Larry Goldbrum, General Counsel of The SPARK Institute, said all of its issues were addressed by the final rules. SPARK asked for a grandfather rule for default funds in place before the final QDIA regulations that now qualify as QDIAs, and the final rules do provide for relief extending back to when those defaults were first adopted by plans.
SPARK was also concerned it did not make sense to give passive investors more fund information than active investors, Goldbrum said. The proposed regulations required all materials for QDIA funds to be provided to participants defaulted into them. The final rules limit the information that must be provided to only the fund prospectus and an annual report upon request.
In addition, the DoL requires that participants be given the opportunity to opt-out of automatic enrollment and retrieve their defaulted monies from the plan without penalty. According to Goldbrum, SPARK asked if a redemption fee is considered a penalty and the DoL responded by saying any fund that imposes a redemption fee within the first 90 days of investing will not qualify as a QDIA.
One interesting point made by Goldbrum concerned the DoL’s reasoning for deciding the annual participant notice of fund defaults can no longer be included in a Summary Plan Description (SPD). The DoL said the notice was too important to be included in an SPD as participants could overlook it or it would lose its importance. Goldbrum stated that, while this is about default investments and not plan fees, the concern that important information would get lost in an overwhelming document could apply to fees also.
David Wray, President of the Profit Sharing/401(k) Council of America (PSCA),
Wray noted there were issues where PSCA did not get exactly what it asked for during the comment period. For one, he noted that PSCA asked for a two-year period for the two step approach of an initial investment in a capital preservation fund and then a move to a QDIA, but he said PSCA feels the 120-day rule should be sufficient to protect those who opt-out early from market volatility.
The final rule limits stable value investments that are grandfathered under its protections to those that bind the plan sponsor under a contract requiring participant direction or a distributable event before funds can be moved or else a penalty will be assessed. But as Wray pointed out, contracts with stable value providers almost uniformly require this, so the transition rule will cover most previously defaulted dollars.
The insurance industry argued heavily for the inclusion of stable value funds as a QDIA. Reports indicate the insurance industry is greatly disappointed by the final regulation, but Jack Dolan, Vice President, American Council of Life Insurers, said the industry is focused on the positives.
"We wish it had been different, but we're not surprised," Dolan said. One of the key messages he said the industry wants to get across to plan sponsors is that stable value funds remain an entirely appropriate investment option for a plan. The Council has always said plan sponsors are in the best position to determine what is appropriate for their workforce, according to Dolan.
Dolan said their companies and representatives will be educating plan sponsors about the regulation and how stable value funds can still be play a crucial role in 401(k) plans. He added the Council wants to dismiss any notion that the regulation affects anything beyond default investments.
Matt Smith, Managing Director, Russell Retirement Services, noted plan sponsors are going to start in earnest making decisions on defaults now that the final rules are out.
He said he tells plan sponsors the most important thing to keep in mind now is to give themselves the proper amount of time to do due diligence on default options and consider different implementation paths. For example, Smith said deciding on target date funds is more complex than it may look as there are significant differences among funds offered.
Smith suggests plan sponsors consider the experience of fund managers, and the objective of funds, and not just accept funds their recordkeeper offers.
Wray noted there will also be a lot of provider systems changes needed to take full advantage of all provisions in the final regulations.
Additionally, he pointed out that, while the choice of the type of QDIA is not a fiduciary decision, the choice of fund manager and the monitoring of funds ongoing are still fiduciary functions of the plan sponsor. Sponsors must have a process in place for choosing and monitoring QDIA providers and managers.