Prudent Default Can Include Lifetime Income Elements: DOL

In an information letter to Christopher Spence, senior director, Federal Government Relations at TIAA, the Department of Labor (DOL) says a defined contribution (DC) plan could prudently choose a default investment for the plan that contains lifetime income elements.

The letter was in response to a request regarding the application of the Employee Retirement Income Security Act (ERISA) to TIAA’s Income for Life Custom Portfolios (ILCP). The DOL notes that one of the conditions for qualifying as a qualified default investment alternative (QDIA) is that any participant or beneficiary on whose behalf assets are invested, must be able to transfer such assets “in whole or in part” 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 QDIA, but not less frequently than once within any three month period. The ILCP’s Annuity Sleeve does not meet this requirement, so the ILCP would not constitute a QDIA.

However, the DOL also notes that in the preamble to its QDIA regulations, it says investments in stable value products or funds may be prudent for some participants or beneficiaries even though such investments themselves may not generally constitute QDIAs. “The Department did not intend those examples to be an exclusive list of investments that could be prudent default investment alternatives,” the letter states in a footnote.

In his letter, Louis J. Campagna, chief, Division of Fiduciary Interpretations, Office of Regulations and Interpretations at the DOL, points out that following issuance of the QDIA regulations, the DOL, along with the Treasury Department and other stakeholders, identified the need for lifetime income as an important public policy issue and has supported initiatives that could lead to broader use of lifetime income options in defined contribution plans as a supplement to and enhancement of accumulation of retirement savings.

In 2014, Treasury issued guidance providing that DC plan sponsors can include deferred income annuities in target-date funds (TDFs) used as a QDIA, even if only offered to older participants, and the plan would not be considered discriminatory. In an accompanying letter, the DOL reiterated that to qualify as a QDIA, participants must be able to transfer assets out of the fund at least quarterly.

In addition, to saying an investment with lifetime income elements can be a prudent default investment option in DC plans, even if not a QDIA, the letter offers considerations for determining whether it is prudent to use this type of investment as a default investment.