In April, plan fiduciaries received further guidance from the Department of Labor (the “Department”) regarding the administration of Qualified Default Investment Alternatives (“QDIAs”) — investments made by plan fiduciaries on behalf of participants or beneficiaries in individual account plans who fail to direct the investment of assets. The Department’s Field Assistance Bulletin No. 2008–03 (“FAB”), published on April 29, 2008, supplements the Department’s October 24, 2007 final Regulation (“Final Regulation”) by providing guidance on the:
- scope of the regulation;
- notice requirements;
- 90-day limitation on fees and restrictions;
- management and asset allocation of QDIAs;
- capital preservation investment option; and
- grandfather relief for stable value funds.
In addition, the Department issued technical corrections to the Final Regulation on April 30, 2008 which:
- clarifies the circumstances in which plan sponsors can limit reinvestment in a QDIA;
- permits a committee consisting primarily of employees of the plan sponsor, and that is a named fiduciary of the plan, to manage a QDIA; and
- further explains the grandfather relief for stable value funds.
The Department Published the QDIA Regulation as a Final Rule on October 24, 2007
Effective December 24, 2007, the Final Regulation provides, if certain conditions are satisfied, relief for fiduciaries who invest assets of an individual account plan (generally, a defined contribution plan) in a QDIA from some of the liability for losses that may result from:
- investing all or part of a participant’s or beneficiary’s plan account in a QDIA; or
- investment decisions by a manager of the QDIA.
The types of QDIAs allowed under the Final Regulation include funds with a mix of equity and fixed income investments (i.e., life-cycle funds or targeted-retirement date funds), a balanced fund, and a professionally managed account. A capital preservation fund (such as a stable value fund) may only be used as a QDIA for the first 120 days after a participant’s first elective contribution under an eligible automatic contribution arrangement (“EACA”). The Final Regulation also requires that a special form of advance notice be provided to participants and beneficiaries and sets forth additional requirements for the QDIA. For a more detailed explanation of the October 24, 2007 Final Regulation, please see our November 2007 issue.
Field Assistance Bulletin 2008–03 Offers Further Guidance and Explains the Technical Corrections
In a series of questions and answers, the FAB addresses some of the most common questions raised by the benefits community regarding the Final Regulation. The technical corrections mirror three of the issues covered by the FAB, and therefore this article addresses both the technical corrections and the FAB together.
Scope of the Final Regulation
In the FAB, the Department has clarified several points regarding the scope of the Final Regulation:
- Plan sponsors who are named fiduciaries of their plans and who choose to create and manage a QDIA based on a mix of investments currently offered in the plan are relieved of liability for decisions to invest all or part of a participant’s or beneficiary’s account in a QDIA. Such plan sponsors, though, are not relieved of liability for the management of the QDIA and selection and monitoring of the QDIA.
- Fiduciaries may avail themselves of relief under the Final Regulation with regard to assets that were invested in a QDIA prior to the effective date of the regulation, provided all conditions of the Final Regulation (i.e., notice and other requirements) are satisfied. However, fiduciaries are not relieved of liability for any fiduciary decisions that were made prior to the effective date of the regulation.
- Relief under the Final Regulation may be obtained even with respect to assets that a participant or beneficiary affirmatively elected to invest in a QDIA prior to the effective date of the Final Regulation, as long as the participant or beneficiary fails to give investment direction on or after the effective date of the regulation, after having been provided the required QDIA notice.
- If non-elective contributions such as a qualified non-elective contribution (QNEC) or the proceeds from litigation or settlement are invested in a QDIA, it may be possible to obtain relief under the Final Regulation, but only to the extent that the participant or beneficiary is given the opportunity to direct the investment of such contributions.
- The Final Regulation may apply to Internal Revenue Code section 403(b) plans provided the plan is a “pension plan” within the meaning of Section 3(2) of the Employee Retirement Income Security Act of 1974 (“ERISA”) and covered by Title I of ERISA.
QDIA Notice Requirement
The FAB also explains the QDIA notice requirements. The information provided in the required notice to participants and beneficiaries regarding a QDIA must include a description of the fees and expenses related to the QDIA. The FAB clarifies that participants and beneficiaries must be provided with information regarding the amount and description of any shareholder-type fees and, for investments whose performance may vary over the term of the investment, the total annual operating expenses of the investment expressed as a percentage (i.e., an expense ratio). A prospectus or profile prospectus of a QDIA, along with the other information required by the QDIA notice rules, can satisfy the notice requirements with respect to the fees and expenses of the QDIA. The notice required under the Final Regulation may be in the form of separate documents provided simultaneously and may be provided through electronic means in compliance with electronic media guidance issued by the Department or the Department of Treasury (“Treasury”) and the Internal Revenue Service (“IRS”). (Incidentally, the Department states that its views on using electronic media to meet the QDIA notice requirement pertains only to the QDIA notice and not to any pass-through of investment materials and that it is working on a separate regulatory initiative regarding broader application of disclosure by electronic means.) In addition, plan sponsors are not required to combine the QDIA notice with any notices issued with respect to any automatic contribution arrangement, although the model notice provided by Treasury and the IRS may be of assistance to those plan sponsors who wish to combine these notices. The FAB notes that the required timing of the notices under Treasury’s proposed regulations on EACAs and qualified automatic contribution arrangements (“QACAs”) are not identical to the timing of the QDIA notice, but states that plan sponsors may choose to satisfy the two different sets of notice requirements at the same time (for example, the annual notices for both the automatic contribution arrangement and the QDIA may be provided at least 30, and not more than 90, days before the beginning of each plan year).
90-Day Limitation on Fees and Restrictions
The Final Regulation prohibits the imposition of any restrictions, fees, or expenses on any transfer or withdrawal of assets from a QDIA by a participant or beneficiary for the 90-day period following the first investment in a QDIA for that participant or beneficiary. The FAB explains that the limitation on fees and restrictions during this 90-day period would be satisfied if a plan sponsor or a service provider paid such a fee in lieu of assessing the fee to the participant or beneficiary. The 90-day limitation on fees and restrictions affects only funds placed in a QDIA after the effective date of the Final Regulation and is not imposed upon assets already existing in a plan as of the effective date of the regulation. The Department also retracted the reference in the preamble to the Final Regulation to “round-trip” restrictions as impermissible restrictions. Both the technical correction published on April 30, 2008 and the FAB clarify that plan sponsors may place restrictions on the ability to reinvest in the QDIA for a limited period of time (so-called “round-trip” restrictions), but only to the extent they do not restrict the right to liquidate or transfer from a QDIA in order to invest in another investment alternative available under the plan.
Management and Asset Allocation
The Final Regulation requires a QDIA to be diversified so as to minimize the risk of large losses, and to be designed to provide a mix of equity and fixed income exposure. The FAB explains that a permanent, long-term QDIA (as opposed to the short-term use of stable value funds, permitted only for the first 120 days after the first elective contribution) must have some fixed income exposure and some equity exposure, but the Department expressly declines to state what quantum of either fixed income or equity must exist. The Department also explains that participants who fail to direct their investments and who are then defaulted into the QDIA must be provided with the same amount of documentation as participants who direct their own investments in an ERISA section 404(c) plan and that the disclosure rules of the Final Regulation are meant to operate in the same manner as the disclosure rules under the ERISA section 404(c) regulations. The FAB states that a plan sponsor can have more than one QDIA, as long as each meets all of the requirements of a QDIA. Furthermore, the Department explained that the Final Regulation was intended to accommodate employers that manage their plan investments in-house by allowing plan sponsors to serve as managers of a QDIA and, in order to clarify that intent, the Department amended the Final Regulation to allow a committee comprised mainly of employees of the plan sponsor (and which is a named fiduciary to the plan) to manage a QDIA, in addition to the plan sponsor.
Stable Value Fund 120-Day Limited QDIA and Grandfather Relief
The FAB clarifies that a stable value fund or capital preservation type investment may only be used as a QDIA for a 120-day period following a participant’s first elective contribution under an EACA. Plans are not required to provide a 120-day capital preservation QDIA or, for that matter, any of the QDIAs described in the Final Regulation. The 120-day capital preservation QDIA generally cannot be managed by the plan sponsor; it must be offered by a state or federally regulated financial institution.
Grandfather relief is available under the Final Regulation only as to assets that are invested in the stable value fund on or before the effective date of the Final Regulation (December 24, 2007) and may begin only thirty days after a plan sponsor has provided the initial notice to participants and beneficiaries required under the Final Regulation.
Both the FAB and the technical corrections clarify that grandfather relief is available to stable value or capital preservation type investments only where:
- no surrender charges or fees are imposed on a participant’s or beneficiary’s withdrawals from the fund; and
- the QDIA invests primarily in investment products that are backed by state or federally regulated financial institutions. In other words, the QDIA must invest primarily in investment products that are either issued by state or federally regulated financial institutions, or are guaranteed by contracts issued by state or federally regulated financial institutions (both as to the principal and accrued interest).
The Department Signals Additional Guidance for the Future
In addition to providing user-friendly explanations and examples, the FAB also foreshadows the issuance of additional Department guidance which will round out the current guidance regarding QDIAs. The Department has signaled that it is in the process of developing a proposed regulation that will establish disclosure requirements for participant directed individual account plans, including requirements regarding disclosure of plan and investment fee and expense information. The Department states that it envisions that compliance with the proposed regulation will satisfy the investment-related fee and expense disclosures required by the Final Regulation. The Department has unofficially stated that these proposed regulations are just weeks away from issuance. As plans implement plan design choices regarding QDIAs, EACAs, and QACAs, it is likely that we will receive further guidance from the Department on the administration of these new plan features.