IMHO: It's About Time

It may have lacked the hoopla of a midnight Harry Potter release, but in retirement industry circles, last week's publication of the Department of Labor's final regulations on qualified default investment alternatives (QDIAs) was nearly as eagerly anticipated.

And, like the speculation as to which Potter character would survive the latest saga, the early betting had been that stable value would not make the QDIA cut—and, in large part, that turned out to be the case (see  More Details of Final QDIA Regulation Emerge ).   Instead, stable-value (or more precisely, capital preservation) vehicle proponents had to content themselves with a sanction as a short-term repository for contributions (up to 120 days—long enough to accommodate the 90-day period that defaulted participants have to opt out), and the assurances from the DoL that they were sure that those vehicles would find a home alongside other options in the time-focused asset-allocation products that were accorded QDIA status (ironically, IMHO, in that regard, capital preservation vehicles seemed to fare better than did pure risked-based allocation fund alternatives).

There was, however, at least one significant victory for capital preservation vehicles: the DoL’s final regulation extends the same QDIA status protections to defaulted contributions made to those vehicles prior to December 24, 2007, the effective date of the  new regulations .   To some, that decision smacked of a “sellout” by the DoL—and it certainly seems a striking inconsistency considering the clear preference accorded diversified, age-based funds in the regulations.  

Frankly, while the decision initially surprised me as well, the longer I consider it, the better I like it.

Considering the inertia associated with the choice of these selections, there is every possibility that plan sponsors permitted the flexibility to leave those existing default options in place will do exactly that (see  SURVEY SAYS: Should There be a Stable Value QDIA? )—a result that certainly has to be a concern for those who question the prudence of those investments over the long term.  

Consider the Alternatives

But consider what the result might have been had the DoL not provided that flexibility.   We could well have had to absorb millions, if not billions, of defaulted investment liquidations—movement that could have had severe financial consequences for the market(s), and potentially for the plans that would be presented with huge surrender charges.   Spared those charges, it is still possible that that massive shift of money could have occurred – departing their current positions—and entering new ones—at an unpropitious moment.  

Even if plan sponsors had decided to simply stay the course on their own (the final regulations cautioned fiduciaries that the exclusive purpose rule precluded the imposition of fees on participant balances just to achieve fiduciary protection), that decision would almost certainly—and sooner rather than later—have drawn the focus of litigators who would cite the DoL’s pronouncements as a proof statement that the investments defaulted in good faith were, in fact, imprudent.

Is this a “victory” for capital preservation proponents?   Well, perhaps in the short term, but there’s no mistaking the DoL’s clear intent.   The grandfather clause extends only to the balances so invested as of the effective date—not for contributions defaulted after that.   Frankly, much as some plan sponsors still prefer the stable-value option (and many do)—and even though the DoL didn’t say that a capital preservation default was inherently imprudent—I think it’s reasonable to expect that these monies will begin to shift toward QDIA-sanctioned alternatives in the months ahead, as they already are.   But thanks to the reasoned approach made possible by the final regulations, they will be able to do so in a measured, prudent fashion.  

It was a long time coming, but, IMHO, it was worth the wait.