Automatic Enrollment, QDIA Notice Feedback
Rev. 12/06/07, E-mail Alert 2007-16

Click here for updated information based on the Automatic Enrollment Final Regs, which were issued February 24, 2009.

We have received a number of calls on automatic enrollment and the QDIA notice.

Is a plan required to have a QDIA?

If a plan does not have automatic enrollment, it is not required that it have a QDIA. However, if there are participants who are defaulted into an investment, for example, due to lack of response to the investment selection, the employer who wants fiduciary relief for the default investment will need a QDIA. If the employer does not wish fiduciary relief in a plan without automatic enrollment, there is no requirement to have a QDIA.

Is there a required notice/disclosure of the investment expenses of the default election used by the plan on a normal on-going basis if the plan is not utilizing auto enrollment?

Again, if the employer wishes fiduciary relief for the default investment, then the QDIA safe harbor relief conditions including the notice requirements will need to be met. There are investment fee and expense disclosure requirements in the IRS model default investment notice.

Would there be a requirement to disclose the default fund expenses if the plan was a safe harbor auto enrollment plan?

It would appear that the answer is yes, provided the plan has participant investment direction. The rules, as proposed for automatic enrollment plans, presuppose that the plan has participant direction. Note that if the plan is employer-investment directed or a pooled investment managed by a registered investment manager, there is no guidance in the automatic enrollment proposed regulations.

If a notice/disclosure about the default investment option expenses is required, does that answer change if the default election is a common collective trust (i.e. not a publicly traded registered mutual fund)?

The final QDIA regulations state that the QDIAs may be offered through a variable annuity contract and similar contracts as well as through common and collective trust funds or other pooled investment funds; provided the QDIA satisfies all the rules the conditions of the QDIA regulations. Thus, the notice requirement must still be satisfied.

At the time of the mailing of the annual automatic enrollment notice, may an automatic enrollment plan choose to automatically enroll those who filed an election to opt out and/or those who have elected less than the minimum automatic deferral amount?

There is a question as to whether an employer with a QACA or an EACA may automatically enroll employees who have filed an election for less than the automatic amount and those who filed to opt out of the plan. Although it is in plan documents and this has been an on-going practice for an ACA, and is specifically allowed by the law, the proposed regulations do not directly address this. One issue that is directly addressed by the new regulations is that an employer cannot force a participant into the arrangement if it will reduce the amount of his or her deferral. There is no similar bar for raising the amount so seemingly, that is okay.

What are some events that give rise to the need for a default investment?

• If a participant enrolls and investment elections are not completed, and the employee does not respond timely, then the deferrals need to go into a QDIA until investment elections are clarified; i.e. incomplete enrollment or election form returned.
  
• Investment election form never returned.
  
• Profit sharing reallocation, and the individual is no longer a participant with an account balance.
  
• Reallocating forfeitures of employer matching contributions as nonelective for an eligible employee who never deferred and thus, never filled out an investment election.
  
• Switch of investment vendors and not all investments able to be mapped and former (or current) employee does not timely respond, thus a default is needed.
  

Click here for an Automatic Enrollment Article (contains proposed regulations)