Mandatory Automatic Enrollment and Pooled Plans

[austin3515]

414A(b)(4)

An eligible automatic contribution arrangement meets the requirements of this paragraph if amounts contributed pursuant to such arrangement, and for which no investment is elected by the participant, are invested in accordance with the requirements of section 2550.404c-5 of title 29 [ie., a QDIA], Code of Federal Regulations (or any successor regulations).

Are pooled trustee directed plans gone for good?  That's too bad because they were a real cheap way of getting a small 401k plan in place. Participant direction is expensive (investment advice, recordkeeping, etc).

Also what if the pooled plan was invested 50/50?  Isn't a 50/50 option eligible to be used as a QDIA?

[Lou S.]

Participant Direction is not required. You can still be a pooled Trustee Directed plan as far as I know.

[austin3515]

I don't know you have to offer a QDIA as the default for auto enrollment...  We were just on a webinar where that was what they said.  HEre is Ilene's write-up from a while ago.

https://ferenczylaw.com/flashpoint-and-not-a-moment-too-soon-in-fact-a-little-late-mandatory-automatic-enrollment-guidance/

 

The QDIA Requirement and Plans with No Participant-Direction

The MAE rules require that the automatic enrollment structure meet the requirements for an eligible automatic contribution arrangement (“EACA”), including both the permissible withdrawal provision and the requirement that there be a QDIA for automatically enrolled participants.  This begs the question: what about 401(k) plans that don’t provide for participant direction of investments?

This question is not answered.  The MAE Regs reiterate the QDIA obligation, without much elucidation.  This clearly requires practitioner comments. Until the final regulation is issued, Ilene and Derrin think it would be a reasonable interpretation of the statute for a trustee-directed plan to invest automatic deferrals in QDIAs, without expanding to allow participant direction of investment.

Actually, maybe it is ok.  I just don;t know what that last sentence means.  Is it as I suggested that you can have a balanced allocation and meet the rule?  I am pretty sure that is what she is saying.  A balaced fund is listed as one of the available QDIA's (target date funds being another).

 

[Peter Gulia]

Might a fiduciary-decided investment portfolio be “invested in accordance with the requirements of [29 C.F.R. §] 2550.404c-5”?

(Observe that the statute’s text does not use the term qualified default investment alternative.)

The referred-to rule allows: “An investment fund product [sic] or model portfolio that applies generally accepted investment theories, is diversified so as to minimize the risk of large losses[,] and that is designed to provide long-term appreciation and capital preservation through a mix of equity and fixed income exposures consistent with a target level of risk appropriate for participants of the plan as a whole. For purposes of this paragraph (e)(4)(ii), asset allocation decisions for such products and portfolios are not required to take into account the age, risk tolerances, investments or other preferences of an individual participant. An example of such a fund or portfolio may be a “balanced” fund.” 29 C.F.R. § 2550.404c-5(e)(4)(ii) https://www.ecfr.gov/current/title-29/part-2550/section-2550.404c-5#p-2550.404c-5(e)(4)(ii).

If a plan does not provide participant-directed investment and instead provides a common investment for all participants, beneficiaries, and alternate payees, wouldn’t a fiduciary seeking to meet its responsibility under ERISA § 404(a)(1)(B)-(C), including diversification and impartiality, invest for a similar balance?

The statute provides: “An eligible automatic contribution arrangement meets the requirements of this paragraph if amounts contributed pursuant to such arrangement, and for which no investment is elected by the participant, are invested in accordance with the requirements of section 2550.404c-5 of title 29, Code of Federal Regulations (or any successor regulations).” Internal Revenue Code of 1986 (26 U.S.C.) § 414A(b)(4).

The Treasury’s proposed interpretation states: “An eligible automatic contribution arrangement satisfies the requirements of this paragraph (c)(4) only if amounts contributed pursuant to the arrangement, and for which no investment is elected by the employee, are invested in accordance with the requirements of 29 CFR 2550.404c-5 (or any successor regulations).” Proposed 26 C.F.R. § 1.414A-1(c)(4).

Neither text limits the phrase “no investment is elected by the participant”. And neither text describes, at least not expressly, a context in which such a fact condition might occur. Couldn’t the fact condition the phrase describes result because the plan does not provide for a participant’s investment direction?

And in that situation, would Internal Revenue Code § 414A(b)(4) be met if the fiduciary-decided portfolio is sufficiently balanced?

This is not advice to anyone.

[acm_acm]

If you're worried about using the trustee-directed account as a QDIA, the your problem is with the investment vehicle that you're forcing all the participants to use.