Employee Benefits and
Executive Compensation
Client Advisory
November 5, 2007
Final Regulations on Qualified Default
Investment Alternatives Released
by William L. Scogland, Matthew J. Renaud, S. Tony Ling and Jorge M. Leon
The Department of Labor has
issued final safe harbor regulations
dealing with default investment
alternatives in qualified defined
contribution plans. The final
regulations implement the
provisions of the Pension
Protection Act of 2006 that expand
the relief available to plan
fiduciaries under Section 404(c) of
the Employee Retirement Income
Security Act of 1974 (“ERISA”).
Many qualified plans are designed
to invest in default funds the
contributions of plan participants
that fail to make affirmative
investment elections in plans where
they are able to direct the
investment of their contributions.
For example, these failures to make
affirmative investment elections
typically arise in the context of
automatic enrollment, nonelective
contributions, rollovers and
conversions. The final regulations
take effect on December 24, 2007.
be relieved from any liability for
investments in the QDIA. The
Department of Labor cautions that
plan fiduciaries must still comply
with ERISA’s prudence standards
in the selecting and monitoring of
the QDIA.
5. Participants invested in a QDIA
must have the opportunity to
transfer assets from the QDIA
to other investment alternatives
in the plan as frequently as for
other plan investments, but not
less than once per quarter; and
6. Participants must be offered the
opportunity to invest in a “broad
A fiduciary must meet six conditions
range of investment alternatives”
to be relieved from liability for the
under the plan.
losses under a QDIA:
Safe Harbor Conditions
1. Participants’ contributions must
be invested in a QDIA;
Categories and Conditions
of QDIAs
2. Participants must have had an
opportunity to direct the
investment of their
contributions, but failed to
provide instructions;
The final regulation provides for
four categories of QDIAs:
1. Investment products that offer a
mix of equity and fixed income
exposure that consider the
participant’s age or retirement
date (e.g., a “lifecycle” or
“targeted-retirement-date” fund);
3. Participants must receive
advance notice of investments
in a QDIA: at least 30 days in
advance of the day a participant 2. Investment products that allocate
is eligible for the plan
contributions among existing
participation, at least 30 days in
plan investment alternatives to
advance
of
any
first
investment
provide asset mixes that reflect a
Background
in a QDIA, or on or before the
participant’s age or retirement
The Department of Labor has made
day of plan eligibility if there’s an
date (e.g., a “professionallyit clear that participants in
opportunity for permissible
managed account”);
participant-directed individual
withdrawal, and on an annual
3. Investment product that offer a
account plans that fail to provide
basis within a reasonable period
mix of equity and fixed income
investment direction will be
of time of at least 30 days in
exposure with a level of risk that
deemed to have exercised control
advance of each subsequent
considers the characteristics of
of their contributions under ERISA
plan year;
the group of employees as a
Section 404(c), so long as such
4.
Participants
must
receive
any
whole rather than the individual
contributions are invested in a
materials
relating
to
the
(e.g., a “balanced” fund); and
qualified default investment
investment
in
a
QDIA
that
the
4. Capital preservation products
alternative (“QDIA”). What this
plan receives;
(including stable value funds),
means is that plan fiduciaries will
©2007 Jenner & Block LLP. Jenner & Block is an Illinois Limited Liability Partnership including professional corporations. This publication is not intended
to provide legal advice but to provide information on legal matters. Transmission is not intended to create and receipt does not establish an attorney-client
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November 5, 2007
Continued from page 1
but only for the first 120 days
after a participant’s first elective
contribution. This category is
also available for default
investments that were made
prior to the effective date of the
final regulation.
Notice Requirement
The annual and advance notices
must describe the following:
1. The circumstances under which
a participant’s contributions may
be invested in a QDIA,
including, if applicable, an
explanation of any elective
contributions that are to be
made on behalf of the
participant and the right to elect
to decline such contributions;
In all cases, a QDIA must be
managed by a registered
investment manager, a plan trustee,
a named fiduciary under the plan,
an investment company or a capital
preservation product. Except under
certain situations, a QDIA generally 2. The right to direct the
investment of plan accounts;
may not invest participant
contributions in employer securities. 3. The QDIA and its investment
A QDIA may not impose any
objectives, risk and return
restrictions, fees or expenses
characteristics, and fees
(including surrender charges,
and expenses;
liquidation or exchange fees,
4. The right to redirect the
redemption fees and similar
investment of assets to another
expenses) on any transfer of
investment fund under the plan,
assets out of the QDIA during the
along with a description of any
first 90 days.
related restrictions, fees or
expenses; and
5. An explanation of where
participants can obtain
investment information for the
plans investment funds.
Next Steps
Plan fiduciaries must determine
whether their plans provide for
default investments and whether
they wish to take advantage of the
safe harbor. If they do, plan
fiduciaries must determine whether
the default fund constitutes a QDIA.
If the default fund does not qualify
as a QDIA, plans and administrative
practices must be timely amended.
Additionally the proper notices must
be prepared and distributed at least
30 days in advance of default
investments occurring after the
December 24, 2007 effective date
in order for the safe harbor to apply.
For more information, please contact the following Jenner & Block attorneys:
William L. Scogland, Partner
Tel: 312 923-2878
Emal: [email protected]
S. Tony Ling, Partner
Tel: 312 923-2640
Email: [email protected]
Matthew J. Renaud, Partner
Tel: 312 923-2958
Email: [email protected]
Jorge M. Leon, Partner
Tel: 312 923-2815
Email: [email protected]
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