Qualified Default Investment Alternatives (QDIA) – DOL Final Regulations

The DOL announced the release of DOL Final Regulation - Default Investment Alternatives Under Participant-Directed Individual Account Plans, which establishes qualified default investment alternatives (QDIA), providing a way to automatically enroll participants in their 401(k) plans:

"A fiduciary of a plan that complies with this final regulation will not be liable for any loss, or by reason of any breach, that occurs as a result of such investments."

The regulations are effective December 24, 2007.

The Department of Labor also provided a Fact Sheet, which discusses the background of the regulation, provides an overview of the final regulation, identifies the qualified default investment alternatives, and discusses some other provisions. Here are some highlights:

• "The final regulation provides the following conditions that must be satisfied in order to obtain safe harbor relief from fiduciary liability for investment outcomes:
  
  
  • Assets must be invested in a "qualified default investment alternative" (QDIA) as defined in the regulation. Participants and beneficiaries must have been given an opportunity to provide investment direction, but have not done so.
    
  • A notice generally must be furnished to participants and beneficiaries in advance of the first investment in the QDIA and annually thereafter. The rule describes the information that must be included in the notice.
    
  • Material, such as investment prospectuses, provided to the plan for the QDIA must be furnished to participants and beneficiaries.
    
  • Participants and beneficiaries must have the opportunity to direct investments out of a QDIA as frequently as from other plan investments, but at least quarterly.
    
  • The rule limits the fees that can be imposed on a participant who opts out of participation in the plan or who decides to direct their investments.
    
  • The plan must offer a "broad range of investment alternatives" as defined in the Department's regulation under section 404(c) of ERISA.

  The final regulation does not absolve fiduciaries of the duty to prudently select and monitor QDIAs."
  

• "The final regulation does not identify specific investment products – rather, it describes mechanisms for investing participant contributions. The intent is to ensure that an investment qualifying as a QDIA is appropriate as a single investment capable of meeting a worker's long-term retirement savings needs. The final regulation identifies two individually-based mechanisms and one group-based mechanism – it also provides for a short-term investment for administrative convenience."
  
• "The final regulation provides for four types of QDIAs:
  
  
  • A product with a mix of investments that takes into account the individual's age or retirement date (an example of such a product could be a life-cycle or targeted-retirement-date fund);
    
  • An investment service that allocates contributions among existing plan options to provide an asset mix that takes into account the individual's age or retirement date (an example of such a service could be a professionally-managed account);
    
  • A product with a mix of investments that takes into account the characteristics of the group of employees as a whole, rather than each individual (an example of such a product could be a balanced fund); and
    
  • A capital preservation product for only the first 120 days of participation (an option for plan sponsors wishing to simplify administration if workers opt-out of participation before incurring an additional tax).

  A QDIA must either be managed by an investment manager, plan trustee, or plan sponsor who is a named fiduciary, or be an investment company registered under the Investment Company Act of 1940.
  

  A QDIA generally may not invest participant contributions in employer securities."
  

• "The final regulation clarifies that a QDIA may be offered through variable annuity contracts or other pooled investment funds."
  
• "The rule provides that ERISA supersedes any State law that would prohibit or restrict automatic contribution arrangements, regardless of whether such automatic contribution arrangements qualify for the safe harbor."

Effective Christmas Eve, New Default Investment Alternatives Regulations Answer Automatic Enrollment Questions discusses the recent history of automatic enrollment and the problems faced when participants did not make an affirmative investment election.