In October 2007 the Department of Labor (DOL) released final regulations governing the use of Qualified Default Investment Alternatives (QDIAs). The Pension Protection Act of 2006 (PPA) added ERISA §404(c)(5) to broaden the relief for plan fiduciaries under ERISA §404(c). The rule extends the fiduciary relief under ERISA §404(c) to situations in which a plan participant fails to choose how to invest funds, and the plan directs that the account be invested in a QDIA.
If a participant receives notice describing the default investment that will apply if he/she does not give investment instructions, and the default investment constitutes a QDIA, the participant will be treated as having exercised control over the assets that are invested in the QDIA.
A fiduciary of an individual account plan will not be liable under ERISA for any loss resulting from the investment in a QDIA, if the following requirements are met:
1) Participants receive advance notice at least 30 days before the first default investment, or at least 30 days before the date of plan eligibility. Participants must receive an annual notice at least 30 days in advance of each subsequent plan year.
Notice must be a separate written statement from the summary plan description. The notice must include: (a) description of the circumstances under which assets may be invested on behalf of the participant in a QDIA, and, if applicable, the circumstances under which elective deferrals will be made on behalf of a participant, including the percentage of the deferrals, and the right of the participant to elect not to have deferrals made (or made at a different level); (b) description of the QDIA, including a description of investment objectives, risk and return characteristics, and fees and expenses; (c) description of the participant's right to direct the investment of account in general, as well as the right to direct investments in a QDIA to any other available investment alternative, without financial penalty; (d) explanation of where participants can get information about plan investment alternatives.
2) Participants given the opportunity to direct their investments and failed to do so.
3) The assets must be invested in a QDIA. There are four alternative types of investment products that meet the definition of a QDIA. The alternatives: (a) product with a mix of investments that takes into account the individual participant's age, retirement age, or life expectancy, such as a life-cycle or targeted retirement date fund; (b) product with a mix of investments that takes into account the characteristics of a group of employees as a whole, such as a balanced fund; (c) investment service that allocates contributions among existing plan options to provide an asset mix that takes into account an individual participant's age or retirement date, such as a professionally managed account; (d) capital preservation product, but only for the first 120 days of participation. Absent participant direction, the plan fiduciary must redirect the participant's account balance into one of the above three QDIA categories after the first 120 days of participation.
There is a “grandfather” rule for plans that have used a stable value product as a default investment fund. A stable value fund will qualify as a QDIA if there are no fees or surrender charges imposed in connection with any withdrawal, the principal and rate of return are guaranteed by state or federally regulated financial institutions, and the amounts were invested before the effective date of the final regulations (December 24, 2007).
4) Plan fiduciaries must provide participants investment information such as fund prospectuses, proxy voting materials, and fund performance and expense information for the QDIA into which a participant's assets will be defaulted.
5) Participants must have the ability to direct the investment not less frequently than once in any three-month period.
6) A broad range of investment alternatives must be offered.
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