“If there are say, three different providers, and the QDIA investment is only on the platform of one provider, must all default contributions be sent to that investment at that provider? Also, what happens if the participant selects Vendor X, but makes no investment election, and the QDIA is on Vendor Y’s platform? Must Vendor X then send the contributions to Vendor Y? Also, what if the participant, makes an investment election with a vendor, but it is not a valid election (e.g. the allocations are in percentages, but the percentages do not add up to 100%)?”
Michael A. Webb, Vice President, Retirement Plan Services, Cammack LaRhette Consulting, answers:
In an attempt to answer these questions, the Experts feel it is important to first clarify the definition of what constitutes the failure to make an investment election as stated in Department of Labor (DOL) Reg. §2550.404c-5. Section (c)(2) of the regulation states that the participant must have “had the opportunity to direct the investment of the assets in his or her account but did not direct the investment of the assets…” Thus, it is clear that the participant must first be given the opportunity to direct investment.
In the case of a multiple vendor plan, the participant must thus be given the opportunity to a) select a vendor, and b) make an investment election within that particular vendor. Thus, if the participant does not take these two actions, the funds would then be invested in the QDIA. And yes, this means those contributions would be invested with the vendor on whose platform the QDIA is present.
With regard to your second question, care should be taken by the plan sponsor, that contributions NOT be remitted to any particular vendor if a participant “did not direct the investment of the assets” to an investment at a particular vendor. This would avoid situations where Vendor X would need to forward contributions to Vendor Y.
The regulations do NOT address what occurs when the participant did “direct investment of the assets, but the investment election was not valid under the investment election procedures of the provider’s contract. The most common example is the one you cite, where the participant simply allocated percentages of his contributions that did not add up to 100%. In such situations, the participant did indeed “direct the investment of the assets,” so presumably the QDIA regulation would not apply. Typically the provider’s contract would contain language as to what would occur when an invalid investment election is made. It is important to note that any investment default that would be made under such a contract provision would NOT be treated as a QDIA under the plan.
NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.
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