The Pension Protection Act of 2006 (PPA) encouraged automatic enrollment in individual account plans by amending section 404(c) of ERISA to provide a safe harbor for plan fiduciaries who invest participant assets in the absence of participant investment direction. Once participants have been given an opportunity to direct the investment of their funds and fail to do so within a specified time, a plan fiduciary may invest those assets in a qualified default investment alternative (QDIA) and qualify for the safe harbor, assuming specified conditions are met.
On October 24, 2007, the Department of Labor (DOL) published final regulations that permit three types of QDIAs, all of which offer a mix of stocks and bonds (target date, life cycle and similar funds; balanced funds and managed accounts). These rules will become effective December 24, 2007.
The insurance and stable value industry had lobbied intensively for stable value funds to be included as QDIAs, but were unsuccessful. In the final regulations, the DOL explained its decision to exclude stable value funds by saying that when such investments are the exclusive component of a participant’s account, they would "not over the long-term produce rates of return as favorable as those generated by products, portfolios and services included as qualified default investment alternatives, thereby decreasing the likelihood that participants invested in capital preservation products will have adequate retirement savings."
Although the DOL did not include stable value funds as QDIAs, it did provide three concessions to the industry. First, participant default funds placed in stable value investments prior to December 24, 2007, will be grandfathered provided all other requirements of the regulations are met. Second, QDIAs offered through variable annuity or similar contracts will not lose their safe harbor status provided all other terms of the exemption are met. Finally, after December 24, 2007, a plan sponsor may invest participant assets in a stable value fund for up to 120 days and still retain the safe harbor protection. After that initial 120 day period, however, the stable value fund will not be a permissible default investment.
We will provide additional information on QDIAs in a future report.
The DOL press release announcing the final regulations can be found here.
The DOL fact sheet summarizing the final regulations can be found here.
The full text of the final regulations can be found here.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
