404(c) & mapping/qualified change in investment options

[Guest ggbrock]

Is it considered a "qualified change in investment options" under the 404© regs if a plan offers a new investment fund (Fund B), which will not replace an existing investment fund (Fund A), (i.e., money invested in Fund A will stay there) but in which a participant's money that they have elected to invest in Fund A will abe invested in Fund B after a certain date?

[J Simmons]

Yes. A 'qualified change' is not limited to just to existing assets.

Joint Committee Taxation (J.C.T. REP. NO. JCX-38-06), Act 621:

For this purpose, a qualified change in investment options means a change in the investment options offered to a participant or beneficiary under the terms of the plan, under which: (1) the participant's account is reallocated among one or more new investment options offered instead of one or more investment options that were offered immediately before the effective date of the change; and (2) the characteristics of the new investment options, including characteristics relating to risk and rate of return, are, immediately after the change, reasonably similar to the characteristics of the investment options offered immediately before the change.

[Guest ggbrock]

But here the participant's account is not being "reallocated" because the money he has invested in Fund A will stay there. It is just new money that will go into Fund B (albeit pursuant to his election to invest in Fund A). Does it change your mind that money is not actually being transferred? The preamble seems to indicate this would only apply when funds are actually being transferred from existing assets.

[J Simmons]

404c1 offers fiduciary relief for investing assets as directed by the EE under certain circumstances.

404c4 offers fiduciary relief incident to changing investment options of similar type, if certain procedural steps are taken.

It would appear that while you are leaving 'old money' in Fund A, no new money will be allowed into Fund A. For those that have given a direction that they want their benefits (or a portion) invested in Fund A, they will as to 'new money' have it re-directed into Fund B.

Are you not wanting to give EEs affected by this advance notice and opportunity to change their A Fund directives, such as directing the investment of their 'new money' into Funds C, D or E, but instead force that new money into Fund B?

[Guest ggbrock]

"Are you not wanting to give EEs affected by this advance notice and opportunity to change their A Fund directives, such as directing the investment of their 'new money' into Funds C, D or E, but instead force that new money into Fund B?"

We are giving them notice stating that they can change their election going forward but will not have time to give 30 days. The fund that is effectively being replaced is tanking and for this (and other reasons) the ER does not want to wait the 30 days . This comes at the beginning on the ER payroll and allowing investment in the old fund ER thinks would not be prudent given that it is doing so poorly. I'm just not sure if this fits within the technical guidance on what it means to be a "QCIO".

[J Simmons]

Both QCIO and QDIA relief provisions require 30 days advance notice.

Perhaps the ER could leave the Fund A directives in place as to new payroll, but give an notice now expressing the ER's concerns about Fund A to those that have a standing directive for investment of their payroll contributions, explaining that Fund B has been added (if it was not already among the choices), and urging each to choose and give a directive for upcoming payroll contributions into Fund B or another investment option under the plan. For those that do not do so by the next payroll, the presumption would be that they wanted to keep their payroll going into Fund A despite the ER's concerns.

Or, if you already have a QDIA noticed up properly, you could notify the EEs that Fund A will no longer be an option effective immediately, that they may affirmatively direct into something other than the QDIA (or the now closed Fund A), but if they do not, they will be considered not to have a directive in place for future payroll deferrals and so such will be invested in the QDIA.