DOL Clarifies "Qualified Default Investment Alternative" Requirements

• Restrictions on Transfers & Withdrawals during the 90-Day Period after the Initial Contribution. No restrictions, fees or expenses can be imposed in connection with a participant's withdrawal or transfer from the QDIA during the 90-day period after the initial contribution or investment. The Preambles to the 2007 Final Regulations included, as an example of a prohibited restriction, a "round trip" restriction on the ability of a participant to reinvest within a defined period of time.
  • Correction: This example was deleted. DOL concluded that the restriction was too broad and should not have been included. Unlike fees assessed on the transfer or liquidation of a QDIA, round-trip restrictions affect only the participant's ability to reinvest in the QDIA for a limited period of time, and would not be a prohibited restriction (unless they affect the ability to liquidate or transfer).

• Permissible Managers of QDIAs. A QDIA which is not a mutual fund or other investment product identified in the regulation can be managed by: (1) an investment manager defined under ERISA § 3(38), (2) a trustee that meets the requirements of an investment manager under ERISA § 3(38), or (3) a plan sponsor who is a named fiduciary under ERISA § 402(a)(2).
  • Correction: The third provision was expanded to also include "a committee comprised primarily of employees of the plan sponsor," which is a named fiduciary. DOL had intended to broadly accommodate those employers who manage the plan's investments in-house, so it expanded this provision to make clear that a committee of the plan sponsor would also qualify.

• Grandfathered "Stable Value" Funds. Stable value funds are treated as QDIAs for investments made before December 24, 2007 (i.e., the effective date of the final regulations). In adding this "grandfather" provision, DOL sought to accommodate employers who had selected stable value funds as the default investment prior to the effective date of the regulations. Stable value funds are defined as investment products designed to guarantee principle and a rate of return generally consistent with that earned on intermediate investment grade bonds, while providing liquidity for withdrawals and transfers, and: (1) which impose no fees or surrender charges in connection with withdrawals, and (2) are guaranteed by a State or federally regulated financial institution as to principal and rates of return.
  • Correction: The definition of stable value fund was liberalized. DOL originally had intended a broader application of the "grandfathering" relief. A stable value fund is now:

  [A]n investment product or fund designed to preserve principle; provide a rate of return generally consistent with that earned on intermediate investment grade bonds; and provide liquidity for withdrawals by participants and beneficiaries, including transfers to other investment alternatives. Such investment product or fund shall, for purposes of this paragraph ..., meet the following requirements:

  1. There are no fees or surrender charges imposed in connection with withdrawals initiated by a participant or beneficiary; and

  2. Such investment product or fund invests primarily in investment products that are backed by State or federally regulated financial institutions.

• Fiduciary duties still apply. Compliance with the regulations does not relieve a plan sponsor of the duty to manage, or select and monitor, the QDIA.

• QDIA relief may apply to participants who previously elected to invest in a default fund. A plan sponsor who is a named fiduciary is relieved of liability for the decision to invest a participant's account in a QDIA. The relief applies to all assets invested in the QDIA on behalf of a participant who, on or after the effective date of the regulations, failed to give investment direction after being provided the required notice -- regardless of whether the participant made an earlier election to invest in the default fund. As the FAB points out through the following example, the result may be significant:

  For example, assume that prior to the effective date of the QDIA regulation, plan sponsor (PS) used Default A as the default investment for its plan, an investment that would not qualify as a QDIA under the regulation. Following publication of the QDIA regulation, PS decides to change to Default B, an investment that would qualify as a QDIA under the regulation, but PS is unable to distinguish between those participants and beneficiaries who directed that their assets be invested in Default A and those participants and beneficiaries who were defaulted into Default A. If PS distributes a new investment election form to all participants and beneficiaries invested in Default A, relief under the QDIA regulation would be available to PS with respect to assets that are moved into Default B and held in the plan accounts of participants and beneficiaries who failed to respond to the investment election form, if all of the requirements of the regulation are otherwise satisfied with respect to such participants and beneficiaries. Alternatively, if Default A is an investment that would qualify as a QDIA under the regulation and PS complies with the notice and other requirements necessary to establish Default A as a QDIA, PS would be relieved of liability in accordance with the QDIA regulation with respect to all assets invested in Default A, without regard to whether the assets were the result of a default investment.

• Relief may apply to non-elective contributions. Relief under the QDIA regulations is available for non-elective contributions if the participant had the opportunity to direct their investment, but failed to do so.

• QDIA and Code notice timing requirements are not consistent. Notices under the QDIA regulation can be given in a timeframe consistent with notices required for qualified automatic contribution arrangements (QACA) and eligible automatic contribution arrangements (EACA) under Internal Revenue Code §§ 401(k)(13) and 414(w), respectively. Plan sponsors can satisfy the annual notice requirements if notice is provided at least 30 and not more than 90 days before the beginning of each plan year. A plan that includes an EACA under Code § 414(w) can satisfy the QDIA initial notice requirement, as well as the IRS's special rule for employees who did not receive the annual notice due to their eligibility date, by providing notice on or before, but no more than 90 days before, the employee's plan eligibility date.

• QDIA and Code notices can be combined. The QDIA notice requirement and the notice requirements of a QACA and EACA can be satisfied in a single disclosure document.

• Investment products with zero fixed income (or zero equity) do not comply. Each category described in the regulation requires that the QDIA fund or product be "diversified so as to minimize the risk of large losses" and be designed to provide varying degrees of long-term appreciation and capital preservation through a mix of equity and fixed income exposures. This does not include funds with no fixed income exposure. (Similarly, this does not include funds with no equity exposure.) Although such funds may be appropriate for individuals acting with regard to their own investments, DOL requires that a QDIA have some fixed income or equity exposure. The minimum fixed income or equity exposure necessary to satisfy the requirement for a QDIA is not specified in the regulation.

• 30-day notice required for "grandfathered" stable value fund relief. Fiduciary relief does not take effect until 30 days after the QDIA notice is furnished to the participants and beneficiaries. Notice distributed on January 1, 2008 to participants who were defaulted into a stable value fund prior to the effective date of the regulation would provide fiduciary relief to the plan sponsor on January 31, 2008 (i.e., 30 days later). Regardless of the date the fiduciary relief is available, the relief will extend only to assets that were invested in the stable value fund on or before the effective date of the final regulation.

If you have any questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact: Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Mary Jones 202.378.5067, Stephen LaGarde 202.879-5608, Erinn Madden 202.572.7677, Bart Massey 202.220.2104, Mark Neilio 202.378.5046, Martha Priddy Patterson 202.879.5634, Tom Pevarnik 202.879.5314, Sandra Rolitsky 202.220.2025, Tom Veal 312.946.2595, Deborah Walker 202.879.4955.

Copyright 2008, Deloitte.

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