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Approximately one-third of eligible workers do not
participate in their employers’ 401(k)-type plans. Studies suggest that
automatic enrollment plans (in which workers “opt-out” of plan
participation rather than “opt-in”) could reduce this rate to less
than 10%, significantly increasing retirement savings.
The Pension Protection Act (PPA) President Bush signed
into law in 2006 removed impediments to employers adopting automatic
enrollment, including employer fears about legal liability for market
fluctuations and the applicability of state wage withholding laws.
These impediments had prevented many employers from
adopting automatic enrollment, or had led them to invest workers’
contributions in low-risk, low-return “default” investments.
The PPA directed the Department of Labor to issue a
regulation to assist employers in selecting default investments that best
serve the retirement needs of workers who do not direct their own
investments.
The Department issued a proposed regulation on
September 27, 2006, and received more than 120 public comments. After
considering the many issues raised by commenters, the Department’s
Employee Benefits Security Administration promulgated the final regulation
on October 24, 2007.
By facilitating the adoption of automatic enrollment
plans, and by encouraging investments appropriate for long-term retirement
savings, the Department estimates the rule will result in between $70
billion and $134 billion in additional retirement savings by 2034.
The final regulation provides the following conditions
that must be satisfied in order to obtain safe harbor relief from
fiduciary liability for investment outcomes:
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Assets must be invested in a “qualified
default investment alternative” (QDIA) as defined in the regulation.
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Participants and beneficiaries must
have been given an opportunity to provide investment direction, but
have not done so.
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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.
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Material, such as investment
prospectuses, provided to the plan for the QDIA must be furnished to
participants and beneficiaries.
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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.
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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.
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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:
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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);
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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);
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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
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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, plan sponsor or a committee
comprised primarily of employees of the plan sponsor that 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.
Recognizing that some plan sponsors adopted stable
value products as their default investment prior to passage of the Pension
Protection Act and this final regulation, the regulation provides a
transition rule. The regulation “grandfathers” these arrangements by
providing relief for contributions invested in stable value products prior
to the effective date of the final rule. The transition rule does not
provide relief for future contributions to stable value products.
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.
A copy of the regulation is available on the agency’s
Web site at www.dol.gov/ebsa under “Laws and Regulations.”
This fact sheet has been developed by the U.S. Department
of Labor, Employee Benefits Security Administration, Washington, DC 20210.
It will be made available in alternate formats upon request: Voice Telephone:
202.693.8664; Text Telephone: 202.501.3911. In addition, the information in this fact
sheet constitutes a small entity compliance guide for purposes of the Small
Business Regulatory Enforcement Fairness Act of 1996.
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