DOL Advisory Group Continues Discussion of QDIA Decumulation Guidance

The 2024 Advisory Council on Employee Welfare and Pension Benefit Plans, commonly known as the ERISA Advisory Council, met on Tuesday in a public, virtual meeting to discuss, in part, lifetime income and qualified default investment alternatives, including annuities.

The council, a 15-member panel selected by the secretary of labor, is working on potential recommendations to send to the Department of Labor on what it deemed earlier this year as important topics for plans and participants. In the meeting, members discussed takeaways from testimony it heard in September regarding QDIAs and lifetime income—many of which appeared to favor the use of annuities to create guaranteed retirement income for participants.

Council members also discussed the potential benefits of annuities; stumbling blocks to both the products and plan sponsor implementation; and, finally, four proposed recommendations for the DOL.

The four draft recommendations below received significant back-and-forth among members, with no firm conclusions drawn. But for plan fiduciaries, the below areas show the council’s early thinking in terms of QDIA requests and recommendations it may send to the DOL. 

Decumulation Guidance 

The first recommendation, which received the most discussion, was for the DOL to create sub-regulatory guidance in the form of a “tips” document for selecting decumulation options inside or outside of a QDIA. Jack Towarnicky, a council member and a counsel at Koehler Fitzgerald LLC, compared it to 2013 DOL sub-regulatory guidance on target-date funds in ERISA plans. 

The guidance, or “road map,” would need to include the criteria a plan fiduciary should consider when reviewing decumulation options, along with general principles drawn from past court rulings on fiduciary litigation. Towarnicky pointed out that, even if the DOL provides this guidance, courts could ultimately disagree, and each case would depend on the “facts and circumstances.” 

“What we are really focusing in on is: … What is the process the plan sponsor or plan investment fiduciary should follow when selecting that decumulation option? So that we’re not basically held to what was the actual result or outcome other than the ongoing duty to monitor,” he said. 

A few members of the council, however, voiced concern about how the tips would be framed and the scope of requirements put on the fiduciary.

Council member Shaun O’Brien, policy director at the American Federation of State, County and Municipal Employees, noted, among other points, that the tips should not only address “procedural prudence,” referring to the process of making plan decisions, but “substantive prudence,” referring to the merits of the investment decision itself.

Council member Jeffrey Lewis, a partner in Keller Rohrback LLP, said he felt the document could be made similar to the DOL’s Interpretative Bulletin 95-1, which addresses selection of an annuity provider under the Employee Retirement Income Security Act. 

“It looks at things that need to be taken into account … as far as all the things that make these [annuities] complicated, and it should be left there,” he said.

He went on to say that the council should not be guiding the DOL on what court decisions to consider in creating such a bulletin, which he called outside of the scope of its role.

QDIA Guidance and Education

The second draft recommendation called on the DOL to provide guidance to plan sponsors and fiduciaries to “improve participant education, notices, transparency, and disclosure” for QDIA investments, including accumulation, transition and decumulation, either in or outside of the QDIA. 

“This proposal is intended to address numerous comments and testimony regarding the financial literacy … [regarding] QDIA investments,” said Towarnicky, of Koehler Fitzgerald. “We believe there needs to be more education specifically on QDIAs. Participants typically do not look beyond the notices that they receive, if they even read those notices.” 

Automatic Rollover Safe Harbor 

The third proposal was for the DOL to amend the safe harbor for automatic rollovers to individual retirement accounts, aligning it with the safe harbor for QDIAs. The recommendation would allow a safe harbor for fiduciaries to make investment decisions on funds that can be forced out of a retirement plan into an IRA—which, after the SECURE 2.0 Act of 2022, were boosted to $7,000 from the previous $5,000. 

“What we are recommending is that the automatic rollovers, which are typically involuntary … align better with the QDIA safe harbor that we have in 404c-5,” Towarnicky said, referring to the DOL QDIA safe harbor regulation.

He pointed to research showing that participants often fail to adjust their investments when shifted from a plan with a QDIA investment into a cash preservation option in an IRA—meaning many participants leave their investments for long periods of time in what are often lower-growth options.

“What we are suggesting here is that the safe harbor should be amended so that the safe harbor [for plan sponsors] applies if the assets are rolled into something that meets the definition of a QDIA that has a growth component,” explained Holly Verdeyen, a partner in and the U.S. defined contribution leader at Mercer, who is also a council member. 

Actual Knowledge

The final recommendation the council considered was for the DOL to confirm the documentation needed to ensure participants have “actual knowledge” of the QDIA investments into which they are allocated, even if the QDIA includes decumulation options such as annuities. The guidance would, in turn, help to “reduce fiduciary concerns about belated, aged claims” concerning QDIAs, according to the draft proposal. 

“Here you have the situation where people don’t read the notices that we send them, and so there’s no process where we can be reasonably comfortable that folks understand the investments that we default them into,” Towarnicky said.

O’Brien, of AFSCME, argued that the recommendation should actually be part of the second proposal related to improved disclosures and notice to participants of what is in their QDIA. He said he saw the recommendation as looking to protect fiduciaries from litigation, and he would not ultimately support it.

“Let’s be direct about what this is,” he said. “This is to make it easier to block lawsuits alleging fiduciary breaches—that’s what the purpose of this is.” 

Lewis, of Keller Rohrback, agreed with O’Brien’s assessment that the recommendation is intended to limit lawsuits, which is not in line with ERISA, and that he would not support it in its current form. He went on to say it “might be palatable” if it was changed to “something that required better disclosures” of the products and lifetime income options in the QDIA.

“I would support that kind of a recommendation,” he said. “Then leave it to the courts to decide whether the disclosures in the particular case constituted ‘actual knowledge’ or not.” 

The ERISA Advisory Council will meet again in a public, online session later this year.