Effective Date of the Final Regulation: December 24, 2007

The Pension Protection Act (PPA) directed the Department of Labor to issue a regulation to assist employers in selecting default investments that best serve the retirement needs of workers who do not direct their own investments.

The final regulation provides the following conditions that must be satisfied in order to obtain “safe harbor” relief from fiduciary liability from investment outcomes.

1. The default investment must be a “Qualified Default Investment Alternative” (QDIA) as defined by the regulation.
2. Participants and beneficiaries must have been given an opportunity to provide investment direction, but have not done so.
3. A notice must be furnished to participants and beneficiaries 30 days in advance of the first investment in the QDIA and annually thereafter. If by plan design, immediate eligibility applies, the notice must be given on or before the date of plan eligibility, provided the participant has the opportunity to make a permissible withdrawal.
4. QDIA Investment Descriptive Material, including investment prospectuses must be furnished to participants and beneficiaries.
5. Participants and beneficiaries must have the opportunity to direct investments out of a QDIA as frequently as from any other plan investments, at least quarterly.
6. The rule limits the fees that can be imposed on a participant who opts out of participation in the plan within the first 90 days or who decides to direct their investments. (Redemption fees) After the 90 day period, the default investment may be subject to the same transfer fees and restrictions that generally apply to all participants.
7. The plan must offer a “broad range of investment alternatives” as defined in the Department’s regulation under 404(c) of ERISA.

The final regulation provides for four types of QDIAs:

1. 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 life-cycle or targeted-retirement-date fund);
2. 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);
3. A product with a mix of investments that takes into account the characteristics of the group of employees as a whole, rather than each individual (an example of such a product could be a balanced fund); and
4. A capital preservation product for only the first 120 days of participation. Recognizing that some plan sponsors adopted stable value products as their default investment prior to passage of the pension Protection Act and this final regulation, the regulation provides a transition rule. The regulation “grandfathers” these arrangements by providing relief for contributions invested in stable value products prior to the effective date of the final rule. The transition rule does not provide relief for future contributions to stable value products.

A QDIA must be managed by an investment manager, plan trustee, or plan sponsor who is a named fiduciary, or be an investment company registered under the Investment Company Act of 1940. The plan fiduciary must prudently select and monitor an investment fund, model portfolio or investment management service within any category of qualified default investment alternatives in accordance with ERISA’s general fiduciary rules.

A QDIA generally may not invest participant contributions in employer securities.

A plan is not required to use a QDIA, but if the plan sponsor would like additional protection it is available by following the requirements of QDIA.

The QDIA Notice must contain:

1. A description of the circumstances under which assets in the individual account of a participant or beneficiary may be invested on behalf of the participant or beneficiary in a qualified default investment alternative (no investment direction provided by the participant or beneficiary after given the opportunity);
2. An explanation of the right of participants and beneficiaries to direct the investment of assets in their individual accounts;
3. A description of the Qualified Default Investment Alternative, including a description of the investment objectives, risk and return characteristics and fees and expenses attendant to the investment alternative;
4. A  description of the right of the participants and beneficiaries on whose behalf assets are invested in a qualified default investment alternative to direct the investment of those assets to any other investment alternative under the plan, including a description of any applicable restrictions, fees or expenses in connection with such transfer;
5. An explanation of where the participants and beneficiaries can obtain investment information concerning other investment alternatives available under the plan.