Reading between the Lines
In late 2007 and early 2008, many members of the retirement plan community were searching for clarification with respect to the final qualified default investment alternative (QDIA) regulations. The final QDIA regulations provide relief from certain fiduciary responsibilities under the Employee Retirement Income Security Act (ERISA) for investments made on behalf of participants who fail to direct their investments under a defined contribution plan (see Default Vault). On April 29, 2008, the Department of Labor (DoL) issued technical corrections to those regulations and also issued Field Assistance Bulletin No. 2008-03 (FAB) consisting of 22 questions and answers about QDIAs.
This column is devoted to the technical corrections. The technical corrections are effective as of December 24, 2007, and address the following three areas: prohibition on round-trip restrictions, clarification as to who may manage a QDIA, and corrections associated with the grandfathered relief for stable value funds.
Round-trip restrictions: Under the final QDIA regulations, defaulted participants must have the right to redirect their funds out of the QDIA and into any other investment available under the plan. No financial penalty on withdrawal (i.e., surrender charges or redemption fees) or restrictions on transfer may be imposed during the first 90 days of investment in the QDIA. Under the preamble to the final QDIA regulations, a round-trip restriction was used as an example of a prohibited restriction.
Upon further reflection, the DoL concluded that the round-trip restriction example was too broad in that it would affect the ability of participants to reinvest in the QDIA but would not necessarily have any impact upon their ability to redirect funds out of a QDIA initially. As a result, the example has been removed. However, if the round-trip restriction creates a mechanism that would somehow affect a participant’s ability to redirect his funds out of the QDIA, then the round-trip restriction would still be impermissible under the final rules.
Clarification on persons who may manage a QDIA: Under the final QDIA regulations, a plan sponsor that is a named fiduciary may manage a QDIA. The DoL received questions regarding the reference to “plan sponsor” and whether a committee that is a named fiduciary of the plan and composed of the plan sponsor’s employees can manage a QDIA. The DoL concluded that a committee of the plan sponsor may manage a QDIA when that committee, pursuant to plan documents, is a named fiduciary.
Corrections on grandfathered relief for stable value products: The third technical correction involves certain issues associated with the grandfathered treatment of stable value products used as a QDIA with respect to contributions made to such products prior to December 24, 2007 (the effective date of the final regulations). The DoL believes that the language contained in the final QDIA regulations unnecessarily limited the availability of the grandfathered relief by requiring that the stable value products be designed to “guarantee principal and a rate of return” and that the principal and rates of return be “guaranteed by a state or federally regulated financial institution.” The technical correction removes the “guarantee” requirements and extends grandfathered relief to stable value products that are designed to “preserve principal,” provided “that such investment products invest primarily in investment products that are backed by state or federally regulated financial institutions.” Importantly and notwithstanding the technical correction, the use of a stable value product for default contributions prior to December 24, 2007, will not, in and of itself, provide fiduciary relief under the final QDIA rules. Adherence to the other QDIA requirements (such as proper notice) will still be necessary to ensure the fiduciary relief.
While this column has been devoted to the technical corrections themselves, and while the FAB does not carry the same legal authority as the regulations, the FAB is worth reading as it sheds some additional light on the DoL’s intended scope and meaning of various provisions. One thing is for sure: The technical corrections and the FAB are not the last word we will hear from the DoL on QDIAs as the application of the QDIA rules continues to evolve.
Quana C. Jew is a partner at the law firm of Arent Fox, focusing on ERISA, employee benefits, and executive compensation. Quana has served as a guest lecturer in the employee benefits area for various law school, bar seminar, and employee benefits-related organizations. Most recently, Washingtonian magazine named Quana as one of Washington’s best tax lawyers.