- reconsider the requirement that participants get a notice 30 days before the first investment in a default alternative, because it limits plans that offer automatic enrollment upon hire;
- offer greater clarification on 401(k) plan investment fees and to map out a plan to more closely monitor those fees;
- add stable value funds to the list of permitted QDIAs;
- make sure that redemption fees or other transfer restrictions applied to a QDIA at the fund level are not considered financial penalties.
The DoL proposal included a safe harbor rule that would give retirement plan sponsors some protections for the default investment options they chose (See DoL Releases Default Investment Option Safe Harbor ).
One of the comment letters came from four Democratic members of Congress, including the two incoming chairs of the House and Senate pension committees and the panels’ respective ranking Democrats. The lawmakers asked the DoL to address the effects of inflation of the rate of return, saying that the primary way “by which investments can preserve or increase capital is by earning returns that equal or exceed the rate of inflation,” and to make more clear that the goal of generating “adequate retirement savings” requires putting aside adequate savings and does not necessarily mean relying only on the unrealistic investment returns.
In the wake of 401(k) fee disclosure suits and the Government Accountability Office’s plea to Congress to consider mandating those disclosures (See GAO Urges Congress to Consider 401(k) Plan Fee Disclosure ), the letter from the legislators urges the department to more closely monitor fees and offer detailed guidance on how to compare, understand and document all fees and expenses. The letter requested that the agency make clear that employers, plan administrators and fiduciaries may not receive payments for offering certain investment options (See Plan Sponsor Sues Principal over 401(k) Fund Revenue Sharing ).
The legislators also asked the DoL to require plan sponsors provide an explanation that failure to select an option will result in a default election and to set out a process on what participants can do to exercise their right to select an option.
The Congress members signing the letter were Representatives George Miller of California and Robert Andrews of New Jersey as well as Senators Edward Kennedy of Massachusetts and Barbara Mikulski of Maryland. Kennedy and Miller are set to chair the committees in their respective chambers handling pension issues – the Senate Health, Education, Labor and Pensions Committee and the House Committee on Education and the Workforce.
The DoL also received comment letters from:
- Fidelity Investments contended that the department's disclosure requirement that says material received by a plan relating to a participant's or beneficiary's investment in a QDIA be passed to participants or beneficiaries who have been defaulted into the QDIA is too burdensome. Fidelity also asked that the final regulations provide fiduciary relief when a plan transfers participants from existing investment options to a QDIA, whether or not a participant provided instructions with respect to the original investments.
- Hewitt Associatesasked that the department apply safe harbor protections to previously defaulted amounts that are subsequently moved from either a prior default investment that was not a QDIA into a QDIA, or a QDIA to an alternative QDIA. The firm also asks that the department eliminate the requirement that a QDIA can only be managed by either an investment company registered under the Investment Company Act of 1940 or an investment manager as defined by the Employment Retirement Income Security Act (ERISA). The group also requested that the final regulation clarify that the annual default investment notice requirement does not apply to one-time default investment events.
- The American Society of Pension Professionals & Actuaries (ASPPA) asked that a principal preservation investment be added to the list of QDIAs for a period of 120 days or less, to allow plans enough time to process participants' requests to return their deferrals. The group also asked that the final regulation permit plan sponsors to provide notices to participants in a current default fund that will be a QDIA informing them that their accounts would remain in the current investment unless they make a different election and that participants be able to transfer their plan assets out of the QDIA within a certain time period for plans that do not provide more frequent investment election changes.
- Profit-Sharing/401(k) Council of America asked the department to shorten the 30-day notice requirement before investing a plan participant's assets in a default investment alternative. The group also asked that a mutual fund and pooled fund redemption fee, as well as other fees routinely applied to an investment when offered as a normal, non-default investment, not be considered a penalty. The council also suggested that the rule limits the ability of plan sponsors to manage qualified default alternatives and that these investment alternatives should be able to hold employer securities in separately managed accounts.
- The Committee on Investment of Employee Benefit Assets (CIEBA) said that the department's requirement about who can manage a QDIA could limit plan sponsors' ability to offer cost effective and well-diversified options tailored to a particular plan. The group also suggested the department shorten the 30-period required for giving a participant notice of default investment.
- Fred Reish , a prominent ERISA attorney with the law firm Reish Luftman Reicher & Cohen, said that the final regulation needs greater clarification that the third party that determines the asset allocations of a plan qualifies as an investment manager under ERISA. He also suggested a change that even though that third party is a fiduciary investment manager for the purposes of the QDIA, the independent party does not, because of that activity, become a fiduciary for the purpose of selecting or monitoring the investment options in the plan.
- Stable Value Investment Association called the DoL's definition of a QDIA too narrow and asked that it include stable value funds as a stand-alone default investment option, because plan fiduciaries may want "more conservative default investments."
- DALBAR, Inc. called the age-based default investment options "inappropriate for an employee after retirement," saying that "employees relying on the default will find that their retirement portfolio is very poorly structured to replace a paycheck for the rest of their lives." The firm also asked the agency to clarify the responsibility of the fiduciary adviser, particularly if an adviser to a plan gets the same protection as the plan sponsor.
The DoL default investment safe harbor would apply to all defined contribution plans that give participants a decision in the investments of their assets, including 401(k), 403(b), and 457 plans. However the rule only applies to plan scenarios where a plan participant's assets are invested in permitted qualified default investment alternatives (QDIAs), which include: lifecycle funds, balanced funds and managed accounts.