On October 24, 2007, the Department of Labor ("DOL") issued final regulations implementing Section 404(c)(5) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), which was added by the Pension Protection Act of 2006 ("PPA"), and expands the fiduciary protections of Section 404(c) of ERISA to fiduciaries who invest plan participants' assets in certain default investment vehicles where such participants (and their beneficiaries) fail to direct the investment of the assets in their plan accounts. The regulations become effective on December 24, 2007.


Section 404(c) of ERISA generally provides that, if certain conditions are satisfied, fiduciaries of individual account plans (e.g., 401(k) plans) will not be held liable for losses incurred in the account of a participant where the participant exercises control over the assets in his or her account (individual account plans which satisfy the requirements of Section 404(c) of ERISA and the regulations thereunder, are often referred to as "ERISA 404(c) plans"). Under PPA and the regulations thereunder, a participant will be deemed to have exercised control over the assets in his or her account if the participant fails to direct the investment of such assets and the plan invests such assets in a "qualified default investment alternative" (a "QDIA"). If the plan complies with the requirements of the regulation, to the extent that the fiduciary has satisfied its fiduciary obligations with respect to the prudent selection and monitoring of the QDIA, the fiduciary will not be liable for losses that result from investments in the QDIA. The regulations make clear that a plan need not qualify as an "ERISA 404(c) plan" in order to receive relief with respect to default investments. In addition, the preamble to the regulations notes that the standards set forth in the regulations are not the sole means by which a fiduciary may satisfy his or her obligations under ERISA with respect to default investments.

General Conditions for Relief

In order to receive fiduciary relief, each of the following six conditions must be satisfied:

  • The assets must be invested in a QDIA.
  • Participants must have had the opportunity to direct the investment of assets in their accounts but failed to do so.
  • Participants must receive both an initial and annual notice of the default investment. The initial notice must be provided (i) at least 30 days before the date of plan eligibility or the date of the first investment in the QDIA or (ii) on or before the date of plan eligibility, provided the participant has the opportunity to make a "permissible withdrawal" as determined under the Internal Revenue Code of 1986, as amended (the "Code"), which generally allows participants to elect to withdraw amounts withheld from the participant's compensation and automatically contributed to the plan within 90 days of the first contribution to the plan. The annual notice must be provided within a reasonable period of time of at least 30 days before the beginning of each subsequent plan year. Although the notices may not be included as part of the plan's summary plan description or summary of material modifications, they may be included with other materials being furnished to participants.

It is anticipated that the QDIA notices will be included with those annual notices required to be provided under the Code to participants in plans which include an automatic enrollment feature. Also, if a plan fiduciary wishes to avail itself of the relief provided by the regulations as soon as possible (i.e., December 24, 2007), the initial notice must be provided by November 24, 2007. Fiduciaries who provide the initial notice after November 24, 2007 will still be eligible to receive the fiduciary protections under the regulations, however, such relief will not begin until 30 days after the notice has been provided to participants.

  • The regulations incorporate by reference the pass-through of information requirements of the regulations applicable to ERISA 404(c) plans. Materials that must be passed-through to participants would include materials provided to the plan relating to the participant's investment in the QDIA (e.g., account statements, prospectuses and proxy voting materials).
  • Participants must have the opportunity to transfer assets invested in the QDIA in accordance with the terms of the plan, but not less frequently than once within any three-month period, to other investment alternatives under the plan. In addition, during the first 90 days of a participant's investment in the QDIA, the participant's account may not be subject to any restrictions, fees or expenses (including surrender charges, liquidation or exchange fees, redemption fees and similar expenses charged in connection with the liquidation of, or transfer from, the investment). However, ongoing fees and expenses for the operation of the investment itself (e.g., investment management fees, distribution and/or service fees and "12b-1" fees) which are not imposed, and do not vary, based on a participant's decision to withdraw, sell or transfer assets out of the QDIA are permitted. In addition, after the end of the 90-day period, any transfer or permissible withdrawal shall not be subject to any restrictions, fees or expenses not otherwise applicable to a participant or beneficiary who elected to invest in that QDIA.
  • The requirement that the QDIA may not impose any restrictions, fees or expenses in connection with the investment in, or transfer or withdrawal from, the QDIA during the first 90 days of the defaulted participant's investment in the QDIA may limit the types of investment vehicles which may qualify as a QDIA. For example, stable value funds which, as discussed below, may be a permitted QDIA for the first 120 days of a default investment, may nevertheless fail to meet the other requirements necessary for QDIA status because they traditionally impose the types of fees and expenses expressly prohibited by the regulations during the first 90 days of the default investment.
  • The plan must offer a "broad range of investment alternatives" within the meaning of the regulations applicable to ERISA 404(c) plans.

QDIA Requirements

In order to be treated as a QDIA, the default investment must:

  • Generally not hold or permit the acquisition of employer securities.1
  • Satisfy the requirements described above regarding transfers from the QDIA to other investment options under the plan.
  • Be managed by an investment manager, a plan trustee, the plan sponsor who is the named fiduciary with respect to the plan or be a registered investment company (e.g., a mutual fund).
  • Fall within one of the following types of investment products:

Life-Cycle or Targeted Retirement Date Funds. Asset allocations are based on the participant's age, target retirement date (e.g., normal retirement age under the plan) or life expectancy.

Balanced Funds. Asset allocations are based on the demographics of the plan as a whole and reflect a target level of risk appropriate for participants of the plan as a whole.

If a balanced fund does not consider or adjust its balance of fixed income and equity exposures to take into account a target level of risk appropriate for the participants of the plan as a whole, the plan fiduciaries will retain this responsibility. The DOL notes in the preamble to the regulations, as a practical matter, this responsibility should be discharged by the fiduciary in connection with the prudent selection and monitoring of the investment fund product. Plan fiduciaries should carefully review the investment guidelines of any "balanced fund" to determine whether it will take into account the plan's population as a whole.

Managed Accounts. Professionally managed accounts which allocate assets of a participant's individual account in a manner similar to a life-cycle/targeted-retirement fund.

Limited Duration Capital Preservation Products (e.g., Money Market Accounts). An investment product or fund which is designed to preserve principal and provide a reasonable rate of return. These products will constitute a QDIA for no more than 120 days after the date of the participant's first elective contribution. Amounts invested in such products must be redirected to another QDIA prior to the end of the 120-day period.

Grandfathered Stable Value Funds. An investment product or fund which is generally designed to guarantee principal and a rate of return generally consistent with that earned on intermediate investment-grade bonds while providing liquidity for withdrawals by participants and beneficiaries. Existing stable value funds will constitute a QDIA solely with respect to assets which were invested before December 24, 2007.

Notice Requirements

As discussed above, participants and beneficiaries must receive advance notice of the QDIA. In addition to being written in a manner calculated to be understood by the average participant, the notice must:

  • Describe the circumstances under which assets may be invested in a QDIA and, if applicable, the circumstances under which elective contributions will be made on behalf of a participant, the percentage of such contributions and the right of the participant to not have such contributions made or to have contributions made at a different percentage.
  • Explain the participants' right to direct investment of assets in their accounts.
  • Describe the QDIA, including its investment objectives, risk and return characteristics and any fees and expenses.
  • Plans that use a limited-duration capital-preservation vehicle, such as a money market account, for the first 120 days of a participant's default investment, should also include a description of how such an investment, without participant instruction, will be redirected after 120 days.
  • Describe the right to transfer assets from the QDIA to any other investment alternative offered under the plan, including a description of any applicable restrictions, fees or expenses in connection with such transfer.
  • Explain where to obtain information regarding the plan's other investment alternatives.

In response to commenters' concerns regarding the status of existing default investment vehicles, the preamble to the regulations notes that any participant, after receipt of a notice that satisfies the requirements of the regulation, may be treated as failing to give investment direction for purposes of the regulation, regardless of whether the participant was defaulted into or affirmatively elected into the original default investment vehicle of the plan. Under these circumstances, if all other conditions of the regulations are satisfied, plan fiduciaries would obtain relief with respect to investments on behalf of such participants in existing or new default investments that constitute QDIAs.

Preemption of State Law

The PPA also amended ERISA to provide that ERISA preempts any state law that would directly or indirectly prohibit or restrict the inclusion of an "automatic contribution arrangement" as defined in ERISA and the regulations issued thereunder. The final regulations provide that ERISA will preempt any such state laws regardless of whether the plan includes an arrangement that satisfies the definition of an "automatic contribution arrangement" under the regulations.

The explicit preemption of such state laws provides a definitive answer that automatic enrollment arrangements are permissible and are not subject to any state wage deduction laws which prohibit employers from taking deductions from employees' wages without their consent.


Because each requirement of the regulations must be satisfied in order to receive the fiduciary protections offered by the regulations, it is important that plan sponsors ensure that their default investment is compliant. Plan fiduciaries who wish to take advantage of the regulations should begin reviewing their default investment vehicle to determine whether it qualifies as a QDIA and if not, whether it would be appropriate to establish a new default investment vehicle and/or transfer participants' accounts to a QDIA. In addition, because the final regulations expanded the notice content requirements, plan sponsors should also begin drafting and/or updating their notices to ensure that they comply with the regulations.