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DOL Issues Final QDIA Rules

January 16, 2008


     The U.S. Department of Labor has recently issued final regulations addressing qualified default investment alternatives (QDIAs) under participant-directed individual account plans.   The final regulations generally provide that if a plan meets the conditions described below, its fiduciaries will not be liable for any loss that is the result of (1) investing in a QDIA, or (2) investment decisions made by an investment manager or investment company in connection with the management of a QDIA. Such fiduciaries, however, retain the duty to prudently select and monitor any QDIAs, and they retain liability for a failure to satisfy these duties.

     Under ERISA Section 404(c), the DOL has long taken the view that when a participant directs the plan with respect to the investment of plan contributions then plan fiduciaries are protected under 404(c).  Less clear, was whether a plan’s default mechanism for a participant that fails to make an affirmative investment election would protect plan fiduciaries.  The final regulations clarify that fiduciaries, with such defaults, will have 404(c) protection.

Conditions

Under the new regulations, a plan fiduciary will qualify for relief from liability for investment losses if the following conditions are satisfied:

  • The plan offers a broad range of investment alternatives.
  • The plan participant had the opportunity to, but failed to, direct the investment of his/her plan assets. As a result, the participant’s plan assets will be invested in a QDIA.
  • At least 30 days before his/her plan assets go into the QDIA, the plan participant receives a notice describing (1) the circumstances under which assets are automatically invested; (2) the “default” investment alternative’s characteristics; (3) the participant’s right to transfer his/her plan assets from the “default” investment to other investment vehicles; and (4) where the participant can obtain information about the plan’s other investment options.
  • The participant is provided with any statements, prospectuses, or voting material that the plan receives.
  • The participant may transfer his/her plan assets to any other investment vehicle available under the plan without financial penalty.

Qualified Default Investment Alternatives (QDIAs)

A QDIA is an investment alternative that:

  • generally does not hold or permit acquisition of employer securities;
  • generally does not restrict participants’ ability to transfer their assets from the QDIA to any other investment option under the plan;
  • is managed by an investment manager (as defined in ERISA) or an investment company registered under the Investment Company Act of 1940;
  • is diversified to minimize the risk of large losses; and
  • is one of the following:

–  Life Cycle or Targeted Funds – investment funds or model portfolios designed to provide degrees of long-term appreciation and capital preservation based on a participant’s age, target retirement date, or life expectancy; 

– Balanced Funds – investment funds or model portfolios that are a mix of equity and fixed income investments consistent with a target level of risk appropriate for the plan as a whole; 

– Managed Accounts – investments where an investment manager allocates the assets of the participant’s individual account to investment options available under the plan, taking into account the participant’s age, target retirement date, or life expectancy; or

– Capital Preservation Accounts – for up to 120 days these types of investments (e.g., money market or stable value funds) will meet the QDIA requirements.  However, after the 120 day period any amounts defaulted into this type of investment will not be protected under 404(c).  Therefore, in order to be protected under the new rules these amounts must be reinvested in one of the other three permitted QDIAs.

The 120 day rule for stable value investments was not included in the DOL’s proposed regulation issued late last year.  Additionally, the new regulation includes “grandfathered” protection for amounts invested in a stable value fund prior to December 24, 2007.