Additional Qualified Default Investment Alternatives (QDIA) Guidance from the DOL
Michele Aiken May 1st, 2008
The Employee Retirement Income Security Act (ERISA) of 1974 Section 404(c) states that individual account plan fiduciaries are not liable for the investment decisions made by participants provided that participants are allowed the right to control their investment decisions. Plans that provided for default investment alternatives were considered to fall outside Section 404(c) because these alternatives do not require participants to exercise any control over the investment decisions.
As required by the Pension Protection Act (PPA) of 2006, the Department of Labor (DOL) issued final regulations (29 CFR § 2550.404c-5) in October 2007 which extend the ERISA Section 404(c) fiduciary protections to plans that allow for investments to be made on behalf of participants who fail to exercise control over their investment decisions. These Qualified Default Investment Alternative (QDIA) regulations were effective as of December 24, 2007.
Under the QDIA regulations, plan sponsors may treat these participants, whose accounts are invested according to default rules because no investment direction was provided, as having exercised investment control. To do so, plan sponsors must meet the specified notice requirements and the default investments must qualify as QDIAs. If the plan complies with the QDIA regulations, plan fiduciaries will qualify for protection against liability for investment losses in the default investment accounts.
On April 29, 2008, the DOL released Field Assistance Bulletin No. 2008-03, which provides plan sponsors with additional guidance on the QDIA final regulations. This bulletin provides answers to some of the most frequently asked questions about the QDIA regulations in areas such as the scope of the regulations, notice requirements, limitation on fees and restrictions, management and asset allocation, capital preservation, and “grandfather” relief. Some of the issues that are clarified in the Field Assistance Bulletin include:
- A plan sponsor is not relieved of liability for the management of the QDIA or for the prudent selection and monitoring of the QDIA
- If the notice and all other requirements under the regulation are satisfied, the fiduciary will be relieved of liability with respect to all assets invested in the QDIA, regardless of whether the assets were contributed prior to the effective date of the regulation (except to the extent otherwise limited by the regulation)
- The QDIA notice can be, but is not required to be, combined with the notices required under the Internal Revenue Code Sections 401(k)(13) and 414(w)
- Defaulted participants should be furnished neither less nor more materials than would be provided to participants who direct their own investments in an ERISA 404(c) plan
Additionally, the description of stable value products or funds was amended in order to broaden the “Grandfather” type relief available for assets invested in certain of these products or funds.
It is important for plan sponsors to understand the new guidance and comply if they wish to receive the benefit of the protections offered. If a plan’s provisions do not comply with these regulations, the plan’s fiduciaries run the risk of breaching their fiduciary duties, exposing themselves to liability to “automatic enrollment” plan participants for investment losses.
Employers and/or plan sponsors of individual account plans that currently provide or want to provide an “automatic enrollment” feature should review their plans to ensure compliance with the new guidance. Their benefits counsel can assist them to ensure that their plan provisions are in compliance.
