Alert May 06, 2008

DOL Provides Guidance on Default Investment Alternatives

The Department of Labor (the “DOL”) issued Field Assistance Bulletin 2008-03 under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), which provides DOL guidance concerning a safe harbor for ERISA plan fiduciaries who invest the assets of participants in a participant-directed defined contribution plan subject to ERISA (a “Plan”) in a qualified default investment alternative (a “QDIA”) and meet certain conditions.  The DOL also made certain technical corrections to the final QDIA regulation (see the October 30, 2007 Alert).  Specifically, the DOL:

  • corrected the “grandfather” relief for stable value funds by revising the definition of stable value fund.  Under the corrected definition, a stable value fund is an investment product or fund that (i) is designed to preserve principal, (ii) provides a rate of return generally consistent with that earned on intermediate grade bonds, (iii) provides liquidity for withdrawals by participants and beneficiaries (including investment transfers), (iv) does not impose fees or surrender charges in connection with withdrawals by participants and beneficiaries, and (v) invests primarily in investment products that are backed by state or federally-regulated financial institutions.  Previously, the DOL required that principal and rates of return be guaranteed by a state or federally regulated financial institution, which precluded many stable value funds from qualifying for the “grandfather” relief.  This correction is retroactive to the effective date of the final QDIA regulation;
  • clarified the scope of the relief under the final QDIA regulation, including that relief under the final QDIA regulation will be available for previously invested amounts once the requirements, including the notice requirement, are satisfied.  In this regard, the DOL noted that relief may be available after the 30-day notice requirement is satisfied, even where the notice was not provided before the effective date of the final QDIA regulation;
  • clarified that a QDIA (other than a 120-day capital preservation QDIA or a grandfathered stable value fund QDIA) must contain some fixed income and some equity investments, and that a fund that contains no fixed income (i.e., 100% equity) or no equity (i.e., 100% fixed income) could not constitute a QDIA.  The DOL indicated, however, that it does not intend to provide any guidance on how much fixed income or equity investments a QDIA must have;
  • clarified that a “plan sponsor” that may manage a QDIA may include a committee of individuals consisting primarily of employees of the plan sponsor; and
  • clarified that the limitation on restrictions, fees or expenses with respect to amounts withdrawn from the QDIA during the initial 90-day period does not apply to previously existing amounts invested in a QDIA, and also that round-trip restrictions are generally not prohibited.
The DOL also provided further guidance on other aspects of the final QDIA regulation, including with respect to the 120-day capital preservation QDIA.