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Department of Labor Issues Regulation for DC Plans on Default Investment Options
On Wednesday, October 24, the U.S. Department of Labor (DOL) issued its final regulations regarding qualified default investment alternatives (QDIA) in defined contribution plans.
This regulation is designed to assist employers in selecting default investments that best serve the retirement needs of workers who have had an opportunity to direct their plan investments but do not actually do so. Read a broader overview of the new DOL regulation.
 "The significance of this decision can not be understated—it will prompt the most dramatic shift in employer-sponsored retirement plans in decades," says Matt Smith, Managing Director, Russell Retirement Services. "And it will leave companies of all sizes with a lot of questions to answer, a range of options to choose from, and a big transition to make."
What is a Qualified Default Investment Alternative?
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- A properly constructed mix of investments that takes into account a participant's age or retirement date (such as a lifecycle or target date fund);
- A properly constructed mix of investments that takes into account the characteristics of the group of employees as a whole, rather than each individual (for example, a balanced fund);
- An investment management service that allocates contributions among existing plan options to provide an asset mix that takes into account a participant's age or retirement date (such as a professionally managed account);
- A capital preservation product for only the first 120 days following a participant's first elective contribution to a plan (an option for plan sponsors wishing to simplify administration if workers opt-out of participation before incurring an additional tax).
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The final QDIA rule (the rule) published by the DOL contains a number of important provisions, among them:
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- QDIA Fees: The rule provides guidance on permissible investment-related fees and impermissible penalty fees.
- Limited Use of Capital Preservation Products: As a default option, a plan could include certain capital preservation products for only the first 120 days following a participant's first elective contribution to a plan (an option plan sponsors may want to explore to simplify administration if workers opt-out of participation before incurring an additional tax).
- "Grandfathering" of Stable Value Default Investments: In light of the fact that some plan sponsors adopted stable value products as their default investments prior to the passage of the Pension Protection Act and the DOL's final rule, the rule "grandfathers" investments in these products existing as of December 24, 2007. Investments in these products made on or after December 24 will not be a QDIA.
- Variable Annuities: The rule clarifies that a QDIA may be offered through a variable annuity or similar types of contracts.
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For more information...
Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, or an opinion regarding the appropriateness of any investment, nor a solicitation of any type. The general information contained in this publication should not be acted upon without obtaining specific legal, tax, and investment advice from a licensed professional.
First used: October 2007
USIMSLRC2747
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