Which is Worse? QDIA Options

[austin3515]

A) Selecting a QDIA as the default investment, such as a Target Retirement Fund or a Balanced Fund, but NOT distributing the QDIA notice (as might be the scenario with a client not so diligent about passing out important notices).

B) Defaulting to a money market in anticipation that the QDIA rules are more or less impossible for most small employers to comply with. I note that the QDIA rules are not mandatory rules. I also note that Great West does a fantastic job at addressing QDIA.

My own personal answer is that A) is worse than B). My saying is "If you're going to put someone on a roller coaster you better tell them that they're going on the roller coaster." I'm reminded of a sign at Disney World posted at the entrance to it's scariest rides. The sign says, in the form of a headline to a longer notice, "This is a ver scary ride." I think that is Disney's version of a QDIA notice.

I just feel like one day someone is going to lose a lot of money and suddnely realize that they didn't like the way they were defaulted. And if the sponsor didn't provide all those notices (each year, mind you) then I can't see how the sponsor avoids liability.

[MoJo]

A) Selecting a QDIA as the default investment, such as a Target Retirement Fund or a Balanced Fund, but NOT distributing the QDIA notice (as might be the scenario with a client not so diligent about passing out important notices).

B) Defaulting to a money market in anticipation that the QDIA rules are more or less impossible for most small employers to comply with. I note that the QDIA rules are not mandatory rules. I also note that Great West does a fantastic job at addressing QDIA.

My own personal answer is that A) is worse than B). My saying is "If you're going to put someone on a roller coaster you better tell them that they're going on the roller coaster." I'm reminded of a sign at Disney World posted at the entrance to it's scariest rides. The sign says, in the form of a headline to a longer notice, "This is a ver scary ride." I think that is Disney's version of a QDIA notice.

I just feel like one day someone is going to lose a lot of money and suddnely realize that they didn't like the way they were defaulted. And if the sponsor didn't provide all those notices (each year, mind you) then I can't see how the sponsor avoids liability.

My opinion would be the opposite of yours (and it's just an opinion). My basis for thinking that is simply that by NOT providing the QDIA notice, at worst I think you'd lose 404© protection for that decision - which is EXACTLY the same result you get by not using a QDIA - i.e. a MM fund - as a default. The next question is, which is more "fiduciarily prudent" (since 404© doesn't apply) - a MM fund that is GUARANTEED to lose purchasing power over time, or an otherwise diversified fund that, if prudently selected in the first place, has the potential to grow? Me thinks the latter....

[austin3515]

Right, because 404c now requires use of a QDIA. So if I use a money market, I shouldn't be checking the 2F box on the 5500, nor should I say so in the SPD.

Now, is 404c all or none? So if I don't use a QDIA is 404c irrellevant?

The DOL has really ruined 401k plans. If I owned my own business I swear I would never start a 401k plan.

[Bird]

"They" clearly want us to use target date (or balanced) funds, so that's what we do. I'd prefer to worry about the lack of notice distribution than using the "wrong" default, for the reasons MoJo mentions. FWIW.

[shERPA]

I agree with MoJo and Bird.

And I agree with Austin's statement "The DOL has really ruined 401k plans. If I owned my own business I swear I would never start a 401k plan."

What made this career tolerable is I am passionate about helping people save money to better take care of themselves, and truly believed qualified retirement plans are one of the best ways to do so. Now? Not so sure anymore. IRS at least seemed willing to work with employers not to kill the goose, so to speak (although they seem to be getting much more aggressive in setting unreasonable high CAP sanctions). And now the DOL heaps on more abuse. Setting employers up for nasty results from "investigations" and making them eventual sitting ducks for plaintiff lawyers.

I'm asking myself, knowing what I know, and what I anticipate coming down the road, should I convince an employer to establish a 401(k) plan? Are the tax benefits really worth the risk at this point?

[austin3515]

I'm just waiting for the call from that irate participant who lost money. That day will come! I'm sure others have already gotten that call.

Recall that in 2008, QDIA was pretty new so the amount of defaulted money was probably relatively low. If we have another "dip" people might have more invested in the qdia and therefore lose more money.

The ones I am most concerned about are the plans that are defaulting transfer balances into a QDIA. You come out of the gate with a huge amount of money in the QDIA. So people now might have 10's of thousands invested in the QDIA. Maybe they were in the money market before. I'm sure they'll have some thoughts on the QDIA decision that was made.

And has anyone been called upon to prove that they did provide a notice? Shall we mail them first class mail, return receipt? IF you get sued, how exactly would you prove this??

I'm still curious to know if using the money market as the default totally invalidates any claim of 404c for the rest of the plan. i.e., the people not being defaulted.

[Kevin C]

http://www.ca6.uscourts.gov/opinions.pdf/12a0203p-06.pdf

Austin,

This case came up in the news section today. Two participants with existing balances sued after they were defaulted into the QDIA when they did not respond to information sent to them about having to make a new investment election or be defaulted into the QDIA. There is a section of the ruling dealing with sending the QDIA notice, which the two say they never received.

[austin3515]

I note that the crux of the defense is that they were able to substantiate that the notice was sent. I doubt most plan administrators could produce such a critical piece of information.

Of couirse, had they not been defaulted, there never would have been a law suit. So again I ask, considering the defendants spent $100,000 defending their claim (perhaps more), which was worse again?

[Lou S.]

B is much worse. Unless you've picked a horrific set of target date funds that have an ungodly expense ratio and/or fail to invest according to its stated goals, I think a participant would have a hard time finding a judge who would rule the trustee made an imprudent decision with the participants money by putting them in a target date fund. OTHO if you default participants to MMK you may find a lot of judges who think that is an imprudent long term investment strategy for retirement, more so with the current DOL guidence out. Especially with MMK rates near 0% even before any possible program charges.

[austin3515]

I just goit the impression from the sited case that had the notice not been sent, the ruling might have gone the other way. In other words, you're not entitled to the safe harbor unless you send out the notice.

Again, I come back to my original point - would anyone have sued? Everyone always talked about how perhaps it would not be prudent to invest in the money market, but were the lawsuits on that topic that were lost? Due to poeple really sue unless they lose principal? I don't know, but I'd like to know if anyone can site a case where a trustee was held liable for investing in the mmkt as opposed to a balanced fund.

Most people would regard never getting into court as preferrable to prevailing in court because of the expense associated with the latter.

[Kevin C]

If you don't provide the notice, you are under the normal fiduciary rules, like in a trustee directed plan. After all, the investment is not being made based on a participant election.

As far as lawsuits the other way, here is one from the news section. http://www.courthousenews.com/2012/03/06/44457.htm

[Bird]

So again I ask, considering the defendants spent $100,000 defending their claim (perhaps more), which was worse again?

I don't see where it cost them $100,000. They were sued for losses in that amount.

I still say to use the target date funds.

[austin3515]

OK, maybe not $100K, but a LOT of money.

And with respect to the sited Kraft case, I'm not sure that's quite the same thing as defaulting someone into the money market. That particular fund was supposed to invest exclusively in Kraft stock and it didn't.

I should clarify that I'm following the QDIA rules based on the flawed assumption that my clients are distributing the notice in all cases.

Anyone has a case where defaulted participants sued over being put in a money market, I'd love to see it. This was of course the norm for decades, so by the DOL's rationale there should be dozens of them!!

[MoJo]

Again, I come back to my original point - would anyone have sued? ....

Um, well, I think the answer is yes, but perhaps not right now (unless you are in a MM fund that actually has a negative return - and some of them do). But 30 years from now, when a participant doesn't have enough money to retire on because it was invested in a MM fund - you bet, some one will sue.

[austin3515]

But some should have already sued, because they have defaulted into MMKT since the 80's. So if they haven't sued yet, why would they ever sue?

[K2retire]

But some should have already sued, because they have defaulted into MMKT since the 80's. So if they haven't sued yet, why would they ever sue?

Back in the 80s money markets actually paid interest.

[austin3515]

There are stable value funds that do pay interest. And I think at some point before I retire money markets will start paying interest again (I'm a bit younger though, admittedly).

[austin3515]

From EBIA's commentary on the case sited above (empahsis added by me):

In any event, this case underscores the importance of adhering to prudent procedures—and documenting those procedures—when carrying out fiduciary functions. For more information, see EBIA’s 401(k) Plans manual at Section XXVI.J (“Protection for Default Investments”).

Link to their article:

http://www.ebia.com/WeeklyArchives/CourtCases/20952

[austin3515]

Another case written up by CCH. Again, a costly lawsuit that would have been AVOIDED had they never tried to use the QDIA... Where are the lawsuits about leaving money in the money market?? I implore you to share with me!!

http://hr.cch.com/news/pension/080312a.asp

[austin3515]

And here's another one. Any law suits over stable value funds? The silence has been deafening

http://www.erisa-lawyers.com/documents/Bid...llments_000.PDF

[BG5150]

And here's another one. Any law suits over stable value funds? The silence has been deafening

http://www.erisa-lawyers.com/documents/Bid...llments_000.PDF

I don't understand part of this.

Who were the plaintiffs in this case? Just a few (disgruntled) participants? Or all of them?

Was it just the plaintiffs who didn't get the notice or was it everyone?