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Date: |
April 29, 2008 |
Memorandum For: |
Virginia C. Smith
Director of Enforcement Regional Directors |
From: |
Robert J. Doyle Director of Regulations
and Interpretations |
Subject: |
Guidance Regarding Qualified Default Investment Alternatives (29
CFR § 2550.404c-5)
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On October 24, 2007, the Department of Labor (Department) published a
final regulation(1) providing relief from certain fiduciary responsibilities
under the Employee Retirement Income Security Act (ERISA) for investments
made on behalf of participants or beneficiaries who fail to direct the
investment of assets in their individual accounts. See 29 CFR §
2550.404c-5 (hereafter referred to as the “QDIA regulation”). Since
publication of the QDIA regulation, a number of issues have been raised
concerning the scope and meaning of various provisions of the QDIA
regulation. This Bulletin is intended to supplement the QDIA regulation by
providing guidance, in a question and answer format, on a number of the
most frequently asked questions.
A plan sponsor that chooses to create and manage a QDIA itself may
be relieved of liability for decisions to invest all or part of a
participant’s or beneficiary’s account in a QDIA only if the plan
sponsor is a named fiduciary (see § 2550.404c-5(e)(3)(i)(C)). The plan
sponsor would not be relieved of liability for the management of the QDIA
(see § 2550.404c-5(b)(1)(ii)) or the prudent selection and monitoring of
the QDIA (see § 2550.404c-5(b)(3)).
Yes, if all conditions of the QDIA regulation are satisfied with
respect to such assets. The relief available under the QDIA regulation is
not limited to assets that are invested in a QDIA on or after the
effective date of the regulation. If the notice and other requirements for
relief under the QDIA regulation are satisfied, the fiduciary will, except
to the extent otherwise limited by the regulation, be relieved of
liability with respect to all assets invested in the QDIA, without regard
to whether the assets were contributed prior to the effective date of the
regulation. The fiduciary will have the benefit of the relief under the
QDIA regulation for fiduciary decisions made on or after the date that all
requirements of the QDIA regulation have been satisfied. However, relief
is not available for fiduciary decisions made prior to the effective date
of the QDIA regulation, such as decisions by a fiduciary to invest assets
in a default investment.
Yes. The relief available under the QDIA regulation would extend
to all assets invested in a QDIA on behalf of participants and
beneficiaries who, on or after the effective date of the regulation, fail
to give investment direction after being provided the required notice
without regard to whether the participant or beneficiary made an earlier
affirmative election to invest in the default investment. This result may
be significant when plan records cannot establish that an investment was
the direct and necessary result of a participant’s or beneficiary’s
exercise of control for purposes of ERISA section 404(c)(1)(A) and 29 CFR
§ 2550.404c-1.
For example, assume that prior to the effective date of the QDIA
regulation, plan sponsor (PS) used Default A as the default investment for
its plan, an investment that would not qualify as a QDIA under the
regulation. Following publication of the QDIA regulation, PS decides to
change to Default B, an investment that would qualify as a QDIA under the
regulation, but PS is unable to distinguish between those participants and
beneficiaries who directed that their assets be invested in Default A and
those participants and beneficiaries who were defaulted into Default A. If
PS distributes a new investment election form to all participants and
beneficiaries invested in Default A, relief under the QDIA regulation
would be available to PS with respect to assets that are moved into
Default B and held in the plan accounts of participants and beneficiaries
who failed to respond to the investment election form, if all of the
requirements of the regulation are otherwise satisfied with respect to
such participants and beneficiaries. Alternatively, if Default A is an
investment that would qualify as a QDIA under the regulation and PS
complies with the notice and other requirements necessary to establish
Default A as a QDIA, PS would be relieved of liability in accordance with
the QDIA regulation with respect to all assets invested in Default A,
without regard to whether the assets were the result of a default
investment.
One of the conditions for fiduciary relief under the QDIA
regulation is that the participant or beneficiary on whose behalf an
investment in a QDIA is made must have had the opportunity to direct the
investment of assets in his or her plan account, but did not direct such
investment. See § 2550.404c-5(c)(2). Although the answer to this question
may vary based on the particular facts and circumstances, if participants
and beneficiaries are not provided the opportunity to direct the
investment of plan assets that result from non-elective contributions such
as QNECs, or the proceeds from litigation or other settlements, at least
one of the conditions for fiduciary relief will not have been satisfied,
and relief would not be available under the QDIA regulation. To the extent
a participant or beneficiary is, in fact, given the opportunity to direct
the investment of such contributions, or after such amounts are allocated
to a participant’s or beneficiary’s plan account and the participant
or beneficiary is subsequently provided the opportunity to direct the
investment of those assets, the answer may be different.
The fiduciary relief provided under section 404(c)(5) of ERISA and
the QDIA regulation is available to a Code section 403(b) plan, if the
program is a “pension plan” within the meaning of section 3(2) of
ERISA and covered by Title I pursuant to section 4(a) of ERISA. For more
information regarding ERISA coverage of Code section 403(b) plans, see 29
CFR § 2510.3-2(f) and Field Assistance Bulletin 2007-02 (July 24, 2007).
Paragraph (d) of § 2550.404c-5 sets forth the information
required to be included in notices required by paragraph (c)(3) of §
2550.404c-5. Fees and expenses are addressed in paragraph (d)(3), which,
among other things, requires that the notice include “a description of
the qualified default investment alternative, including a description of
the. . . fees and expenses attendant to the investment alternative[.]”
In the absence of further guidance, the Department believes that, for
purposes of § 2550.404c-5(d)(3), participants and beneficiaries generally
should be provided information concerning: (1) the amount and a
description of any shareholder-type fees such as sales loads, sales
charges, deferred sales charges, redemption fees, surrender charges,
exchange fees, account fees, purchase fees, and mortality and expense fees
and (2) for investments with respect to which performance may vary over
the term of the investment, the total annual operating expenses of the
investment expressed as a percentage (e.g., expense ratio). In this
regard, the Department notes that it is currently developing a proposed
regulation that would establish disclosure requirements, including
requirements applicable to the disclosure of plan and investment fee and
expense information, for participant directed individual account plans.
The Department anticipates that furnishing the information required under
that regulation would satisfy the investment-related fee and expense
disclosures required by paragraph (d)(3) of § 2550.404c-5.
With regard to the form of disclosure of the fee and expense
information, the Department notes that there is nothing in the QDIA
regulation that would preclude the use of separate, but simultaneously
furnished, documents to satisfy the notice requirements of §
2550.404c-5(c)(3). Accordingly, in the absence of additional guidance, the
furnishing of a prospectus or profile prospectus of an investment
alternative subject to the Securities Act of 1933, along with the other
information required by paragraph (d) of § 2550.404c-5, could be used to
satisfy the disclosures required by paragraph (d)(3) of § 2550.404c-5.
The preamble to the QDIA regulation provides the Department’s
view that “plans that wish to use electronic means by which to satisfy
their notice requirements may rely on either guidance issued by the
Department of Labor at 29 CFR § 2520.104b-1(c) or the guidance issued by
the Department of Treasury and Internal Revenue Service at 26 CFR §
1.401(a)-21 relating to use of electronic media.” [Emphasis added.]
Accordingly, in the absence of further guidance, the Department’s views
extend only to the QDIA regulation’s notice requirement at paragraph
(c)(3) of § 2550.404c-5. However, the Department currently is working on
a separate regulatory initiative concerning the broader application of
disclosure by electronic means.
No. Although the Department did coordinate with Treasury and the
Internal Revenue Service to ensure that plan sponsors could comply with
the notice requirements of the Code (sections 401(k)(13) and 414(w)) and
ERISA (sections 404(c)(5) and 514(e)(3)) with a single, stand-alone
document, plan sponsors are not required to combine these notices. Some
plan sponsors offering a qualified automatic contribution arrangement (QACA)
under Code section 401(k)(13) will not seek the fiduciary relief provided
by ERISA section 404(c)(5). Alternatively, a plan sponsor could select a
QDIA and avail itself of the fiduciary relief provided by ERISA section
404(c)(5) under circumstances other than automatic enrollment or under an
automatic enrollment provision that is not intended to qualify under Code
sections 401(k)(13) and 414(w). Plan sponsors are free to satisfy these
notice requirements independently if they choose to do so. For plan sponsors that wish to combine these notices, the Department
coordinated with the Department of Treasury and the Internal Revenue
Service in providing a sample
notice which is available on the
internet that may be
used to help a plan sponsor satisfy these notice content requirements.
The timing requirements for these notices are not inconsistent.
Under the Department’s QDIA regulation, an initial notice generally must
be provided at least thirty days in advance of a participant’s date of
plan eligibility or any first investment in a QDIA, or on or before the
date of plan eligibility (if the participant has the opportunity to make a
permissible withdrawal as determined under section 414(w) of the Code). An
annual notice also must be provided at least thirty days in advance of
each subsequent plan year.
Under the Treasury Department’s proposed regulations on QACAs and
eligible automatic contribution arrangements (EACAs), the Treasury
Department articulated the timing requirements for the notices required
under Code sections 401(k)(13) and 414(w). See 72 FR 63144. Specifically,
a notice must be provided within a reasonable period of time before the
beginning of each plan year or a reasonable period of time before an
employee first becomes eligible under the plan. A notice is deemed to
satisfy these timing requirements if the notice is provided at least
thirty days (and not more than ninety days) before the beginning of each
plan year or, if an employee did not receive the annually-required notice
because it was provided before his or her date of eligibility for the
plan, at least by the employee’s eligibility date (and not more than
ninety days before the employee’s eligibility date).
Although the timing provisions for these notices are not identical,
plan sponsors can easily satisfy both requirements for a plan year. A plan
sponsor can satisfy the annual notice requirements under the QDIA
regulation and the Treasury Department’s proposed regulations if a
notice is provided at least thirty, and not more than ninety, days before
the beginning of each plan year. For example, the sponsor of a calendar
year plan may choose to distribute a notice on November 1 of each year. A
notice distributed on September 1 would not necessarily comply with the
Service’s rules, because September 1 is more than ninety days before the
first day of the subsequent plan year.
Further, a plan that includes an EACA under section 414(w) of the Code
and permits an employee to withdraw default contributions during the
90-day period following the date of the employee’s first elective
contribution can satisfy the Department’s initial notice requirement, as
well as the Service’s special rule for employees who do not receive the
annually-required notice due to their eligibility date, by providing a
notice on or before, but no more than ninety days before, an employee’s
date of plan eligibility. For example, if a new employee is immediately
eligible for participation on his or her first day of employment, which is
June 1, the distribution of a notice to that employee on June 1 would
satisfy both regulations.
Yes. While the QDIA regulation generally provides for disclosure
through a separate notice, the Department indicated in the preamble to the
QDIA regulation that it anticipates that the QDIA notice requirements and
the notice requirements of Code sections 401(k)(13)(E) and 414(w)(4) could
be satisfied in a single disclosure document. See 72 FR at 60455. It is
the view of the Department that the information required to be disclosed
in a notice pursuant to Code section 401(k)(12)(D) is sufficiently related
to the information required to be disclosed in the QDIA notice that
combining the notices would improve, rather than complicate, the
disclosure of plan information to participants and beneficiaries.
Yes. Paragraph (c)(5)(ii) of § 2550.404c-5 generally provides
that, for a 90-day period following the first investment in a QDIA on
behalf of a participant or beneficiary, any transfer or withdrawal of
assets from the QDIA by a participant or beneficiary cannot be subject to
any restrictions, fees, or expenses (including surrender charges,
liquidation or exchange fees, redemption fees and similar expenses charged
in connection with the liquidation of, or transfer from, the investment).
The Department included this requirement to ensure that participants and
beneficiaries would not be restricted from or penalized for moving assets
out of the QDIA during the period of time that they would be most likely
to opt out of the plan or redirect their plan investments. To the extent
that any such fees or expenses otherwise assessed to the account of a
participant or beneficiary are paid by the plan sponsor or a service
provider, and not by the participant or beneficiary or the plan generally,
the assessment of the fees or expenses would not serve to inhibit a
participant’s or beneficiary’s decision to opt out of the investment
alternative and the policy objective of the requirement at §
2550.404c-5(c)(5)(ii) would be satisfied. This Bulletin does not address
the character of these payments for Code purposes.
Paragraph (c)(5)(ii) of § 2550.404c-5 generally provides that,
for a 90-day period following the first investment in a QDIA on behalf of
a participant or beneficiary, any transfer or withdrawal of assets from
the QDIA by a participant or beneficiary cannot be subject to
restrictions, fees, or expenses.
For purposes of this requirement, the 90-day condition on restrictions,
fees or expenses does not apply to participants or beneficiaries who have
“existing” assets invested in the plan as of the effective date of the
QDIA regulation. For example, if a plan, prior to the effective date of
the QDIA regulation, used a balanced fund as its default investment, and
the balanced fund qualifies as a QDIA under the QDIA regulation, the plan
sponsor may wish to continue to use this fund as its default investment
and obtain relief under the regulation. With respect to “existing”
assets, the plan sponsor is not subject to the condition described in
paragraph (c)(5)(ii) of the regulation for a 90-day period following the
effective date of the regulation (or the date the balanced fund becomes a
QDIA). Of course, consistent with paragraph (c)(5)(iii) of the regulation,
assets invested in the QDIA cannot be subject to any restrictions, fees,
or expenses that are not otherwise applicable to participants and
beneficiaries who elected to invest in the QDIA.
However, if a new participant is enrolled in the plan on or after the
effective date of the QDIA regulation, the restriction in paragraph
(c)(5)(ii) of the final regulation will apply with respect to the first
elective contribution or other investment that is made into the balanced
fund QDIA on behalf of that participant.
No. The Department has concluded that the reference in the
preamble to the QDIA regulation to “round-trip” restrictions was too
broad and should not have been included as an example of an impermissible
restriction. As stated in the preamble to the technical corrections to the
regulation,(2) “round-trip” restrictions, unlike fees and expenses
assessed directly upon liquidation of, or transfer from, an investment,
generally affect only a participant’s ability to reinvest in the
qualified default investment alternative for a limited period of time.
This is not a restriction prohibited by paragraph (c)(5)(ii) of the final
regulation. However, to the extent that a “round-trip” restriction
would affect a participant’s or beneficiary’s ability to liquidate or
transfer from a qualified default investment alternative or restrict a
participant’s or beneficiary’s ability to invest in any other
investment alternative available under the plan, it would be impermissible
for purposes of paragraph (c)(5)(ii) of the QDIA regulation.
No. Each of the QDIA categories described in paragraph (e)(4)(i)
through (iii) of the QDIA regulation requires that the investment fund
product, model portfolio, or investment management service be “diversified
so as to minimize the risk of large losses” and be designed to provide
varying degrees of long-term appreciation and capital preservation through
a mix of equity and fixed income exposures. In the preamble to the QDIA
regulation, the Department explains that it did not intend to include
funds, products, or services with no fixed income exposure. Although an
investment option with no fixed income component may be appropriate for
certain individuals actively directing their own investments, the
Department determined that a QDIA should have some fixed income exposure.
Similarly, a fund, product, or service with no equity exposure cannot
qualify as a QDIA under paragraph (e)(4)(i) through (iii) of the QDIA
regulation.
The regulation does not establish minimum fixed income or equity
exposures necessary to satisfy the requirement for a mix within a QDIA.
The Department continues to believe that such a determination is best left
to the discretion of the entities described in paragraph (e)(3) of the
QDIA regulation in assessing the appropriateness of a particular QDIA and,
therefore, the Department does not plan to provide further guidance on the
issue.
No. In response to comments, the Department explained in the
preamble that it believed that defaulted participants should be furnished
neither less nor more material than would be provided to participants who
direct their own investments in an ERISA section 404(c) plan. The
disclosure rules set forth in paragraph (c)(4) of § 2550.404c-5,
therefore, are intended to operate in the same manner as under the section
404(c) regulations (29 CFR § 2550.404c-1). That is, for purposes of the
QDIA regulation, defaulted participants are required to be automatically
furnished, in the case of registered investment companies, the most recent
prospectus or profile prospectus (see Advisory Opinion No. 2003-11A
(September 8, 2003)) and furnished any material relating to voting, tender
or similar rights provided to the plan. See 29 CFR § 2550.404c-1(b)(2)(i)(B)(1)(viii)
and (ix). In addition, plans are required to furnish either automatically
or upon request certain information concerning the plan’s investment
alternatives, such as annual operating expenses and the value of shares or
units in the investment alternatives. See 29 CFR § 2550.404c-1(b)(2)(i)(B)(2).
Yes. Nothing in the QDIA regulation limits the ability of a plan
sponsor to use more than one QDIA, so long as all requirements of the
regulation are satisfied with respect to each QDIA.
Yes. In response to comments on the proposed regulation,
paragraph (e)(3) of the final QDIA regulation was expanded to include a
plan sponsor who is a named fiduciary of the plan in response to comments
on the proposed regulation. The Department intended that this expansion
would broadly accommodate employers that manage their plan investments
in-house. However, the reference to “plan sponsor” in paragraph
(e)(3)(i)(C) has raised questions as to whether a committee that is a
named fiduciary of the plan and is comprised primarily of employees of the
plan sponsor can manage a qualified default investment alternative when
that committee, pursuant to plan documents, is a named fiduciary. To
address this uncertainty, the Department has amended paragraph (e)(3)(i)(C)
in the technical corrections to the QDIA regulation(3) to make clear that
such a committee of the plan sponsor may manage a qualified default
investment alternative.
Yes. The 120-day capital preservation QDIA, described in
paragraph (e)(4)(iv), permits investment in a capital preservation product
for a 120-day period following a participant’s first elective
contribution (as determined under Code section 414(w)(2)(B)) to an
eligible automatic contribution arrangement (EACA). This QDIA is intended
to provide administrative flexibility to plans that satisfy the EACA
requirements and allow employees to make permissible withdrawals in
accordance with Code section 414(w)(1). Accordingly, a plan fiduciary that
uses the 120-day capital preservation QDIA for the investment of assets
other than assets contributed pursuant to an EACA will not obtain
fiduciary relief under the regulation. For example, use of the 120-day
capital preservation QDIA for a rollover from an IRA or other plan would
not relieve a plan sponsor from liability under the QDIA regulation
(unless the rollover was made during the 120-day period following a
participant’s first EACA contribution).
No. A plan sponsor is not required to use any of the QDIAs
described in the regulation for its plan, including the 120-day capital
preservation QDIA. The 120-day capital preservation QDIA, described in
paragraph (e)(4)(iv) of § 2550.404c-5, was included in the regulation to
afford plan sponsors the flexibility of using a capital preservation
investment alternative for the investment of contributions during the
period of time when employees are most likely to opt out of plan
participation.
Generally, no. The investment fund or product must be offered by
a State or federally regulated financial institution as required in
paragraph (e)(4)(iv)(A)(2) of the QDIA regulation.
No, but the relief provided by the QDIA regulation generally will
not take effect until thirty days after the initial notice required by §
2550.404c-5(c)(3) is furnished to participants and beneficiaries. For
example, if a plan sponsor distributes the initial notice on January 1,
2008 to participants and beneficiaries who were defaulted into a stable
value fund prior to the effective date of the regulation, and assuming all
other requirements of the regulation have been satisfied, the fiduciary
relief provided by the regulation would be available to the plan sponsor
on January 31, 2008 (i.e., thirty days later). Of course, regardless of
the date on which fiduciary relief is available to the plan sponsor, the
relief will extend only to assets that were invested in the stable value
product or fund on or before the effective date of the final regulation.
Paragraph (e)(4)(v) of the QDIA regulation provides “grandfather”-type
relief for assets invested in certain stable value products or funds prior
to the effective date of the regulation. Following publication of the QDIA
regulation, the Department determined that the description of stable value
products and funds as set forth in paragraph (e)(4)(v) may limit the
availability of the “grandfather”-type relief, contrary to the
intention of the Department. Accordingly, to ensure broad application of
this relief to stable value products and funds, the Department amended
paragraph (e)(4)(v) of the QDIA regulation.(4) As amended, paragraph (e)(4)(v)(A)
provides that relief is available with respect to “an investment product
or fund designed to preserve principal; provide a rate of return generally
consistent with that earned on intermediate investment grade bonds; and
provide liquidity for withdrawals by participants and beneficiaries,
including transfers to other investment alternatives.” Two additional
conditions apply: no fees or surrender charges can be imposed in
connection with withdrawals from the product or fund initiated by a
participant or beneficiary, and the product or fund must invest primarily
in investment products that are backed by State or federally regulated
financial institutions. For example, the product or fund may be issued
directly by a State or federal regulated financial institution.
Alternatively, the principal and accrued interest on the product or fund
may be backed by contracts issued by such institutions.
Questions concerning the QDIA regulation or this guidance can be
directed to the Division of Fiduciary Interpretations, Office of
Regulations and Interpretations, at 202.693.8510.
-
72 FR 60452 (Oct. 24, 2007).
-
73 FR 23349 (April 30, 2008).
-
73 FR 23349, 23350.
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73 FR 23349, 23350.
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