• New DOL Guidance on Qualified Default Investment Alternatives
  • May 14, 2008
  • Law Firm: Ogletree, Deakins, Nash, Smoak & Stewart, P.C. - Greenville Office
  • Employers that have adopted qualified default investment arrangements for their 401(k) plans now have a new resource to help work through potential problems, including issues related to investments that predate the qualified default investment alternative (QDIA) rules, the coordination of QDIA and other plan-related notices, grandfathered stable value funds, and so-called “round trip” restrictions.  This resource is in the form of a Q&A released by the Department of Labor (DOL) on April 29 as Field Assistance Bulletin (FAB) 2008-03.  That same day, the DOL revised its QDIA regulations to include certain corrective amendments.

    Under the Employee Retirement Income Security Act (ERISA), fiduciaries of participant-directed individual account plans are not liable for losses when participants or beneficiaries exercise control of investment of their accounts, if the plan satisfies the requirements of ERISA Section 404(c).  The Pension Protection Act of 2006 added new ERISA Section 404(c)(5), which provides that a participant who has the opportunity to direct the investment of his or her account but does not provide investment directions, is treated as exercising control over his or her account with respect to assets that the plan invests in a QDIA in accordance with DOL regulations.  On October 24, 2007, the DOL published the final regulation implementing the provisions of ERISA Section 404(c)(5). 

    Following issuance of the final QDIA regulation, the DOL received many common questions.   FAB 2008-03 provides guidance on the most frequently asked questions regarding QDIAs, in the form of 22 questions and answers addressing the scope of the QDIA regulation, notice requirements, the 90-day limitation on fees and restrictions, the 120-day capital preservation QDIA, and grandfather relief for stable value funds.  Among the issues discussed in FAB 2008-03 are the following: 

    • A committee established by a plan sponsor and that, pursuant to the plan documents, is a named fiduciary of the plan and is comprised primarily of employees of the plan sponsor can manage a QDIA. 
    • Plan sponsors are not required to combine the required QDIA notice with the other notices required by the Internal Revenue Code and ERISA (for example, notices of qualified automatic contribution arrangements, traditional safe harbor plan notices, and notices regarding 90-day withdrawals from eligible automatic contribution arrangements). However, the QDIA notice requirements and the other notice requirements can be satisfied in a single disclosure document; and the DOL and IRS have coordinated to provide a sample notice.  FAB 2008-03 states that the DOL considers the information required to be in a safe harbor notice and a QDIA notice are sufficiently related so that combining the notices would improve, rather than complicate, the disclosure of plan information to participants and beneficiaries.
    • Relief is available under the QDIA regulation for assets invested in a default investment prior to the effective date of the regulation if all conditions of the QDIA regulation are satisfied.  However, relief is not available for fiduciary decisions made prior to the effective date of the QDIA regulation, such as decisions by fiduciary to invest assets in a default investment.  The relief also extends to assets invested in a QDIA on behalf of participants and beneficiaries who, following the effective date of the QDIA regulation, fail to give investment direction after being provided the required notice, without regard to whether the participant made an earlier affirmative election to invest in the default investment.  This result may be significant when plan records cannot establish whether an investment was a result of a participant’s affirmative election. 


    For example, assume that prior to the effective date of the QDIA regulation, plan sponsor (Sponsor) used default A as the default investment for its plan, an investment that would not qualify as a QDIA under the regulation (for example, a money market fund).  Following publication of the QDIA regulation, Sponsor decides to change to default B, an investment that qualifies as a QDIA, but Sponsor is unable to distinguish between those participants who directed that their assets be invested in default A and those participants who were defaulted into default A.  If Sponsor distributes a new investment election form to all participants and beneficiaries invested in default A, relief under the QDIA regulation is available to Sponsor with respect to assets that are moved into QDIA default B and are held in the plan accounts of participants and beneficiaries who fail to respond to the investment election form, if all the requirements of the QDIA regulation are otherwise satisfied. Alternatively, if default A is an investment that would qualify as a QDIA under the regulation and Sponsor complies with the notice and other requirements necessary to establish default A as a QDIA, Sponsor would be relieved of liability with respect to all assets invested in default A without regard to whether the assets were the result of a default investment.