In what is reportedly the first federal appellate court ruling in a case concerning the 2007 QDIA regulations, the 6th U.S. Circuit Court of Appeals found University Medical Center (UMC) acted in accordance with the Department of Labor’s (DOL) interpretation of its own regulations. Participants James Christopher Bidwell and Susan Wilson argued that since they were not defaulted into the stable value fund, but rather chose that investment for their 403(b) accounts, UMC violated its fiduciary duties under the Employee Retirement Income Security Act (ERISA) by transferring their funds into a newly selected QDIA (see “Court Finds QDIA Switch not an ERISA Breach”).
Bidwell and Wilson argued that the Safe Harbor provision in the regulation applies only to employer-selected investments made on behalf of participants who fail to elect an investment vehicle, and that neither of them qualifies as such a participant because each specifically selected the Lincoln Stable Value Fund. However, the court noted that in the preamble to the final regulation, the DOL stated explicitly that “the final regulation applies to situations beyond automatic enrollment” including circumstances such as “[t]he failure of a participant or beneficiary to provide investment direction following the elimination of an investment alternative or a change in service provider, the failure of a participant or beneficiary to provide investment instruction following a rollover from another plan, and any other failure of a participant or beneficiary to provide investment instruction.”
Thus, the DOL emphasized that “[w]henever a participant or beneficiary has the opportunity to direct the investment of assets in his or account, but does not direct the investment of such assets, plan fiduciaries may avail themselves of the relief provided by this final regulation, so long as” the other Safe Harbor requirements are satisfied. Following the 2007 QDIA regulations, UMC changed its default fund from the Lincoln Stable Value Fund to the Lincoln LifeSpan Fund. Since plan fiduciaries at UMC did not know which participants were defaulted into the stable value fund and which participants chose the fund, they directed Lincoln Retirement Services Company to send a notice of the change to all participants who were 100% invested in the stable value fund. The letter offered an opportunity to choose to stay in the fund before the transfer date.