DOL Proposes Default Investment Guidance

The U.S. Department of Labor (DOL) has proposed guidance concerning default investments in participant-directed defined contribution plans under ERISA section 404(c), as required by the Pension Protection Act of 2006. The guidance would protect plan fiduciaries if, in the absence of investment direction from the participant, the fiduciary invests the participant’s assets in a qualified default investment alternative (QDIA) and certain notice and other conditions are met. Plan fiduciaries would still have to prudently select and monitor any QDIAs under their plans.

The DOL proposes to make the regulation effective 60 days after it is finalized. Under the proposed regulation, the conditions for fiduciary relief are:

• Assets must be invested in a QDIA, which:
  • May be a life-cycle or targeted-retirement-date fund, a balanced fund or a professionally managed account
  • May not hold employer securities, except in limited circumstances
  • Must be diversified so as to minimize the risk of large losses
  • Must be managed by either an investment manager or an investment company registered under the Investment Company Act of 1940
  • Generally may not impose financial penalties or otherwise restrict the ability of a participant or beneficiary to transfer from the QDIA to any other investment alternative available under the plan
• Participants and beneficiaries must have been given an opportunity to provide investment direction, but failed to do so.
• A notice written so as to be understood by the average plan participant must be furnished to participants and beneficiaries at least 30 days in advance of the first investment, and at least 30 days in advance of each subsequent plan year, and must include:
  • A description of the circumstances under which assets will be invested in a QDIA
  • A description of the investment objectives, characteristics, and fees and expenses of the QDIA
  • An explanation of the right of participants and beneficiaries to direct investment of the assets out of the QDIA
  • An explanation of where to obtain information concerning the other plan investment alternatives
• Information, such as investment prospectuses, provided to the plan by the QDIA must be furnished to participants and beneficiaries.
• Participants and beneficiaries must have the opportunity to direct investments out of a QDIA with the same frequency available for other plan investments but no less frequently than quarterly, without financial penalty.
• The plan must offer a “broad range of investment alternatives” as defined in the existing 404(c) regulations.

Although many sponsors currently use stable-value and money-market funds in their plans, and the DOL considered including them, these funds do not appear on the list of approved investment vehicles for QDIAs in the proposal.

What’s Next 

The DOL invited comments on the proposed regulations and Watson Wyatt submitted suggestions, some of which were based on responses to its October web-based survey on default investments and the proposed regulations. The survey results will appear in next month’s Insider.