006) at 9, Figure 8; see also Fidelity Investments, 

Building Futures Volume VII: How Workplace 

Savings are Shaping the Future of Retirement (2006) 

at 128, Figure 130). 

50There are several reasons to believe that asset 

allocation will not shift very abruptly, and that 

stable value products will continue to claim a large 

share of 401(k) plan assets. First, while this 

regulation generally does not extend fiduciary relief 

to default investments that consist solely of stable 

value products, it does not foreclose qualified 

default investment alternatives from including such 

products, and leaves intact general fiduciary 

provisions that may otherwise permit default 

investments that consist solely of such products. A 

significant number of plans currently utilize stable 

value products as their default investment option, 

reflecting determinations by a significant number of 

plan fiduciaries that stand-alone stable value 

products are a prudent investment for defaulted 

participants. Nothing in this regulation is intended 

to suggest or require that a plan fiduciary change 

an otherwise prudent selection of a stable value 

product for a plan’s default investment option. The 

Department therefore anticipates that some plans 

will continue to direct all or a portion of default 

investments to stable value products. Second, the 

preservation products, such as money 

market or stable value funds, as a standalone long-term investment option for 

contributions made after the effective 

date of this regulation. However, the 

Department believes that such 

investments can play an important role 

as a component of a qualified default 

investment alternative. Further, it is 

important to note that the exclusion of 

such funds as a qualified default 

investment alternative does not 

preclude their use as a default 

investment option—fiduciaries are free 

to adopt default investments they deem 

to be prudent without availing 

themselves of the fiduciary relief 

afforded by this regulation. 

Including such instruments for future 

contributions might have yielded some 

benefits if, for example, their inclusion 

would encourage more plan sponsors to 

implement automatic enrollment 

programs or fewer workers to opt out of 

them. The Department believes such 

cases would be rare, however. First, a 

decreasing proportion of plans already 

are designating such instruments as 

default investments.45 Second, workers 

concerned that a default investment 

provides more risk than they prefer 

need not refuse or terminate 46

participation in response, but instead 

need only direct their contributions into 

a different investment option otherwise 

available in the plan. 

Including such instruments might 

benefit some affected short-tenure 

participants who cash out and spend 

their accounts during downturns in 

equity prices. Historically, though, 

equity returns are positive more often 

then they are negative, so this potential 

benefit is likely to be outweighed by the 

opportunity cost to affected short-tenure 

participants who cash out during 

upturns.47 Moreover, the Department 

believes that this regulation should be 

calibrated to foster preservation of 

retirement accounts rather than to 

accommodate cashouts, consistent with 

other provisions of law, such as the 

mandatory withholding and additional 

tax provisions applicable to premature 

distributions. 

Some comments on the proposed 

regulation expressed concern that 

qualified default investment alternatives 

would expose risk averse participants to 

excessive investment risk, and on that 

basis urged the Department to include 

stand-alone capital preservation 

instruments as qualified default 

investment alternatives. The 

Department is not persuaded by this 

argument, however, for three reasons. 

First, the regulation’s primary goal is to 

promote default investments that 

enhance retirement saving, not to align 

default investments with individuals’

levels of risk tolerance.48 Second, the 

Department nonetheless believes that 

the qualified default investment 

alternatives included in the regulation 

can satisfy most affected individuals’

risk preferences.49 Finally, participants 

who find default investments too risky 

can opt out of them without opting out 

of plan participation entirely. 

Some comments cautioned that the 

exclusion of stand-alone capital 

preservation products from the 

definition of qualified default 

investment alternatives would prompt a 

large, rapid movement of money across 

asset classes, with negative 

consequences for financial markets. In 

particular according to these comments, 

movement out of stable value products 

might repress those products’ future 

interest crediting rates and thereby harm 

investors who continue to hold them. 

The Department believes, however, that 

movement away from stable value 

products and therefore any negative 

impact on forward crediting rates will 

be modest, as only a relatively small 

portion of current assets in stable value 

products appears to be attributable to 

defaulted participants.50 Additionally, 


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Department expects that stable value products will 

continue to be offered as an investment option by 

many participant-directed plans and selected by 

many participants. It is expected that participants 

will invest only a small fraction of assets by default, 

and will actively direct a large majority of assets. 

The Department’s low- and high-impact estimates 

respectively suggest that between 1.2 percent and 

1.5 percent of 401(k) plan assets will be invested 

by default in 2034. Viewed another way, absent this 

regulation, the Department estimates that just $10 

billion would be invested by default in capital 

preservation vehicles in 2034 (expressed in 2006 

dollars). This compares with approximately $400 

billion of 401(k) assets invested in stable value 

products today. Third, there will be some offsetting 

effect, deriving from the increase in actively 

invested account balances expected to result from 

this regulation. The Department estimates that the 

regulation, by promoting automatic enrollment and 

higher average investment performance, will 

increase aggregate actively invested account 

balances in 2034 by between $59 billion and $114 

billion (expressed in 2006 dollars), or between 2.4 

percent and 4.6 percent, while aggregate default 

invested account balances will grow by just $11 

billion to $20 billion. Stable value products will 

capture some share of the increase in actively 

invested account balances. Fourth, the extent to 

which some plans do move money out of stable 

value products may be additionally moderated by 

stable value product features that have the effect of 

discouraging large movements and by associated 

fiduciary considerations. Plan fiduciaries, in 

determining whether, how and under what 

circumstances a change should be made in the 

plan’s default investment option, must assess, 

among other things, the potential economic 

consequences of such a change to participants’

investments in such options. Finally, because this 

regulation includes a ‘‘grandfather’’-like provision 

applicable to certain stable value products, it 

provides no direct incentive for plan fiduciaries to 

reallocate account balances heretofore invested by 

default in such products. 

51As noted above, the Department expects that 

asset allocation will not shift very abruptly, and 

that stable value products will continue to claim a 

large share of 401(k) assets. In addition, while stable 

value products comprise a substantial fraction of all 

401(k) assets (perhaps as much as 20 percent), their 

underlying portfolios hold only a small fraction 

(generally between 0.5 percent and 2 percent) of all 

debt and of major debt categories such as mortgages, 

corporate bonds and treasury and agency issues. 

These estimates are based on stable value product 

data provided by the Stable Value Industry 

Association and the U.S. Federal Reserve Board of 

Governors’ Flow of Funds Accounts. 

52This assumes that, as under the baseline, 50 

percent of default contributions will be directed to 

capital preservation products and 50 percent to 

(other) qualified default investment alternatives. 

53For this calculation, the Department assumes a 

20 percent endorsement effect. 

according to these comments, 

movement out of stable value products 

might alter short-term conditions in the 

markets for debt securities that underlie 

such products. Decreased demand for 

stable value products might then repress 

the price of underlying debt instruments 

and increased demand for qualified 

default investment alternatives might 

drive up equity prices. The Department 

believes any such effects would be 

gradual and negligible.51

If included as a qualified default 

investment alternative and thereby 

promoted as a default investment, 

stand-alone capital preservation 

products’ generally inferior long-term 

investment returns would almost 

certainly erode the regulation’s 

beneficial effect on retirement income. 

The Department estimates that 

including capital preservation 

instruments as a stand-alone qualified 

default investment alternative would 

reduce aggregate account balances in 

2034 by between $5 billion and $7 

billion (expressed in 2006 dollars).52

This negative effect will be larger if 

there is an endorsement effect ($26 

billion under the low-impact 

estimate)—that is, if the instruments 

status as a qualified default investment 

alternative encourages active (in 

addition to default) investments in 

them.53

Finally, the Department believes it is 

desirable for a default investment 

vehicle to be diversified across asset 

classes, rather than to include only a 

single asset class. Such diversification 

can improve a portfolio’s risk and return 

efficiency. 

In summary, in weighing the merits of 

potential qualified default investment 

alternatives, the Department sought 

primarily to promote default 

investments that enhance retirement 

savings. The Department considered 

market trends, generally accepted 

investment theories, mainstream 

financial planning practices, and actual 

investor behavior, as well as the 

estimated effect of qualified default 

investment alternatives on retirement 

savings. All of these criteria suggest that 

it is desirable to invest retirement 

savings in vehicles that provide for the 

possibility of capital appreciation in 

addition to capital preservation. 

Accordingly, the Department did not 

include stand-alone capital preservation 

instruments among the qualified default 

investment alternatives under the 

regulation. However, the Department 

has modified the regulation to include 

a ‘‘grandfather’’-like provision pursuant 

to which stable value products and 

funds will constitute a qualified default 

investment alternative under the 

regulation for purposes of investments 

made prior to the effective date of the 

regulation. 

Balanced Defaults 

The Department also considered 

whether to include as a qualified default 

investment alternative an investment 

fund product or model portfolio that 

establishes a uniform mix of equity and 

fixed income exposures for all affected 

participants. Such a product or model 

portfolio 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 

potential qualified default investment 

alternatives such a product or portfolio 

may be simpler, less expensive and 

easier to explain and understand. These 

advantages sometimes may outweigh 

the potential advantage of more 

customized risk levels. And the 

inclusion of such products or model 

portfolios might help heighten 

competition in the market and thereby 

enhance product quality and 

affordability across all qualified default 

investment alternatives. Accordingly, 

the Department has included such 

instruments as qualified default 

investment alternatives under this 

regulation. 

Federalism Statement 

Executive Order 13132 (August 4, 

1998) outlines fundamental principles 

of federalism and requires Federal 

agencies to adhere to specific criteria in 

the formulation and implementation of 

policies that have a substantial direct 

effect on the States, the relationship 

between the national government and 

the States, or on the distributive power 

and responsibilities among the various 

levels of government. As noted above, 

section 902(f) of the Pension Protection 

Act adds a new provision to ERISA 

(section 514(e)) providing that 

notwithstanding any other provision of 

section 514, Title I of ERISA supersedes 

State laws that would directly or 

indirectly prohibit or restrict the 

inclusion of an automatic contribution 

arrangement in any plan. In the 

preamble to the notice of proposed 

rulemaking published on September 27, 

2006, the Department specifically 

discussed the preemption provision 

enacted in the Pension Protection Act 

and requested comments on whether, 

and to what extent, addressing this 

provision in the regulations would be 

helpful. Although no States provided 

comments on the proposed regulation, 

other commenters requested that the 

Department use the regulation to clarify 

the application of the statutory 

preemption provision. As noted 

elsewhere in this preamble, paragraph 

(f) of the final regulation addresses those 

comments. In accordance with section 4 

of the E.O. 13132, the Department of 

Labor has construed the preemptive 

effect of ERISA section 514(e) at the 

minimum level necessary to achieve the 

objectives of the statute. 


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In any event, the Department does not 

view the final rule, as distinct from the 

statute, as having a substantial direct 

effect on the States, on the relationship 

between the national government and 

the States, or on the distribution of 

power among the various levels of 

government. The statute preempts State 

laws and the regulation merely clarifies 

application of the statutory provision in 

a way that is consistent with the plain 

language and the legislative history. 

State wage withholding restrictions will 

not be affected except as they apply to 

automatic contribution arrangements of 

ERISA-covered plans. Moreover, the 

regulation imposes no compliance costs 

on State or local governments. As a 

result, the Department concludes that 

the final regulation does not have 

federalism implications. 

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 amends 

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 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 any qualified 

default investment alternative within 

the meaning of paragraph (e) of this 

section, 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 

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 any fiduciary described in 

paragraph (e)(3)(i) of this section 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 a notice that 

meets the requirements of paragraph (d) 

of this section: 

(i) (A) At least 30 days in advance of 

the date of plan eligibility, or at least 30 

days in advance of the date of any first 

investment in a qualified default 

investment alternative on behalf of a 

participant or beneficiary described in 

paragraph (c)(2) of this section; or 

(B) On or before the date of plan 

eligibility provided the participant has 

the opportunity to make a permissible 

withdrawal (as determined under 

section 414(w) of the Internal Revenue 

Code of 1986, as amended (Code)); and 

(ii) Within a reasonable period of time 

of at least 30 days in advance of each 

subsequent plan year; 

(4) A fiduciary provides to a 

participant or beneficiary the material 

set forth in 29 CFR 2550.404c1(b)(2)(i)(B)(1)(viii) and (ix) and 29 CFR 

404c-1(b)(2)(i)(B)(2) relating to a 

participant’s or beneficiary’s investment 

in a qualified default investment 

alternative; 

(5)(i) Any participant or beneficiary 

on whose behalf assets are invested in 


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Federal Register / Vol. 72, No. 205 / Wednesday, October 24, 2007 / Rules and Regulations 60479 

a qualified default investment 

alternative may transfer, in whole or in 

part, such assets to any other investment 

alternative available under the plan 

with a frequency consistent with that 

afforded to a participant or beneficiary 

who elected to invest in the qualified 

default investment alternative, but not 

less frequently than once within any 

three month period; 

(ii)(A) Except as provided in 

paragraph (c)(5)(ii)(B) of this section, 

any transfer described in paragraph 

(c)(5)(i), or any permissible withdrawal 

as determined under section 414(w)(2) 

of the Code, by a participant or 

beneficiary of assets invested in a 

qualified default investment alternative, 

in whole or in part, resulting from the 

participant’s or beneficiary’s election to 

make such a transfer or withdrawal 

during the 90-day period beginning on 

the date of the participant’s first elective 

contribution as determined under 

section 414(w)(2)(B) of the Code, or 

other first investment in a qualified 

default investment alternative on behalf 

of a participant or beneficiary described 

in paragraph (c)(2) of this section, shall 

not be subject to any restrictions, fees or 

expenses (including surrender charges, 

liquidation or exchange fees, 

redemption fees and similar expenses 

charged in connection with the 

liquidation of, or transfer from, the 

investment); 

(B) Paragraph (c)(5)(ii)(A) of this 

section shall not apply to fees and 

expenses that are charged on an ongoing 

basis for the operation of the investment 

itself (such as investment management 

fees, distribution and/or service fees, 

‘‘12b–1’’ fees, or legal, accounting, 

transfer agent and similar administrative 

expenses), and are not imposed, or do 

not vary, based on a participant’s or 

beneficiary’s decision to withdraw, sell 

or transfer assets out of the qualified 

default investment alternative; and 

(iii) Following the end of the 90-day 

period described in paragraph 

(c)(5)(ii)(A) of this section, any transfer 

or permissible withdrawal described in 

this paragraph (c)(5) of this section shall 

not be subject to any restrictions, fees or 

expenses not otherwise applicable to a 

participant or beneficiary who elected to 

invest in that qualified default 

investment alternative; 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 shall 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 or beneficiary in a qualified 

default investment alternative; and, if 

applicable, an explanation of the 

circumstances under which elective 

contributions will be made on behalf of 

a participant, the percentage of such 

contributions, and the right of the 

participant to elect not to have such 

contributions made on the participant’s 

behalf (or to elect to have such 

contributions made at a different 

percentage); 

(2) An explanation of the right of 

participants and beneficiaries to direct 

the investment of assets in their 

individual accounts; 

(3) 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; 

(4) 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, including a description of any 

applicable restrictions, fees or expenses 

in connection with such transfer; and 

(5) 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 available to participants and 

beneficiaries that: 

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

acquisition of employer securities, 

except as provided in paragraph (ii). 

(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)(4)(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 

to the extent the investment 

management service has discretionary 

authority over the disposition of such 

employer securities; 

(2) Satisfies the requirements of 

paragraph (c)(5) of this section regarding 

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: (A) an investment 

manager, within the meaning of section 

3(38) of the Act; (B) a trustee of the plan 

that meets the requirements of section 

3(38)(A), (B) and (C) of the Act; or (C) 

the plan sponsor who is a named 

fiduciary, within the meaning of section 

402(a)(2) of the Act; 

(ii) An investment company registered 

under the Investment Company Act of 

1940; or 

(iii) An investment product or fund 

described in paragraph (e)(4)(iv) or (v) of 

this section; and 

(4) Constitutes one of the following: 

(i) An investment fund product or 

model portfolio that applies generally 

accepted investment theories, is 

diversified so as to minimize the risk of 

large losses and 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)(4)(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 applies generally 

accepted investment theories, is 

diversified so as to minimize the risk of 

large losses and 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)(4)(ii), asset allocation 


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60480 Federal Register / Vol. 72, No. 205 / Wednesday, October 24, 2007 / Rules and Regulations 

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 a 

fiduciary, within the meaning of 

paragraph (e)(3)(i) of this section, 

applying generally accepted investment 

theories, 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 are 

diversified so as to minimize the risk of 

large losses and change their asset 

allocations and associated 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)(4)(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.’’

(iv)(A) Subject to paragraph 

(e)(4)(iv)(B) of this section, an 

investment product or fund designed to 

preserve principal and provide a 

reasonable rate of return, whether or not 

such return is guaranteed, consistent 

with liquidity. Such investment product 

shall for purposes of this paragraph 

(e)(4)(iv): 

(1) Seek to maintain, over the term of 

the investment, the dollar value that is 

equal to the amount invested in the 

product; and 

(2) Be offered by a State or federally 

regulated financial institution. 

(B) An investment product described 

in this paragraph (e)(4)(iv) shall 

constitute a qualified default investment 

alternative for purposes of paragraph (e) 

of this section for not more than 120 

days after the date of the participant’s 

first elective contribution (as 

determined under section 414(w)(2)(B) 

of the Code). 

(v)(A) Subject to paragraph (e)(4)(v)(B) 

of this section, an investment product or 

fund designed to guarantee principal 

and a rate of return generally consistent 

with that earned on intermediate 

investment grade bonds, while 

providing liquidity for withdrawals by 

participants and beneficiaries, including 

transfers to other investment 

alternatives. Such investment product 

or fund shall, for purposes of this 

paragraph (e)(4)(v), meet the following 

requirements: 

(1) There are no fees or surrender 

charges imposed in connection with 

withdrawals initiated by a participant or 

beneficiary; and 

(2) Principal and rates of return are 

guaranteed by a State or federally 

regulated financial institution. 

(B) An investment product or fund 

described in this paragraph (e)(4)(v) 

shall constitute a qualified default 

investment alternative for purposes of 

paragraph (e) of this section solely for 

purposes of assets invested in such 

product or fund before December 24, 

2007. 

(vi) An investment fund product or 

model portfolio that otherwise meets the 

requirements of this section shall not 

fail to constitute a product or portfolio 

for purposes of paragraph (e)(4)(i) or (ii) 

of this section solely because the 

product or portfolio is offered through 

variable annuity or similar contracts or 

through common or collective trust 

funds or pooled investment funds and 

without regard to whether such 

contracts or funds provide annuity 

purchase rights, investment guarantees, 

death benefit guarantees or other 

features ancillary to the investment fund 

product or model portfolio. 

(f) Preemption of State laws. (1) 

Section 514(e)(1) of the Act provides 

that title I of the Act supersedes any 

State law that would directly or 

indirectly prohibit or restrict the 

inclusion in any plan of an automatic 

contribution arrangement. For purposes 

of section 514(e) of the Act and this 

paragraph (f), an automatic contribution 

arrangement is an arrangement (or the 

provisions of a plan) under which: 

(i) A participant may elect to have the 

plan sponsor make payments as 

contributions under the plan on his or 

her behalf or receive such payments 

directly in cash; 

(ii) A participant 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 

(iii) Contributions are invested in 

accordance with paragraphs (a) through 

(e) of this section. 

(2) A State law that would directly or 

indirectly prohibit or restrict the 

inclusion in any pension plan of an 

automatic contribution arrangement is 

superseded as to any pension plan, 

regardless of whether such plan 

includes an automatic contribution 

arrangement as defined in paragraph 

(f)(1) of this section. 

(3) The administrator of an automatic 

contribution arrangement within the 

meaning of paragraph (f)(1) of this 

section shall be considered to have 

satisfied the notice requirements of 

section 514(e)(3) of the Act if notices are 

furnished in accordance with 

paragraphs (c)(3) and (d) of this section. 

(4) Nothing in this paragraph (f) 

precludes a pension plan from 

including an automatic contribution 

arrangement that does not meet the 

conditions of paragraphs (a) through (e) 

of this section. 

Signed at Washington, DC, this 15th day of 

October, 2007. 

Bradford P. Campbell, 

Assistant Secretary, Employee Benefits 

Security Administration, Department of 

Labor. 

[FR Doc. 07–5147 Filed 10–23–07; 8:45 am] 

BILLING CODE 4510–29–P 


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