On October 24, 2007, the U.S. Department of Labor (DOL) issued final regulations applicable to qualified default investment alternatives (QDIAs) under participant-directed individual account plans. These regulations extend Employee Retirement Income Security Act (ERISA) Section 404(c) fiduciary relief for decisions to invest plan assets in default investment funds as long as those funds meet QDIA requirements. Although the final regulations become effective on December 24, 2007, plan sponsors and plan fiduciaries can maximize fiduciary protection if QDIA notices are provided on or before November 24, 2007.
Under ERISA Section 404(c), fiduciaries of individual account plans are not responsible for participant investment decisions as long as the participants have the right to exercise control over their investment decisions. Default investment alternatives have not historically been eligible for Section 404(c) relief because participants did not make the affirmative investment decision. The DOL regulations solve that problem by extending Section 404(c) protection to QDIAs.
A QDIA is generally described as a balanced fund, a life-cycle fund (based on the participant’s age or target retirement date) or professionally managed account. A QDIA must be managed by an investment manager, a plan trustee, a plan sponsor or an investment company registered under the Investment Company Act of 1940. The final regulations exclude capital preservation funds, such as money market or stable value funds, as permitted QDIAs. Investments in stable value funds, however, are provided grandfather protection under certain circumstances for investments made prior to December 24, 2007. In addition, plans that provide for automatic enrollment arrangements under Code Section 414(w) may invest participant contributions in a capital preservation QDIA (such as money market or stable value funds) for up to 120 days if the participant is given an opportunity to opt out of the fund and withdraw those amounts within 90 days in accordance with the “automatic unwind” provisions of Code Section 414(w).
Under the final rules, a fiduciary will be afforded ERISA Section 404(c) relief for QDIAs, provided that the fiduciary prudently selects the QDIA fund and meets all of the following conditions:
- Each participant is given an opportunity to direct the assets in his or her account but does not do so.
- Participants and affected beneficiaries are furnished an advance notice (both before initial investment in a QDIA and an annual QDIA notice) that describes the circumstances under which plan contributions will be invested on their behalf in a QDIA.
- Participants are automatically provided investment information relating to the QDIA, such as a fund prospectus.
- Defaulted participants are permitted to transfer out of the QDIA with the same frequency afforded other participants, but at least once each quarter.
- No restrictions, fees or expenses are imposed by the QDIA during the 90-day period beginning on the date of the participant’s first contribution.
- The plan offers a broad range of investment alternatives that satisfy ERISA Section 404(c).
Advance notice pertaining to a QDIA must be provided at least 30 days in advance of the date of plan eligibility or 30 days in advance of the first investment in a QDIA. Additionally, all plan participants who are defaulted into a QDIA must be provided an annual notice at least 30 days in advance of each plan year. The QDIA notice may be combined with an automatic enrollment notice. However, the final regulations clarify that disclosure requirements may not be satisfied by including QDIA notice information in a summary of material modification or summary plan description.
The QDIA notice must contain all of the following:
- The circumstances under which a participant’s account may be invested in a QDIA, and, if the plan uses automatic enrollment, an explanation of the circumstances under which elective contributions will be made on behalf of the participant, the percentage of such contributions and the right of the participant to opt out or elect to contribute at a different rate
- An explanation of the participants’ rights to direct the investment of assets in their accounts
- A description of the QDIA fund, including the investment objectives, the risk and return characteristics, and the fees and expenses attributable to the QDIA
- A description of the participant’s right to direct amounts invested in a QDIA to other investment alternatives offered under the plan, including a description of any applicable restrictions, fees or expenses as related to the transfer
- An explanation of where the participant can obtain additional information concerning the other investment alternatives offered under the plan
Plan sponsors are not required to comply with the QDIA final regulations. Indeed, if a plan requires participants to make affirmative investment elections upon enrollment, the QDIA regulations will not apply to those decisions. Moreover, even where a plan uses default investment funds, the regulations clearly provide that they are not the exclusive means by which a fiduciary may satisfy the ERISA fiduciary responsibilities with regard to a plan’s default fund. Failure to comply with the regulations means that the plan fiduciary is responsible for the default investment decision.
To qualify for this protection on the earliest available date, plan sponsors and fiduciaries should issue an initial QDIA notice by November 24, 2007, to all affected participants and beneficiaries (i.e., those who are affected by default investment options). Even if a plan sponsor or fiduciary fails to satisfy the initial QDIA notice requirement by November 24, 2007, Section 404(c) fiduciary relief for later default QDIAs could be available for investments made after the notice requirements are satisfied.