On April 29, 2008, the Department of Labor (DOL) released amendments to the qualified default investment alternative (QDIA) regulations it issued last Fall. It also published Field Assistance Bulletin (FAB) 2008-03 relating to QDIAs. Together the amendments and the FAB clarify a number of questions left unanswered by the final regulations when they were issued.
The concept of a qualified default investment alternative arises from Section 404(c)(5) of ERISA, which was added by the Pension Protection Act of 2006 and provides fiduciary when plan assets are invested in default investments that meet specific requirements. It was left to the DOL to fill in the details on what constitutes a covered default investment arrangement and any other requirements for the protection offered by Section 404(c).
After the final regulations were issued, plan sponsors and employee benefits professionals raised a number of questions with the DOL. The amendment of the regulations and the FAB answer some, but not all, of these questions. The amendment clarifies the following points:
“Round trip” restrictions
A restriction on the ability of the participant or beneficiary to reinvest in a QDIA within a defined period of time is not necessarily an impermissible restriction that is barred during the 90-day period beginning on the date of the participant’s first elective contribution or first investment in a QDIA. However, if such a “round-trip” restriction would affect the participant’s or beneficiary’s ability to liquidate or transfer from a QDIA or to invest in any other investment alternative, then it would be impermissible.
QDIA managers
The rule permitting a plan sponsor who is a named fiduciary to manage a QDIA also extends to a committee of the plan sponsor.
Grandfather rule
The amendments expand the existing grandfather relief to apply to provide relief to stable value products and funds, which must primarily invest in investment products that are backed by state or federally-regulated financial institutions, whether the products are issued directly by the institution or the principal and accrued interest on the product is backed by contracts issued by the institution.
The FAB clarifies the following points:
· A plan sponsor that chooses to create and manage a QDIA itself will be relieved of liability for decisions to invest all or part of a participant’s or beneficiary’s account in a QDIA only if it is the named fiduciary. It will not be relieved of liability for the management of the QDIA or the prudent selection and monitoring of the QDIA.
· If the notice and other requirements for relief under the final regulations are satisfied, the relief is available (except as may otherwise be provided in the regulations) with respect to all assets invested in the QDIA, even assets invested prior to the effective date of the regulations and assets invested in a QDIA on behalf of participants and beneficiaries who fail to give investment direction after receiving notice without regard to whether they made an earlier affirmative election to invest in the QDIA.
· The description of the “fees attendant to the investment alternative” includes sales loads, sales charges, redemption fees, surrender charges, exchange fees, account fees, purchase fees, mortality and expense charges and, if applicable, the expense ratio. If the information provided in the notice satisfies final fee disclosure regulations to be issued by the DOL, it will be considered to satisfy this requirement.
· Fee and expense information may be provided in the form of separate documents furnished at the same time as the notice, including a fund prospectus or profile.
· Plan sponsors do not have to combine the QDIA notice with automatic enrollment arrangement notices.
· The QDIA notice can be combined with the required notice for a traditional safe harbor 401(k) plan, just as it may be combined with notices for automatic contribution arrangements.
· The 90-day restriction on restrictions, fees or expenses in a QDIA does not apply to participants or beneficiaries who have “existing” assets invested in the plan on the effective date of the regulations.
· A plan sponsor can use more than one QDIA (i.e. for different types of contributions) so long as all meet the requirements of a QDIA.
· An investment fund must have some fixed income exposure in order to be a QDIA.
· The special rule which permits use of a 120-day capital preservation QDIA for a 120-day period following a participant’s first elective contribution is limited to contributions made under an eligible automatic contribution arrangement as described in Section 414(w) of the Internal Revenue Code. Use of such a QDIA for assets not contributed pursuant to an eligible automatic contribution arrangement does not provide relief from liability.
· Under the grandfather rule for stable value funds, if a plan sponsor did not distribute a notice 30 days prior to the effective date of the regulations to obtain relief for prior contributions to a stable value fund or product, relief will be available 30 days after the initial notice is distributed (but only with respect to assets invested in the stable value fund before the effective date of the final regulations).
Conclusion
This guidance provides welcome clarity on a number of the questions that have been troubling plan sponsors that are trying to make sure that they are complying with the requirements of the regulations in order to get the relief from fiduciary liability offered by the use of a QDIA. However, as always, some questions remain and new questions undoubtedly will be discovered.
Ian Kopelman is a partner at DLA Piper Rudnick Gray Cary US LLP. Ian is also PSCA’s legal counsel.