Navigating the QDIA Notice Requirements
The first bulletin provided a general overview of the fiduciary protections and the requirements imposed by the regulation. The second bulletin was a detailed discussion of the investments that are eligible to be QDIAs and some of the specific investment related issues. This bulletin discusses the notice and information requirements and the practical application of those rules.
As background, the Pension Protection Act of 2006 (PPA) provides fiduciaries with protection under ERISA section 404(c)(5) from losses that result from investing a defaulted participant’s account. (The fiduciary protection afforded by the QDIA regulation is commonly being called a “safe harbor” and we use that term in this bulletin.) The DOL issued a regulation that sets forth the requirements that plans must satisfy to receive that protection. Included in the requirements are that the accounts of participants who do not select the investments for their money be invested in a “qualified default investment alternative” or “QDIA” and that these individuals be given notices and specified information. (For ease of reference, we use the term “participants” in this bulletin to refer to participants and beneficiaries, except as otherwise indicated.)
Yes. The statute, ERISA section 404(c)(5), requires notices to be provided in order for the fiduciary protection to apply. Section 404(c)(5)(A) states “a participant in an individual account plan meeting the notice requirements of subparagraph (B) shall be treated as exercising control over the assets in the account…” Similarly, DOL Regulation § 2550.404c-5(c)(3) states: “a fiduciary shall qualify for the relief described in paragraph (b)(1) of this section if:…The participant or beneficiary on whose behalf an investment in a qualified default investment alternative may be made is furnished a notice that meets the requirements of paragraph (d) of this section.…”
COMMENT: We are concerned that many plans failed to give the notices late last year when the opportunity was first available. The failure to give the notice, either initially or annually, will cause the loss of the 404(c)(5) fiduciary safe harbor. However, it may be restored, at least prospectively. (See Q4 and Q6 below.) It is highly likely that, independent of the protection afforded by the notice (and the resulting safe harbor), placing defaulting participants in a QDIA-type investment is a prudent investment decision by plan fiduciaries. (This is particularly true of the managed account QDIA, since ERISA provides separate fiduciary protections where managed accounts are used.) As a result, there appears to be little, if any, risk to fiduciaries if the safe harbor is lost. Nonetheless, there is much to be said for a “belt-and-suspenders” approach to fiduciary risk management and, as a result, adherence to the QDIA conditions is recommended.
Participants need to be given both initial notices and annual notices. Initial notices must be given to employees before their assets are invested in the QDIA. Annual notices must be given every year and serve to remind participants about their default into the QDIA and their right to direct the investment of their accounts. (See the Chart at the end of this bulletin describing what types of notices need to be provided.) Fiduciaries of plans that had default investments before the regulation became effective (that is, December 24, 2007) must give participants in the default investment “a transition” notice in order to receive the protection under ERISA section 404(c)(5) for the old defaults. A transition notice serves as the initial notice for these individuals and explains to participants any changes being made to the default account. (See Q7 below and the Chart at the end of the bulletin describing the types of transition notices.)
The initial notice must be given:
(1) at least 30 days before the date the employee becomes eligible to participate in the plan (e.g., for a new participant), or at least 30 days before the date the participant's assets are invested in the QDIA (e.g., for a rollover before satisfying the eligibility requirements); or
(2) on or before the employee becomes eligible to participate for an automatically enrolled plan if participants can withdraw their deferrals within 90 days in accordance with Internal Revenue
Code ("Code") section 414(w).
The regulation does not define when an employee is considered to be "eligible to participate." For example, an employee may satisfy the eligibility provisions several months before her entry date. It is unclear whether the notice would need to be given 30 days before the employee (i) satisfied the eligibility provisions or (ii) reached her entry date. However, we believe that the correct timing would be to provide the initial notice at least 30 days before her entry date for the plan.
When defaults occur, it is most often either because an employee was automatically enrolled or an employee regularly enrolled, but did not direct her investments. In those cases, the notice must be given at least 30 days before the employee "entered" the plan. As a result, the initial notice is, by definition, given to employees, rather than to participants.
The notice has to go out to all employees who are anticipated to enter the plan, because fiduciaries cannot know who will or will not default in advance. Large plan sponsors will probably handle those notices internally. However, small plan sponsors and many mid-sized plan sponsors will need external help from their providers and advisers. As a result, some providers will need to modify their systems to include new hires in order to help provide notices to employees before they enter the plans.
Neither the statute nor the regulation provides an outer limit in terms of how far in advance the initial notice can be provided. However, the FAB provides that a notice will be deemed to satisfy the timing requirements if it is provided not more than 90 days before the employee's eligibility date.
The rest of the bulletin can be viewed online at http://www.reish.com/publications/pdf/qdianoticereq.pdf