Default Vault
On October 24, 2007, the Department of Labor (DoL) issued its long awaited final regulations on qualified default investment alternatives (QDIAs), effective December 24, 2007.
Under the final regulations, plan fiduciaries will be insulated from certain fiduciary liability associated with the investment of plan assets in QDIAs, which include the following three types of investment products: (i) target-date or lifecycle funds (selected for each participant based on an individual’s age); (ii) balanced funds (one selected for the plan based on the demographics of all plan participants); or (iii) professionally managed accounts. In addition, plan participant contributions may be defaulted into a capital preservation product (e.g., stable value or money market fund) during the first 120 days following the initial investment provided that such participant contributions are re-directed to one of the QDIA-eligible products following the first 120 days. The final rules provide grandfathered relief for participant contributions that were defaulted into certain types of stable value products or funds prior to December 24, 2007.
In addition to the requirement that the participant’s contributions be invested in a QDIA, certain other requirements must be met for fiduciary relief to apply. Following is a brief summary of these requirements.
(i) The participant must have been given the right to direct his investment, but must have failed to do so.
(ii) A participant who is defaulted into the QDIA must receive an advance notice and an annual notice that meets certain content and timing requirements. With respect to the content requirement, the notice must provide (a) a description of the circumstances under which a participant’s assets will be invested in a QDIA, (b) the rights of a participant to direct his investments, (c) a description of the QDIA, (d) a description of the participant’s right to re-direct his contributions from the QDIA into the plan’s other investments, and (e) an explanation of where the participant may obtain information about the plan’s other investments.
With respect to the timing of the notices, the advance notice must be provided (a) at least 30 days before the date of plan eligibility (for elective contributions) or at least 30 days before the first investment in the QDIA (for circumstances other than elective contributions) or (b) on or before the plan’s eligibility date, provided that the participant has the opportunity to withdraw his contributions during the first 90 days of participation. The final regulations provide that the distribution requirements for the QDIA notices may not be met by inclusion of the notices as part of a summary plan description (SPD) or summary of material modifications (SMM). However, electronic distribution of the notices is permitted provided that the IRS or DoL rules on electronic distribution are met.
(iii) The participant must be provided with the same materials as those required to be provided to participants who actively direct the investment of their funds, as set forth under Section 404(c) of ERISA (e.g., plan prospectuses).
(iv) The participant must have the right to redirect his funds out of the QDIA and into any other plan investment alternatives at least as frequently as a participant who affirmatively elects to invest his funds in a QDIA, but at least once within any three-month period. No financial penalty on withdrawal (e.g., redemption fees) may be imposed during the first 90 days of investment in the QDIA. However, fund administrative fees may be imposed.
(v) The plan must offer a broad range of investment alternatives as defined under Section 404(c) of ERISA.
Although the above rules provide some fiduciary relief where the fiduciary directs the investment of participant contributions, adherence to the above rules is optional. If a plan fiduciary chooses to fit within the protections of the QDIA rules, the scope of the fiduciary relief is identical to the relief granted for carrying out investment directions under ERISA Section 404(c) plans. If a plan fiduciary chooses not to fit within the protections created by the QDIA regulations, the fiduciary will continue to be subject to the prudent man standard of conduct as to all aspects of the default investment process. In all cases, the fiduciary is still responsible for the prudent selection of the default fund, the ongoing monitoring of such fund, and assuring that the fees and expenses associated with such fund are reasonable.
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. She also serves on the Advisory Board of the Women’s Pension Exchange. Most recently, Washingtonian magazine named Quana as one of Washington’s best tax lawyers.