New Regs Covering Default 401(k) Investments Provide Fiduciary
Relief For Plan Sponsors

(Published October 12, 2006)

Currently, many plan sponsors use money market or similar investments when they must invest employees' 401(k) contributions without direction from them — so-called default investments. Plan sponsors were afraid that other investment options could potentially lead to fiduciary-based lawsuits. With the expected rise of employers using negative-option 401(k)s due to the passage of the Pension Protection Act of 2006, Congress realized that money market investments would not give participants the necessary returns needed for their retirement. As part of the Act, they directed the DOL to issue new regulations that would provide fiduciary relief for plan sponsors that offered default investments other than just money market accounts.

On September 27, 2006, the Employee Benefits Security Administration (part of the DOL) issued proposed regulations that relieve plan sponsors of fiduciary liability if they offer qualified default investment alternatives (QDIAs) to their 401(k) participants. In order to qualify as a QDIA, certain notice and investment standards must be met. 

Six Conditions to Relief  

Plans would be required to satisfy these six conditions before fiduciaries are relieved of responsibility for employees' default investments. 

• Assets would need to be invested in QDIAs. This would be defined to include life-cycle or targeted-retirement-date funds; balanced funds; or professionally managed accounts. Whatever investments are chosen as the default, they must be diversified so as to minimize the risk of large losses (note that large isn't quantified). The regs would also impose further limitations: no investments in employer stock (there are two exceptions); no financial penalties or other restrictions on employees who later choose to exercise control over their accounts; and management by registered investment managers.

• Employees and beneficiaries must have been given an opportunity to choose investment options, but failed to do so. 

• Employees and beneficiaries would need to receive notice at least 30 days in advance of the first investment, and at least 30 days in advance of each subsequent plan year. Plans could satisfy this responsibility by furnishing a summary plan description or summary of material modifications. Content requirements: a description of the circumstances under which assets would be invested in a QDIA; a description of the investment objectives of the QDIA; and an explanation of the right of participants and beneficiaries to direct their investments out of the default investment. 

• Any material, such as investment prospectuses and other notices, provided to the plan by the QDIA would need to be furnished to employees and beneficiaries.

• Employees and beneficiaries must have the opportunity to direct investments out of the QDIA with the same frequency available to other employees. This must be no less than quarterly, but could be as often as daily.

• The plan must offer a broad range of investment alternatives (this is a current ERISA requirement).

The regs won't become effective until 60 days after final regs are issued.

To view the proposed regs in their entirety, visit: http://edocket.access.gpo.gov/2006/pdf/06-8282.pdf.

Related Topic(s): Benefits - ERISA