The U.S. Department of Labor recently issued final regulations providing fiduciary relief to plan fiduciaries who select default investment options for their individual account plans (including 401(k) plans) which give participants the right to direct investments. These regulations, which went into effect on December 24, 2007, implement a safe harbor for default investments. Under the final regulations, participants and beneficiaries in individual account plans who are given the opportunity to direct the investment of their account but fail to do so are treated as exercising control over the assets in their accounts if the plan invests in a qualified default investment alternative (QDIA).
A plan fiduciary will not be liable for any losses that are the direct and necessary result of investing all or part of the participant's or beneficiary's account in a QDIA if all of the following conditions are met:
Assets must be invested in a QDIA which is one of three types of investment products, portfolios or services:
- A life-cycle or target-retirement-date fund or account which provides a different mix of debt and equity investments depending on the participant's age, retirement date or life expectancy;
- A balanced fund that takes into account the characteristics of the group of employees as a whole, rather than each individual; or
- An account that is individually managed.
Note: Principal preservation products such as stable value and money market funds generally do not qualify as a QDIA. However, the regulations contain a grandfather provision for investments made to certain types of stable value funds before December 24, 2007, as well as provide short-term QDIA status to these products (limited to 120 days after the date of the participant's first elective deferral) allowing plans with automatic enroll-ment provisions administrative flex-ibility in distributing deferral to participants who were automatically enrolled but elected to opt out and withdraw their deferrals within 90 days.
- Participants must have an opportunity to direct the investment of their account balances but they fail to do so.
- Written notice containing specific information must be provided to participants at least 30 days before the first investment in a QDIA and 30 days before the beginning of each subsequent plan year.
- If a mutual fund is used as a QDIA, all participants must receive a copy of the most recent prospectus at the same time they receive their initial notice and participants must have the right to request additional materials with respect to the QDIA that they have with respect to other funds available under the plan.
- Participants must have the same rights to change investment options as other plan participants, but not less than once every three months and restrictions, fees and expenses generally may not be imposed on participants defaulted into a QDIA during the first 90 days after their account is initially invested into the QDIA.
- The plan must offer a broad range of investment alternatives that satisfy the requirements of Section 404(c) of the Employee Retirement Income Security Act (ERISA).
Fiduciaries still have a duty to prudently select and monitor QDIAs under the plan and could be liable for any resulting losses if they fail to satisfy these duties. The final regulations also clarify that ERISA supersedes any state law prohibiting or restricting automatic contribution arrangements, without regard to whether the arrangements qualify for the QDIA safe harbor.
Fiduciaries of individual account retirement plans with default investments who want to avoid personal liability for investment losses that participants may experience when they fail to choose their own investments options should act to maximize the protection offered under these final regulations. In particular, plan fiduciaries should review their plan's default investment option to determine whether it is a QDIA and change the default investment option to a QDIA (if necessary). In addition, default investment safe harbor notices should be issued to all plan participants at least 30 days before the first QDIA investment (or the first day of a plan year).