QDIA: when do you deliver prospectus

[k man]

if participant goes into a QDIA i would assume it is necessary to provide a prospectus at or near the time the investment is made. for example a prospectus could be mailed to the participant after the cash is invested. the regs dont mention prospectuses at all but 404© requires a prospectus be made available to the participant after the investment is made.

[Peter Gulia]

To get QDIA relief concerning a default-invested participant, beneficiary, or alternate payee, a fiduciary must deliver to the person the QDIA notice and at least the prospectus required by the ERISA § 404© regulations – even if the fiduciary doesn’t follow other aspects of the ERISA § 404© regulations or doesn’t follow the ERISA § 404© regulations concerning other persons. 29 C.F.R. § 2550.404c-5©(4).

So to get QDIA relief, a plan fiduciary (or its agent) must furnish the prospectus to the default-invested participant, beneficiary, or alternate payee “immediately following” or “immediately prior to” the defaulted-invested person’s “initial investment” in the default option. 29 C.F.R. § 2550.404c-1(b)(2)(i)(B)(1)(viii).

[k man]

To get QDIA relief concerning a default-invested participant, beneficiary, or alternate payee, a fiduciary must deliver to the person the QDIA notice and at least the prospectus required by the ERISA § 404© regulations – even if the fiduciary doesn’t follow other aspects of the ERISA § 404© regulations or doesn’t follow the ERISA § 404© regulations concerning other persons. 29 C.F.R. § 2550.404c-5©(4).

So to get QDIA relief, a plan fiduciary (or its agent) must furnish the prospectus to the default-invested participant, beneficiary, or alternate payee “immediately following” or “immediately prior to” the defaulted-invested person’s “initial investment” in the default option. 29 C.F.R. § 2550.404c-1(b)(2)(i)(B)(1)(viii).

ok. i agree. now lets talk about furnish and what that means. can furnish be via electronic means. it would seem difficult to satisfy electonically across the board but if you could at least for those that consent to receive things electronically.

[Peter Gulia]

Even without the participant's consent, a plan administrator may deliver to a participant's worksite e-mail address a return-receipt e-mail that explains that its attachments (in .pdf) are the retirement plan's summary plan description, automatic-contribution notice, default-investment notice, and the prospectus for the default investments. 29 C.F.R. 2520.104b-1©. Such an e-mail must explain the significance of the documents furnished.

This means also must include "notice" (which might be one sentence) of the addressee's right to request a paper copy of a document. But if the attachments are in .pdf and a printer is nearby, those who want to read will print a document and not bother with a request.

[John Feldt ERPA CPC QPA]

I'm pretty sure the "prospectus" can be a summary instead of the whole booklet prospectus, just an fyi. If I remember, I'll find the cite when I return to the office and try to post it here.

[Peter Gulia]

ERISA Advisory Opinion 2003-11A observed that the Labor department’s ERISA § 404© rule doesn’t define the word “prospectus”. Following this, the Opinion states an interpretation that IF the “most recent prospectus” in the plan’s possession is a profile prospectus, delivering it would meet the § 404© rule’s prospectus-delivery condition. The Opinion also states an interpretation that if the “most recent prospectus” is a Securities Act of 1933 § 10(a) [15 U.S.C. § 77j(a)] prospectus, the § 404© rule’s prospectus-delivery condition is met only if a fiduciary delivers that prospectus.

Even if a retirement plan’s fiduciary is completely confident that the profile prospectus is the “most recent prospectus”, a cautious person shouldn’t rely on this strained interpretation. Because the Opinion isn’t a rule or regulation, a court need not defer to it. Further, ERISA § 404© is an affirmative defense against a fiduciary-breach claim; the burden of proof is on the defendant to show that every condition was met. Any ambiguity concerning whether the prospectus-delivery condition was met makes it too easy for a court to find that the ERISA § 404© defense doesn’t apply.

A better practice is to deliver BOTH the “full” prospectus and a profile prospectus (if any) so that a participant has his or her choice about the way he or she prefers to read. The expense of delivering these securities documents can be a proper plan expense to be allocated among participants’, beneficiaries’, and alternate payees’ accounts,

[k man]

do you think the prospectus must be in the form of a .pdf or can it be a link?

[Peter Gulia]

Some of the rules say that an electronic means must or should be designed to deliver the information in a way "that is no less understandable to the recipient than a written paper document." Considering this, some practitioners prefer a .pdf (over .html or other means) because a print-out from a .pdf is similar in appearance to the securities issuer's printed prospectus.

If attaching a .pdf to the e-mail would be burdensome to the plan's administration, a link to an appropriate Internet or intranet site from which a user may download and print the .pdf might be enough if it's accompanied by clear explanations about how to use everything (in addition to the required explanation that a participant, beneficiary, or alternate payee may require the plan administrator to furnish a paper copy). Again, I believe in making "self-service" so easy that it's obviously more convenient than asking the plan administrator.

A plan administrator should consider furnishing a link only to the plan's site (or a site that the plan administrator controls), and not to an investment provider's site. In managing plan communications, a plan's administrator must act as a prudent expert would act. Some believe that it's appropriate for a plan fiduciary to consider the likelihood of participants' irrational behavior. If a plan fiduciary believes that some participants would ignore a warning that the plan fiduciary is not responsible for a third person's communications, a fiduciary might consider participants' mistaken thinking in considering whether it's in the plan's and participants' best interests to provide a link to communications that the plan fiduciary can't control.

[John Feldt ERPA CPC QPA]

I agree that just having access to it is not enough. I said I would post the cite for the profile, but the Fiduciary Guidance Counsel member found it for us while I was out.

The plan must provide the participant with a copy of the most recent prospectus under DOL Reg. §2550.404c-1(b)(2)(i)(B)(1)(viii).

However, I believe that a copy of a “profile” would suffice in lieu of a prospectus unless the participant specifically requests the prospectus itself, per DOL Advisory Opinion 2003-11A.

Just my opinion. Also, IMHO, just because the court need not defer to it, that does not mean the court can easily ignore it. Maybe someday we'll see if a court case is found that hinges on this item, and where the court decides to ignore DOL Advisory Opinion 2003-11A.

edit: typo