Compliance October 23, 2007

More Details of Final QDIA Regulation Emerge

October 23, 2007 (PLANSPONSOR.COM) - Saying it was

 

"probably the most important regulation issued resulting from

 

the Pension Protection Act of 2006," Bradford Campbell,

 

Assistant Secretary for the Employee Benefit Security

 

Administration (EBSA) at the Department of Labor, addressed

 

media representatives regarding the Final Regulations on

 

Qualified Default Investment Alternatives (QDIAs) under

 

Participant Directed Individual Account Plans.

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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:

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  • 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.

The final regulation is here. A fact sheet on the regulation from the DoL is here .

Opinions October 22, 2007

IMHO: Heightened Sensibilities

I was at a conference a couple of weeks ago, when the CEO of a large, national consulting firm stood up and commented on the increased fiduciary burden that the Pension Protection Act had placed on plan sponsors - an obligation to ensure that participants' savings are sufficient to provide an adequate retirement.
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Now, in fairness, I wasn’t paying a LOT of attention to him when he stood up.   He wasn’t on the panel, and I was trying to finish taking down some notes from the comments of someone who was.   Nonetheless, I think I got the essence of his perspective—that PPA has created a new level of fiduciary responsibility for plan sponsors—correct.

Even if I missed some nuance in that particular instance (and I wasn’t the only one to hear it that way), I’m hearing that sentiment more and more these days—at least from the provider community.

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Now, there are a lot of troubling things in the PPA for defined benefit plan sponsors, though not as bad as many feared, and certainly not as bad now that we’ve had some time to let the markets and contributions restore some of the damage from that not-so-perfect storm (see  IMHO: “Over” Blown? ).   But on the defined contribution side, I have always felt that the authors of the PPA had taken a Hippocratic Oath—choosing first to do no harm.   The PPA took a number of existing design options—automatic enrollment, contribution acceleration, participant advice, asset-allocation funds—took into account all the areas that plan sponsors had expressed concern with over the years (how much to automatically defer, how to invest those contributions, how to return contributions for workers who wanted to opt out but didn’t, how to offer participant advice…), and provided not only a structure, but some safe harbors as well.   Moreover—and IMHO, this is the best part of the PPA on the DC side—they didn’t take away a single design option, just gave us some new ones to work with (see  IMHO: PPA’s Sway ).

New Options

What that means, of course, is that if you like the concept of automatic enrollment, but find that mandatory match a bit expensive—or don’t like the idea of going back and rousing those employees who never signed up years ago with an automatic enrollment notice—nothing stops you from adopting automatic enrollment on your own terms.   You won’t get the protections of the safe harbor—but then, how many plans with automatic enrollment have a problem with passing their ADP test?   If you still prefer (despite all the industry punditry) a stable value fund for the default—or if you just want to use a managed account that’s been put together by the plan adviser—you can still do that, even though you’ll forgo the generous protections afforded the use of a qualified default investment alternative.   It’s as though the good folks in Washington finally realized they were dealing with adults, not crooks—adults who could be trusted to do the right thing(s), given the proper incentives and structure (unfortunately, the DB system wasn’t treated with the same latitude, IMHO).  

However, over the past several months, I have detected a subtle shift in the dialogue about PPA.   People have, in short order, gone from talking about how many people will adopt automatic enrollment to how everybody should—and I figure in another year, some will say everybody “must.”   People talk about how the defined contribution system HAS to change because we’ve lost the protections of the defined benefit system—even though the vast majority of private sector American workers have NEVER enjoyed those protections.   And some people—generally speaking, people in the business of selling retirement plans (though they have agents)—are beginning, in words anyway, to “convert” a plan fiduciary’s obligation to deliver a certain level of benefit via a pension plan to an obligation to ensure that the defined contribution plan fulfills that same goal.  

Now, since I don’t think you can find that obligation in ERISA—or in the PPA—it gets laid at the feet of plaintiffs’ attorneys who will sue the plan fiduciary for an inadequate result, or is rationalized as “best practices” (another term that I don’t recall stumbling across in ERISA)—or, as some surely walked away from that conference saying, “I recently heard so-and-so say….”

I’d like to believe that those who are promulgating the “enhanced” obligation view are doing so for the purest of motives—that their interest lies only in helping ensure a financially satisfying retirement for all.   Still, it seems to me that if they are successful in converting the already daunting fiduciary obligations of a defined contribution program to that of requiring—directly, or by inference—the ensuring of a defined benefit with a DC program, we’ll only do to the former what we are well on our way to doing with the latter.

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