On October 22, 2007, the Department of Labor released its final regulation on “qualified” default investment alternatives, which are investment alternatives to be used in connection with automatic enrollment and default investment design features of a participant-directed 401(k) or similar individual account plan. If the conditions of the regulation are met, the plan fiduciary selecting the default investment alternative would be protected from fiduciary liability as a result of the investment of participant assets in that alternative.
The principal conditions to this protection from fiduciary liability are as follows:
- Assets must be invested in a “qualified default investment alternative” (a “QDIA”), as defined in the regulation;
- The participant or beneficiary whose account is being invested in the QDIA must have had the ability to direct the account investments, but has not provided a direction;
- A notice containing certain specified information must generally be furnished to participants and beneficiaries in advance of the first investment of their account assets in the QDIA and annually thereafter;
- Participants and beneficiaries must have the opportunity to direct investments out of a QDIA as frequently as from other plan investments, but at least quarterly;
- The plan must offer a diverse group of investment alternatives; and
- The QDIA must either be managed by an investment manager, plan trustee, or plan sponsor who is a named fiduciary under ERISA, or be either a registered investment company or an investment product or fund of a type described in the regulation.
Essentially adopting the provisions of the proposed regulation, the final regulation provides for three types of long-term investment options that will be deemed to be “qualified”:
- An investment fund product or model portfolio with a mix of investments that takes into account the individual’s age, target retirement date or life expectancy (such as a life-cycle or targetedretirement- date fund);
- An investment fund product or model portfolio with a mix of investments that takes into account the risk characteristics of the plan participants as a whole, rather than each individual (such as a balanced fund); and
- An investment management service that allocates contributions among existing plan options to provide an asset mix that takes into account an individual’s age, target retirement date or life expectancy (such as a professionally-managed account).
Additionally, the regulation includes capital preservation products (such as stable value funds) in the definition of a QDIA under two narrow circumstances. First, capital preservation products will be treated as QDIAs with respect to contributions invested in such products prior to the regulation’s effective date. Second, on a prospective basis, the regulation permits their use as a temporary QDIA for the employee’s first 120 days of participation.
The final regulations become effective on December 24, 2007.