Following the issuance of regulations by the U.S. Department of Labor (DOL) relating to Qualified Default Investment Alternatives (QDIAs), University Medical Center, Inc. (UMC) decided to change its default fund from the Lincoln Retirement Services Company Stable Value Fund to Lincoln’s Lifespan Fund. UMC did not maintain records that would allow it to determine which participants had elected to invest in the Stable Value Fund versus those participants who had been invested in that fund by default. As a result, UMC mailed notices to any participant with one hundred percent of their investment in the Stable Value Fund, advising that all existing investments in the Stable Value Fund would be transferred to the Lifespan Fund unless the participant directed otherwise by July 16, 2008.

The plaintiffs in the case failed to respond to the notice and therefore had their investments transferred to the Lifespan Fund. The plaintiffs claimed that they never received the notice—that it was only upon receiving their quarterly benefit statements they learned of the transfer. At that time, the plaintiffs returned their investments to the Stable Value Fund, but not before sustaining losses during the interim. While UMC could demonstrate that all notices had been mailed and that the addresses it had for the plaintiffs were correct, there was no evidence that the notice was received by the plaintiffs.

The U.S. Court of Appeals for the Sixth Circuit upheld the lower court’s ruling that the DOL’s QDIA regulation shielded UMC from liability to the plaintiffs. In relevant part, that regulation provides that, with certain exceptions:

[A] fiduciary of an individual account plan that permits participants or beneficiaries to direct the investment of assets in their accounts and that [satisfies certain conditions] shall not be liable for any loss, or by reason of any breach under part 4 of title I of ERISA, that is the direct and necessary result of [] investing all or part of a participant’s or beneficiary’s account in any [QDIA].

Two of the specified conditions are that 1) participants and beneficiaries have been given an opportunity to provide investment instruction but have not done so, and 2) a notice generally must be furnished to participants and beneficiaries in advance of the first investment in the QDIA and annually thereafter.

The plaintiffs did not argue that UMC failed to satisfy the required conditions set forth in the DOL regulation; they instead argued that that the DOL regulation did not apply in the first instance because they had elected to invest in the Stable Value Fund. Reviewing the DOL’s commentary to the regulation, the court made quick work of plaintiffs’ argument. It noted that the “DOL stated explicitly that ‘the final regulation applies to situations beyond automatic enrollment,’” and that it extends to any “failure of a participant or beneficiary to provide investment instruction,” “without regard to whether the participant or beneficiary was defaulted into or elected to invest in the original default investment vehicle of the plan.” Since the plaintiffs failed to provide investment instructions in response to UMC’s notice regarding the plan’s new default investment, the Sixth Circuit held that UMC was entitled to the regulation’s protections in transferring the plaintiffs’ investments. The Sixth Circuit also noted that although the plaintiffs failed to address whether proper notice was provided, UMC’s actions were “reasonably calculated to ensure actual receipt of the material by plan participants,” which is all that is required by ERISA. (Bidwell v. Univ. Med. Ctr., Docket No. 11-5493, 6th Cir. June 29, 2012)