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DOL Updates Guidance on Qualified Default Investment Alternatives

    Client Alerts
  • May 02, 2008

This week the U.S. Department of Labor issued additional guidance on Qualified Default Investment Alternatives (“QDIAs”), including technical corrections to final regulations issued in October 2007 (discussed in detail in an EmployNews article on October 26, 2007 found at link).  The Department of Labor also issued a Field Assistance Bulletin (“FAB”) addressing frequent questions it has received since publication of the final regulations.  Subject to certain conditions, the QDIA regulations are intended to relieve retirement plan fiduciaries from liability for investing participant accounts in a QDIA when the participants have not provided investment directions.  Among other clarifications, the FAB addresses the following issues:

  • The guidance explains when the regulatory relief applies for assets invested in a default investment prior to the effective date of the regulation (December 24, 2007), including with respect to participants who affirmatively elected to invest in a QDIA prior to the effective date.  The requirement to provide the QDIA notice and other conditions still apply. 
  • Fiduciary relief may be available if non-elective contributions such as qualified non-elective contributions (QNECs), or the proceeds from litigation or settlements, are invested in a QDIA, provided the affected participant is generally given the opportunity to direct the investment of such contributions and the other regulatory conditions for relief are met.
  • The QDIA rules apply to ERISA-covered 403(b) plans.
  • The QDIA notice rules require disclosure of information regarding fees and expenses of the QDIA.  The FAB states that such information would include sales loads, sales charges, deferred sales charges, redemption fees, surrender charges, exchange fees, account fees, purchase fees, mortality and expense fees and expense ratios.  A mutual fund QDIA prospectus may satisfy this requirement at least in part.
  • The QDIA notice can be provided electronically, but investment materials may not.
  • For plans with qualified automatic contribution arrangements (“QACAs”) or eligible automatic contribution arrangements (“EACAs”), the QDIA notice does not have to be incorporated with the QACA and/or EACA required notice, but they may be combined.  
  • The QDIA notice can be combined with the 401(k) safe harbor notice for safe harbor plans.
  • Participants generally must be allowed 90 days following the first investment in a QDIA to transfer or withdraw assets from the QDIA without fees.  A plan sponsor or service provider can pay any redemption fees that would otherwise be assessed to the account of a participant who affects such transfer or withdrawal. (The FAB notes that it does not address the character of such payments for tax purposes.)
  • The 90-day restriction against the imposition of fees noted above does not apply to participants’ “existing” assets invested in a QDIA as of December 24, 2007.  The general requirement that assets defaulted into a QDIA cannot be subject to any restrictions, fees or expenses not otherwise applicable to participants who elected to invest in the QDIA still applies.
  • An investment fund or product with zero fixed income (or zero equity) cannot qualify as a QDIA.
  • A plan sponsor can use two different QDIAs, for example, one for its automatic contribution arrangement, but another for rollover contributions.  To obtain the fiduciary relief offered by the regulations, all of the QDIA conditions must be satisfied with respect to each QDIA.