DOL Finalizes Qualified Default Investment Alternative Regulation

The Pension Protection Act of 2006 (PPA) required the U.S. Department of Labor (DOL) to provide fiduciary protection for default investments in participatory defined contribution plans. The DOL proposed default investment guidance in 2006 (see Watson Wyatt Insider, November 2006, December 2006 and March 2007) and now has finalized the qualified default investment alternative (QDIA) regulation.

The safe harbor generally allows three types of QDIAs: life-cycle or targeted-retirement-date funds, balanced funds and professionally managed accounts. The final regulation took effect December 24, 2007.

In related guidance, the IRS recently released proposed regulations on automatic contribution arrangements (see IRS Proposes Regulations on Automatic Contribution Arrangements).

Safe Harbor Relief for QDIAs
Under the final rules, sponsors must meet the following requirements to obtain the safe harbor relief:

• Invest assets in a QDIA (see next page for more detail)
• Give participants and beneficiaries an opportunity to provide investment direction
• Furnish an explanatory notice to participants and beneficiaries before making the first investment in the QDIA and annually thereafter (see next page for more detail)
• Provide participants and beneficiaries with material, such as investment prospectuses, provided to the plan for the QDIA
• Give participants and beneficiaries the opportunity to direct investments out of a QDIA as frequently as from other plan investments, but at least quarterly
• Do not exceed the limits on fees that plans can impose on participants who opt out of plan participation or decide to direct their investments
• Ensure that the plan offers a “broad range of investment alternatives”

QDIA Details
The DOL says that its intent is to ensure that all QDIAs are appropriate as a single investment capable of meeting a worker’s long-term retirement savings needs. Like the proposed regulation, the final regulation generally establishes three main types of QDIAs:

• A product with a mix of investments that takes into account the individual’s age, target retirement date or life expectancy (for example, a life-cycle or targeted-retirement-date fund)
• A product with a mix of investments that takes into account the characteristics of the group of employees as a whole, rather than each individual (for example, a balanced fund)
• An investment service that allocates contributions among existing plan options to provide an asset mix that takes into account the individual’s age, target retirement date or life expectancy (for example, a professionally managed account)

Unlike the proposed regulation, the final regulation provides that for the first 120 days of participation, a capital preservation product can also qualify as a QDIA. This option is available to simplify administration in plans that allow employees to opt out of participation under Code section 414(w) within 90 days of their first contribution. Also, the final regulation grandfathers contributions invested in stable value products before December 24, 2007.

A QDIA must either be managed by an investment manager, plan trustee or plan sponsor who is a named fiduciary, or be an investment company registered under the Investment Company Act of 1940. The final regulation clarifies that a QDIA may be offered through variable annuity contracts or other pooled investment funds.

Timing of Initial Notice
The final regulations provide a new notice rule for plans that allow participants to elect within 90 days of making their first contribution to withdraw contributions under section 414(w). Those plans can give participants the initial required QDIA notice “on or before the date of plan eligibility” instead of having to give 30-day advance notice.

Preemption
Under the final regulation, ERISA supersedes any state law that would prohibit or restrict automatic contribution arrangements, regardless of whether such automatic contribution arrangements qualify for the safe harbor.