The regulation means plan sponsors will not be liable for investment outcomes for investments to which participants who do not otherwise select their investments are defaulted if they choose a QDIA as the default investment and follow the guidelines set out by the department. Campbell warns however that sponsors will still be responsible for prudently selecting and monitoring the particular funds that make up the QDIA and the managers of those funds.
Campbell pointed out that in the final regulation the DoL did not specify particular investment products, but provided mechanisms with which to ensure participants are invested appropriately. The QDIA options include:
- A product with a mix of investments that takes into account the individual’s age or retirement date (an example of such a product could be a lifecycle or targeted-retirement-date fund);
- An investment service that allocates contributions among existing plan options to provide an asset mix that takes into account the individual’s age or retirement date (an example of such a service could be a professionally-managed account);
- A product with a mix of investments that takes into account the characteristics of the group of employees of the employer as a whole, rather than each individual (an example of such a product could be a balanced fund); and
- A capital preservation product for only the first 120 days of participation (an option for plan sponsors wishing to simplify administration if workers opt-out of participation before incurring an additional tax).
One significant change from the proposed regulations issued last year is a transition rule by which contributions that were previously defaulted into stable value funds are grandfathered under the protections of the QDIA regulation. Such contributions invested in stable value funds prior to the effective date of the regulation (roughly, December 23) may stay invested in the funds, but new contributions for those participants going forward must be invested in a QDIA in order for the plan sponsor to remain protected from liability.
Campbell pointed out that stable value funds would likely still be a very big part of QDIAs as underlying investments.
The more broad definitions of QDIAs along with the expansion of eligible providers from just fund managers and investment managers to include plan sponsors and trustees also allows for portfolios of funds offered in the plan selected by the plan sponsor or an adviser to the plan to qualify as a QDIA. In the case where an adviser selects the asset allocation of such a portfolio, the plan sponsor would be the fiduciary or investment manager under the plan, Campbell said.
Campbell noted the DoL’s economic analysis suggests that as a result of the new regulation, by 2034 participation rates for plans might increase by as much as 8% up to 134 billion in additional retirement savings. Campbell shared a quote from Secretary of Labor Elaine Chao that reiterated this result is exactly what is intended by the new regulation: “This is a key component of the PPA and will help many more workers and their families build a nest egg for a secure and comfortable retirement.”
The following conditions must be satisfied to obtain safe harbor relief from fiduciary liability for investment outcomes:
- Assets must be invested in a QDIA as defined in the regulation.
- Participants and beneficiaries must have been given an opportunity to provide investment direction, but have not done so.
- A notice generally must be furnished to participants and beneficiaries in advance of the first investment in the QDIA and annually thereafter. The rule describes the information that must be included in the notice.
- Material, such as investment prospectuses, provided to the plan for the QDIA must be furnished to participants and beneficiaries.
- Participants and beneficiaries must have the opportunity to direct investments out of a QDIA as frequently as from other plan investments, but at least quarterly.
- The rule limits the fees that can be imposed on a participant who opts out of participation in the plan or who decides to direct their investments.
- The plan must offer a "broad range of investment alternatives" as defined in the department's regulation under section 404(c) of ERISA.
The regulation provides that a QDIA generally must not invest in employer securities.
The regulation as originally proposed by the DoL required notice be given to participants 30 days prior to eligibility for plan participation, but some commenters pointed out this would not work for plans with immediate eligibility that utilize automatic enrollment. The final rule adds that notice be given 30 days prior to eligibility or 30 days prior to the initial investment into the default fund and also includes the option to provide concurrent notice in cases where 30 days prior to the initial investment is not feasible.
Rather than stating that participants who opt out of enrollment and wish to withdraw their funds from the default investment must be allowed to do so without penalty, the regulation specifies that no fees or penalties must be imposed that are not otherwise imposed on participants who deliberately select the QDIA as an investment.
A fact sheet on the regulation from the DoL is here .