Department of Labor (DoL) officials last week released the proposed safe harbor rule governing default investment options that can be chosen by retirement plan sponsors for auto enrollment programs and scenarios in which employees fail to submit investment instructions (See DoL Releases Default Investment Option Safe Harbor ) .
The qualified default investment alternatives (QDIAs) in the proposal include:
- lifecycle or targeted-retirement date funds,
- balanced funds, and
- managed accounts.
Larry Goldbrum, executive vice president and general counsel of The SPARK Institute, said the options make sense. He pointed out that plan sponsors can look at their retirement plan participant population and cater their default investment option choice to the general demographics.
The selections give plans sponsors flexibility, Goldbrum told PLANSPONSOR.com. They can choose the option good for the plan as a whole, such as a balanced fund, or select target date funds to cater to employee age ranges, or choose the managed account option to cater to the individual participant.
However, Dallas Salisbury, president and CEO of the Employee Benefit Research Institute, expressed concern about the QDIAs proposed. He said the main issue is how plan sponsors can properly default young and mobile participants who are likely to leave the plan soon and more likely to take their money out without having some kind of stable value or money market option. The worry is that without a stable value or money market-type option (or both), people will take out their money in a down market and have to take the loss. Salisbury wants to add both a money market and a stable value option along with the three existing QDIA alternatives set out by the DoL.
Salisbury said he is also concerned that plan lawyers will pressure sponsors away from pushing for additional QDIA alternatives because of the safe harbor offered for the three approved options and the signals that the DoL hopes plans use the ones it has proposed.
While he said he certainly supports the DoL’s stated goal of continuing to encourage long-term retirement saving, Salisbury argued that it is simply unrealistic in a day when plans offer loans and hardship withdrawals as ways for participants to take money out over the short term. “That’s not how retirement plans are structured,” Salisbury said of the existing rule proposal.
On that issue, Philip Suess, principal with Mercer Investment Consulting and segment leader for its DC business, notes the DoL is not ruling out money market or stable value default investments. The point is there is protection if the plan sponsor wants to move to equity vehicles as default options, but the department maintains money market and stable value vehicles are not imprudent.
The QDIA protections mirror protections given by 404(c), Suess points out. The DoL is telling plans to follow its suggested process for selection in funds and plan officials will not responsible for losses that may be incurred. Just like 404(c), the fiduciary still has responsibility in selecting and monitoring such funds. Also, just as compliance with 404(c) is voluntary if sponsors want to afford themselves its protection, choice of a QDIA is also voluntary.
Goldbrum agrees. He said stable value and money market vehicle providers may have felt they were overlooked, but the department was signaling a shift from short-term cash preservation to more long-term growth and was removing a barrier of concern about potential lawsuits if plan sponsors choose an equity-type investment.
Related to the QDIA choices, Rich Koski, managing director at Buck Consultants, said he was surprised the DoL went with target date funds because some have what he said is a high equity exposure and unusually high fees. He also questioned the DoL’s instructions to consider the average participant in the plan as a whole when selecting a balance fund option since most of the people in the plan will not be defaulters. According to Koski, a balanced fund for defaulters should take into account those likely to use them – the younger, more mobile workers.
The proposed rule requires that a notice be furnished to participants and beneficiaries 30 days in advance of the first investment, and at least 30 days in advance of each subsequent plan year, and must include: a description of the circumstances under which assets will be invested in a QDIA; a description of the investment objectives of the QDIA; and an explanation of the rights of participants and beneficiaries to direct investment of the assets out of the QDIA. Also, any material, such as investment prospectuses and other notices, provided to the plan by the QDIA must be furnished to participants and beneficiaries.
The DoL also provided in the proposed rule that participants and beneficiaries must have the opportunity to direct investments out of a QDIA with the same frequency available for other plan investments but no less frequently than quarterly, without having to pay a fee and sponsors may not impose financial penalties or otherwise restrict the ability of a participant or beneficiary to transfer the investment from the qualified default investment alternative to any other investment alternative available under the plan.
Lynn Dudley, vice president, retirement policy at the American Benefits Council, suggested it would be good to have DoL guidance on how plan sponsors should handle a situation where a participant did not respond in the specified 30 days, were defaulted into a QDIA, and then wanted out of the default. "You need to be able to get them back out to whatever they want," she told PLANSPONSOR.com. Dudley gave the example of a participant that might have had a critical medical problem in the family and may not have been paying attention to the DoL-required notice.
Goldbrum also expressed concern about the notice requirement, specifically for plans that have immediate eligibility. Those plans will not be able to have 30 days written notice. The SPARK Institute is asking for the regulation to include that plans meet QDIA requirements if participants get notice at the time of enrollment.
Additionally, Goldbrum noted that the proposal appears to require that a defaulted employee receive more fund disclosure than participants who are actively managing their retirement accounts, and he said he feels that does not make sense.
On the issue of fees and penalties, Dudley questioned whether the DoL really means participants should be able to get out of defaults with no back-end load at all or does it really mean a low load? "You have to know more about what no fees at the end means," she said.
The requirement that a participant be allowed to transfer money out of default options without penalty also needs to be fine tuned, according to Goldbrum. Many funds charge redemption fees, and Goldbrum wonders if this is considered a penalty.
Suess did not see cost barriers to implementing a QDIA. Information can be included in Summary Plan Description to be in compliance, Suess pointed out. He said it is likely the Pension Protection Act has other provisions that would have some bearing on plan communications anyway. In addition, many plans have already moved to lifestyle or target date funds, so they will not likely have to select a new fund not previously in the plan.
One decision that may come up, Suess noted - if a plan has both managed accounts and lifestyle funds, which the plan sponsor would choose as a default. He feels lifestyle funds would likely be chosen since managed accounts tend to be more expensive.
Industry experts interviewed by PLANSPONSOR.com generally felt positive about the DoL proposal. "Overall we think it's very good. The department really listened to the needs of plan sponsors and the service provider community," Goldbrum said. Of the DoL and its proposal Dudley said, "They know what they're doing and they know this has to work."
Rebecca Moore/Fred Schneyer