FAAF: QDIA Essentials
What do the regulations mean for retirement plan sponsors, and what questions are still unanswered?
align=”center”> The Panel Audio File
Roberta Ufford, Principal, Groom Law, Chartered, explained to attendees at PLANSPONSOR’s 2008 Future of Asset Allocated Funds Conference in Newport Beach, California, that the Pension Protection Act (PPA) expanded protections for plan sponsors under Section 404(c) of the Employee Retirement Income Security Act (ERISA). Under 404(c), a fiduciary is not liable for investment decisions directed by participants if a number of conditions are met. The PPA added a provision that covers participants who do not give investment direction when first participating in the plan and treats them as still having control if they are defaulted into a fund that is considered a QDIA.
Sponsors of plans that qualify as 404(c) plans enjoy protection from liability from participants that are defaulted into these investments, but the provision of the PPA added more conditions to qualify for the protections, including more participant notification requirements, limits on fees for participants who opt out of the QDIA, and a mandate that participant transfers must be allowed at least quarterly, Ufford noted.
Fred Reish, Managing Director, Reish Luftman Reicher & Cohen, added that an implicit benefit of the new regulations in addition to the defense against suits by participants that are defaulted into a QDIA is a defense against suits by participants who actively select a QDIA as their investment choice. If it is not wrong to default a participant into the fund, then it cannot be an imprudent investment for a participant who selects it, he said.
Going forward, Reish said he believes more plan sponsors will fully describe their QDIA choice to participants and present it as a benchmark for a prudent investment selection for all participants.
Impact of the Regulations
However, there are issues to address before sponsors are that comfortable with QDIAs. The hardest part of implementing the regulations for sponsors, according to Reish, is the requirement to provide a number of participant notices. Employees eligible to participate in their company's retirement plan must be notified of what investment the plan has adopted as a QDIA. Participants must be notified 30 days prior to being defaulted that they will be defaulted into the QDIA. Plan sponsors must also send notices concerning the QDIA to those eligible annually.
A predominant problem right now, Reish said, is that some plan sponsors did not do anything about the regulations yet, and no notices were sent last year (see Building a Better Default ). For sponsors in this situation, Reish suggested sending notices right now. He reminded conference attendees that participants should be told what stable value assets are grandfathered for protection under the regulation and that they must choose a new long-term investment.
Another situation causing some confusion for sponsors concerns prior default investments that now qualify as a QDIA. If a sponsor chooses to keep their default investment and declare it a QDIA, Reish said they should give participants a 30-day notice declaring the old default a QDIA, and give 30-day notices of the QDIA default to new participants going forward. Ufford pointed out that for sponsors who did not send notices prior to December 24, 2007, there will be a gap in protection given to the QDIA under the regulations. However, she said, if the prior default was selected using a prudent process, sponsors should have no problems.
Ufford also warned conference attendees that even if all conditions of the QDIA regulations are followed, if the QDIA was imprudently selected, sponsors could still face liability. When selecting which QDIA to use - target-date funds, managed accounts, or a balanced fund - Ufford said sponsors should look at participant demographics. As an example she noted that a balanced fund would be too conservative for young participants and would be too risky for older participants.
Sponsors are still responsible for the selection and monitoring of the QDIA investment. For selecting and monitoring, there are two levels of decision-making, Ufford said: the objective, thorough, analytical, and documented process of selecting the QDIA provider; and the equally diligent process of selecting the investment by researching the fund manager and performance history. Reish stressed that, for managed accounts, sponsors should evaluate the performance of the investment manager more so than the fund.
For selection and monitoring of target-date funds, Reish said sponsors should understand the methodology used for the glide path, the methodology used in selecting underlying investments, and who is responsible for selecting underlying investments. Sponsors should also ask what the criteria is for removing funds and what costs are associated with the funds, he added.
Stable Value Defaults: To Move or not To Move
While the QDIA regulations included a provision grandfathering protection for investments defaulted into a stable value fund prior to December 24, 2007, plan sponsors may decide to move these assets into the new QDIA for cost and administrative reasons. Ufford warned that if restrictions within the stable value contract would cause a loss to participants if assets were moved, sponsors should not move them.
Reish added that sponsors should look out for "deemed extermination" provisions in the stable value contract. Instructing participants to move their stable value investments or stopping new contributions into the investments could be considered a "deemed extermination" by the provider, resulting in penalties. To avoid penalties, Reish said some sponsors are waiting for contracts to end or times when penalties are reduced, and some are moving the assets in increments.
More to Come
As with any new regulations, during the initial phase of implementation, "kinks" emerge that must be ironed out. Ufford told attendees more guidance can be expected expanding on the definition of stable value investments and addressing the resetting of prior defaults other than stable value funds. She said she also anticipates further guidance on the format for delivering notices and on notice relief for rollovers, allowing sponsors to default rollover assets temporarily until notices are sent.
In addition, according to Ufford, providers are asking about the time they must give participants to direct investments during plan conversions and sponsors are asking if they can pay any redemption fees funds charge to satisfy the limit on fees for participants who opt out of the QDIA. Answers to these and other questions should be forthcoming from the Department of Labor.
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