Transfer to New QDIA Did Not Violate ERISA

In what is reportedly the first federal appellate court ruling in a case concerning the 2007 QDIA regulations, the 6^th U.S. Circuit Court of Appeals found University Medical Center (UMC) acted in accordance with the Department of Labor’s (DOL) interpretation of its own regulations. Participants James Christopher Bidwell and Susan Wilson argued that since they were not defaulted into the stable value fund, but rather chose that investment for their 403(b) accounts, UMC violated its fiduciary duties under the Employee Retirement Income Security Act (ERISA) by transferring their funds into a newly selected QDIA (see “Court Finds QDIA Switch not an ERISA Breach”).  

Bidwell and Wilson argued that the Safe Harbor provision in the regulation applies only to employer-selected investments made on behalf of participants who fail to elect an investment vehicle, and that neither of them qualifies as such a participant because each specifically selected the Lincoln Stable Value Fund. However, the court noted that in the preamble to the final regulation, the DOL stated explicitly that “the final regulation applies to situations beyond automatic enrollment” including circumstances such as “[t]he failure of a participant or beneficiary to provide investment direction following the elimination of an investment alternative or a change in service provider, the failure of a participant or beneficiary to provide investment instruction following a rollover from another plan, and any other failure of a participant or beneficiary to provide investment instruction.”  

Thus, the DOL emphasized that “[w]henever a participant or beneficiary has the opportunity to direct the investment of assets in his or account, but does not direct the investment of such assets, plan fiduciaries may avail themselves of the relief provided by this final regulation, so long as” the other Safe Harbor requirements are satisfied.  

Bidwell and Wilson also argued that UMC had a duty to maintain records of which investors in the Lincoln Stable Value Fund were investors by election and which were investors by default in order to afford special treatment to the investors by election. They assert that as original investors by election they had a right to have their investment remain within the Lincoln Stable Value Fund until they explicitly directed UMC otherwise.  

The court noted that the DOL has said: “It is the view of the Department that any participant or beneficiary, following receipt of a notice in accordance with the requirements of this regulation, may be treated as failing to give investment direction for purposes of paragraph (c)(2) of § 2550.404c-5, without regard to whether the participant or beneficiary was defaulted into or elected to invest in the original default investment vehicle of the plan.  Under such circumstances, and assuming all other conditions of the regulation are satisfied, fiduciaries would obtain relief with respect to investments on behalf of those participants and beneficiaries in existing or new default investments that constitute qualified default investment alternatives.” According to the court’s opinion, in essence the DOL explained that, upon proper notice, participants who previously elected an investment vehicle can become non-electing plan participants by failing to respond.   

The court said that although Bidwell and Wilson argue the DOL’s interpretation conflicts with UMC’s obligation to keep records of which participants are investors by election and which participants are investors by default, they cite no authority stating that such a recordkeeping obligation exists.   

The court also found the transfer did not violate the terms of the 403(b) plan. Although the plan states that “[a]ll elections shall control until a new election is made,” this provision must be read in conjunction with other plan provisions that provide the plan administrator with “all powers necessary to enable” the proper administration of the fund, including the power to direct a participant’s investment where no election is made, to restrict investments as necessary, and to establish uniform rules for the administration of the plan, the opinion stated. The court concluded that it is reasonable that these powers include the capacity to require plan participants either to confirm their investment election or to have their investment transferred to a new investment mechanism in the interest of aligning the administration of the fund with new federal regulations.