Source: https://www.dwt.com/blogs/employment-labor-and-benefits/2008/01/default-investment-regulations-still-availableand
Timestamp: 2020-08-07 15:54:31
Document Index: 322974897

Matched Legal Cases: ['§404', '§404', '§404', '§ 404', '§ 404', '§ 404', '§ 404', '§ 404', '§ 404']

Default Investment Regulations Still Available—and Important—for 401(k) Plans | Employment Advisor | Davis Wright Tremaine
In October 2007 the Department of Labor (DOL) released final regulations governing the use of Qualified Default Investment Alternatives (QDIAs). The regulations became effective Dec.24, 2007, but in light of the holiday season and year-end tasks, some employers deferred taking any action. The issue remains relevant because plan sponsors can prospectively gain access to the protection described here, after taking the applicable steps. Plan sponsors who deferred their analysis at the end of last year should schedule time (soon) to review the topic
In part to promote automatic enrollment 401(k) plans, the Pension Protection Act of 2006 (PPA) added ERISA §404(c)(5) to broaden the protection available for plan fiduciaries under ERISA §404(c). The new rule extends the fiduciary protection available under ERISA §404(c) to situations in which a plan participant (or beneficiary) fails to choose how to invest his or her account balance, and the plan directs that the account be invested in a QDIA in accordance with DOL guidance.
More specifically, ERISA § 404(c)(5) provides that if a participant in an individual account plan receives proper notice describing the default investment that will apply if he or she fails to give investment instructions, and the default investment constitutes a QDIA under DOL guidance, then the participant will be treated as having exercised control over the assets in his or her account that are invested in the QDIA.
Although largely aimed at automatic enrollment 401(k) plans, the relief is also available whenever a participant has the right to choose how his or her account should be invested, but fails to exercise that choice, with the result that the plan document or a fiduciary must decide what to do with the funds. For example, such a situation would include a rollover from another plan, after which the participant fails to give investment directions.
Under the final regulations, a fiduciary of an individual account plan will not be liable under ERISA for any loss resulting from the investment in a QDIA, or for any investment decision of the QDIA manager, if the following requirements are met:
1) Participants must receive advance notice
Each participant (or beneficiary) who may be affected by a QDIA must receive advance notice. The notice must be provided at least 30 days before the first default investment, or at least 30 days before the date of plan eligibility. The notice can be given at the time the participant becomes eligible, for example in a plan that has immediate eligibility, if the plan also includes a right to revoke auto-enrollment within 90 days and withdraw the contributions made.
In addition to the initial notice given on or before eligibility, participants must receive an annual notice at least 30 days in advance of each subsequent plan year.
The form of the notice must be a separate written statement, as opposed to being part of a summary plan description or summary of material modification. However, the notice may be combined with another notice, such as a notice associated with an automatic enrollment plan.
The notice must be written in a manner calculated to be understood by the average plan participant. In this regard, it must include the following:
A description of the circumstances under which assets may be invested on behalf of the participant in a QDIA, and, if applicable, the circumstances under which elective deferrals will be made on behalf of a participant, including the percentage of the deferrals, and the right of the participant to elect not to have deferrals made (or made at a different level
A description of the QDIA, including a description of investment objectives, risk and return characteristics, and fees and expenses
A description of the participant's right to direct the investment of his or her account in general, as well as the right to direct investments in a QDIA to any other available investment alternative, without financial penalty
An explanation of where participants can get information about plan investment alternatives
2) Participants must have been given the opportunity to direct their investments and failed to do so
3) The assets must be invested in a “qualified default investment alternative” (QDIA)
The regulations provide four alternative types of investment products that meet the definition of a QDIA. These are:
A product with a mix of investments that takes into account the individual participant's age, retirement age, or life expectancy, such as a life-cycle or targeted retirement date fund;
A product with a mix of investments that takes into account the characteristics of a group of employees as a whole, such as a balanced fund;
An investment service that allocates contributions among existing plan options to provide an asset mix that takes into account an individual participant's age or retirement date, such as a professionally managed account;
A capital preservation product, but only for the first 120 days of participation. Absent participant direction, the plan fiduciary must redirect the participant's account balance into one of the above three QDIA categories after the first 120 days of participation.
The final regulations provide that a QDIA may not impose a fee or charge on any transfer or distribution out of the QDIA during the first 90 days of the investment. Many mutual funds impose surrender fees to penalize short-term investments. As a result, plan sponsors should review the funds they may wish to use in structuring a QDIA and verify that no fees will apply during the first 90 days.
The final regulations also provide a “grandfather” rule for plans that have historically used a stable value or similar products as a default investment fund. The regulations provide that a stable value fund or similar product will qualify as a QDIA if there are no fees or surrender charges imposed in connection with any withdrawal, the principal and rate of return are guaranteed by state or federally regulated financial institutions, and the amounts were invested before the effective date of the final regulations (Dec. 24, 2007).
4) Participants must be given investment information
Another requirement to qualify for ERISA § 404(c)(5) protection is that plan fiduciaries must provide participants (and beneficiaries) relevant investment information of the sort that is usually required for ERISA § 404(c) plans. This requirement covers fund prospectuses, proxy voting materials, and (upon request) fund performance and expense information for the QDIA into which a participant's assets will be defaulted.
5) Participants must have the ability to control investments if they wish
Participants must have the ability under the plan to direct the investment of assets held in their accounts with a frequency consistent with that afforded to participants who elected to invest in the QDIA, but not less frequently than once in any three-month period.
As mentioned above, during the 90 days of the first elective deferral resulting from a default investment, no fee or charge may apply to any participant-directed transfer from a QDIA to another investment alternative available under the plan.
6) A broad range of investment alternatives must be offered
A plan utilizing a QDIA must also offer a broad range of investment alternatives. In this regard, compliance with the ERISA § 404(c) standard of a “broad range of investment alternatives” will suffice. The plan may obtain QDIA relief without complying with 404(c) in all respects.
ERISA § 404(c)(5) provides welcome protection for fiduciaries of plans that permit participants to direct investments. Now fiduciaries have clear guidance on how to handle the situation of a participant's failure to give investment instructions. However, even with the new protections offered under ERISA § 404(c)(5), it is important to note the new regulations do not relieve plan fiduciaries of their obligations to prudently select and monitor the QDIA. In addition, nothing in the regulations provides relief from ERISA's prohibited transaction exemptions.