On October 24, 2007, the United States Department of Labor (the "DOL") published final regulations on automatic enrollment and qualified default investment alternatives ("QDIAs") for participant-directed individual account plans, including 401(k) plans. The proposed regulation was published on September 27, 2006, to implement certain provisions of the Pension Protection Act of 2006, which created the QDIA option to encourage plan fiduciaries to make suitable default investment decisions for individuals who fail to direct the investment of their accounts. The final regulation is effective on December 24, 2007.
Under the final regulation, a participant in a participant-directed individual account plan will be deemed to have exercised control over assets in his or her account if, in the absence of investment directions from the participant, the plan invests in a QDIA. A fiduciary of a plan that complies with the final regulation will not be liable for any loss, or by reason of any breach, that occurs as a result of such investment. Plan fiduciaries remain responsible for the prudent selection and monitoring of the QDIAs. Thus, the scope of the fiduciary relief provided under the final QDIA regulations is the same as the scope of the fiduciary relief provided under Section 404(c) of the Employee Retirement Income Security Act of 1974 ("ERISA"), though the final regulation provides relief to plans other than ERISA Section 404(c) plans.
Further, the scope of the relief applies beyond the automatic enrollment context. Thus, the final regulation applies to any failure to provide investment instruction, including an individual's failure to provide investment direction following the elimination of an investment alternative, a change in service provider or a rollover from another plan.
The final regulation conditions this fiduciary relief upon the satisfaction of various conditions generally applicable to Section 404(c) relief, but also (1) requires the provision of an initial notice and an annual notice to an employee whose funds may be invested in a QDIA, and (2) prohibits the plan from imposing any restrictions, fees or expenses (excluding fees or expenses charged on an ongoing basis for the operation of the investment itself such as investment management fees, distribution or service fees and 12b-1 fees) on transfers or withdrawals from a QDIA.
Under the final regulations, the DOL sanctions the following specific funds as QDIAs:
- "life cycle" funds and “targeted-retirement date” funds that take into account an individual’s age or retirement date;
- "balanced" funds having a mix of investments and taking into account the characteristics of the group of participants as a whole;
- "managed" accounts that allocate an individual's contributions among existing plan options based on his or her age or retirement date;
- stable value funds used as short-term capital preservation but only up to 120 days after the investment is made; and
- stable value funds for plan money invested in such funds before December 24, 2007.
The final regulations should make it easier for fiduciaries of 401(k) plans and other participant-directed defined contribution plans to adopt automatic enrollment and default investment plan design features.
The final regulation is available at CFR Section 2550.404c-5 and at: http://www.dol.gov/ebsa/regs/fedreg/final/07-5147.htm.