QDIA FAQs
Rev. 05/22/08, E-mail Alert 2008-7

On April 29, 2008, the DOL issued FAB 2008-03 in Q&A format to confirm a number of issues about Qualified Default Investment Alternatives (QDIA) regulations of October 24, 2007. The DOL also added clarification to a number of issues and made one addition to the final regulations. The DOL grouped the FAQs by six topic headings. Below is our re-write of the FAQs. The topics:

Scope of QDIA Regulations
Notice Requirements
90-day Limitation on Fees and Restrictions
QDIAs – Management And Asset Allocation
120-Day Capital Preservation QDIA
Grandfather-Type Relief For Stable Value Funds

1. Scope Of QDIA Regulation

Q&A-1 Fiduciary Relief and Responsibility
A plan sponsor creating/managing a QDIA itself may have fiduciary relief for decisions to invest a participant’s/beneficiary’s account in a QDIA only if the plan sponsor is a named fiduciary. However, the plan sponsor is still responsible and liable for the management of the QDIA or the prudent selection and monitoring of the QDIA.

Q&A-2&3
QDIA relief for a default investment used prior to the effective date of the regulations is available, provided the QDIA regulations are satisfied with respect to such assets, including providing the notice. The relief available under the QDIA regulation would extend to all assets invested in a QDIA on behalf of participants and beneficiaries who, on or after the effective date of the regulation, fail to give investment direction after being provided the required notice without regard to whether the participant or beneficiary made an earlier affirmative election to invest in the default investment. This result may be significant when plan records cannot establish that an investment was the direct and necessary result of a participant’s or beneficiary’s exercise of control for purposes of ERISA.

Example 1
Assume that prior to the effective date of the QDIA regulation, the plan sponsor (PS) used Default A as the default investment for its plan, an investment that would not qualify as a QDIA under the regulation. Following publication of the QDIA regulation, the PS decides to change to Default B, an investment that would qualify as a QDIA under the regulation, but PS is unable to distinguish between those participants and beneficiaries who directed that their assets be invested in Default A and those participants and beneficiaries who were defaulted into Default A. If PS distributes a new investment election form to all participants and beneficiaries invested in Default A, relief under the QDIA regulation would be available to PS with respect to assets that are moved into Default B and held in the plan accounts of participants and beneficiaries who failed to respond to the investment election form, if all of the requirements of the regulation are otherwise satisfied with respect to such participants and beneficiaries.

Alternatively, if Default A is an investment that would qualify as a QDIA under the regulation and PS complies with the notice and other requirements necessary to establish Default A as a QDIA, PS would be relieved of liability in accordance with the QDIA regulation with respect to all assets invested in Default A, without regard to whether the assets were the result of a default investment.

Q-4. Fiduciary relief under the QDIA regulation is available only if a participant or beneficiary has had the opportunity to direct the investment before the QDIA is used. If a non-elective contribution, such as a QNEC, or the proceeds from litigation or settlements, are invested in a QDIA without the participant or beneficiary first having had a chance to direct where the investment should go, then there is no fiduciary relief.

Q-5. The QDIA regulations, including the preemption provisions, apply to 403(b) plans if the 403(b) is an ERISA 403(b) under ERISA section 3(2).

2. Notice Requirements

Q-6. QDIA fees and expenses information must be provided in the notice or in another disclosure document. Information to be provided includes:

1. The amount and a description of any shareholder-type fees such as sales loads, sales charges, deferred sales charges, redemption fees, surrender charges, exchange fees, account fees, purchase fees, and mortality and expense fees, and
   
2. for investments with respect to which performance may vary over the term of the investment, the total annual operating expenses of the investment expressed as a percentage (e.g., expense ratio).
   

The DOL is currently drafting a proposed regulation on disclosure requirements, including requirements for disclosing plan and investment fee and expense information for participant directed individual account plans. The DOL expects this to satisfy the investment-related fee and expense disclosures required by the QDIA Notice.

The QDIA regulations permit the use of separate, but simultaneously furnished, documents to satisfy the notice requirements. Thus, a prospectus or profile prospectus of an investment alternative subject to the Securities Act of 1933 may be used in addition to the QDIA notice.

Q-7. The QDIA notice may be sent electronically by following either the DOL or IRS guidance on electronic disclosures. However, electronic distribution rules apply only to the QDIA notice requirement, and not to the pass-through of investment materials. The Department currently is working on a separate regulatory initiative concerning the broader application of disclosure by electronic means.

Q-8. The QDIA notice may be a stand-alone notice or may be combined with the safe harbor 401(k) and/or with the automatic enrollment notice. Plan sponsors are free to satisfy these notice requirements independently if they choose to do so.

Q-9. The QDIA notice timing requirement will be satisfied if it is provided using the same timeframe as the safe harbor 401(k) notice rules of 30-to-90 days before the beginning of the plan year. If an employee did not receive the annually required notice because it was provided before his or her date of eligibility for the plan, the notice is to be provided at least by the employee’s eligibility date (and not more than ninety days before the employee’s eligibility date). The QDIA notice and the EACA automatic enrollment notice timeframes are also coordinated.

For example, if a new employee is immediately eligible for participation on his or her first day of employment, which is June 1, the distribution of a notice to that employee on June 1 would satisfy both regulations.

Q-10. The QDIA, safe harbor and automatic contribution notices may be combined into a single disclosure.

3. 90-Day Limitation On Fees And Restrictions

Q-11. Plan sponsor or service provider may pay a fee or expense (e.g., redemption fee) during the initial 90-day period.
To the extent that any such fees or expenses otherwise assessed to the account of a participant or beneficiary are paid by the plan sponsor or a service provider, and not by the participant or beneficiary or the plan generally, the assessment of the fees or expenses would not serve to inhibit a participant’s or beneficiary’s decision to opt out of the QDIA within the first 90 days. The FAB does not address the character of these payments for Code purposes.

Q-12. The 90-day period is limited to the first investment in a QDIA on behalf of a participant or beneficiary.
The 90-day condition on restrictions, fees or expenses does not apply to participants or beneficiaries who have “existing” assets invested in the plan as of the effective date of the QDIA regulation.

Example 2
Prior to the effective date of the QDIA regulation, a plan used a balanced fund as its default investment, and the balanced fund qualifies as a QDIA under the QDIA regulation. The plan sponsor may continue to use this fund as its QDIA. With respect to “existing” assets, the plan sponsor is not subject to the condition described in paragraph (c)(5)(ii) of the regulation for a 90-day period following the effective date of the regulation (or the date the balanced fund becomes a QDIA). Of course, consistent with paragraph (c)(5)(iii) of the regulation, assets invested in the QDIA cannot be subject to any restrictions, fees, or expenses that are not otherwise applicable to participants and beneficiaries who elected to invest in the QDIA.

However, if a new participant is enrolled in the plan on or after the effective date of the QDIA regulation, the restriction in paragraph (c)(5)(ii) of the final regulation will apply with respect to the first elective contribution or other investment that is made into the balanced fund QDIA on behalf of that participant.

Q-13. QDIA may include “round-trip” restriction for the first 90 days
The reference in the preamble to the QDIA regulation to “round-trip” restrictions was too broad. Since “round-trip” restrictions generally affect only a participant’s ability to reinvest in the QDIA for a limited period of time, they are permitted. However, if a “round-trip” restriction would affect a participant’s or beneficiary’s ability to liquidate or transfer from a QDIA or restrict a participant’s or beneficiary’s ability to invest in any other investment alternative available under the plan, it would not be permitted during the first 90 days of the QDIA.

4. QDIAs – Management And Asset Allocation

Q-14. An investment fund or product with zero fixed income (or, alternatively, zero equity) does not qualify as one of the permanent, long-term QDIAs.
Each of the long-term QDIA categories require the investment fund product, model portfolio, or investment management service to be “diversified so as to minimize the risk of large losses” and be designed to provide varying degrees of long-term appreciation and capital preservation through a mix of equity and fixed income exposures. QDIAs do not include funds, products, or services with no fixed income or no fixed equity exposure. There should be some fixed income and/or fixed equity exposure, though DOL does not provide minimum fixed income or equity exposures necessary to satisfy the mix within a QDIA.

Q-15. In the case of registered investment companies, defaulted participants are required to be automatically furnished the most recent prospectus or profile prospectus (see Advisory Opinion No. 2003-11A (September 8, 2003)) and furnished any material relating to voting, tender or similar rights provided to the plan.
In addition, plans are required to furnish either automatically or upon request certain information concerning the plan’s investment alternatives, such as annual operating expenses and the value of shares or units in the investment alternatives.

Q-16. A plan sponsor may use two different QDIAs, for example, one for its automatic contribution arrangement, and another for rollover contributions. Of course, each QDIA must satisfy the QDIA requirements.

Q-17. An individual account plan sponsored by a single employer, can have a committee that is established by a plan sponsor and is a named fiduciary of the plan treated as managing a QDIA.
The final QDIA regulation was expanded to include a plan sponsor who is a named fiduciary of the plan in response to comments on the proposed regulation. The Department intended that this expansion would broadly accommodate employers that manage their plan investments in-house. However, the reference to “plan sponsor” has raised questions as to whether a committee that is a named fiduciary of the plan and is comprised primarily of employees of the plan sponsor can manage a QDIA when that committee is a named fiduciary. To address this uncertainty, the Department has amended paragraph (e)(3)(i)(C) in the technical corrections to the QDIA regulation to make clear that such a committee of the plan sponsor may manage a qualified default investment alternative.

5. 120-Day Capital Preservation QDIA

Q-18. The 120-day capital preservation QDIA is available only for an EACA.
This QDIA is to provide administrative flexibility to allow employees to make permissible withdrawals within 90 days only for contribution under an EACA. Fiduciary relief for a 120-day capital preservation QDIA is not available for plans that are not EACAs and after the first 90 days.

Example 3
Use of the 120-day capital preservation QDIA for a rollover from an IRA or other plan would not relieve a plan sponsor from liability under the QDIA regulation unless the rollover was made during the 120-day period following a participant’s first EACA contribution.

Q-19. Plans are not required to provide a 120-day capital preservation QDIA.
The 120-day capital preservation QDIA was created to handle the participant’s who opt out within the 90 day period.

Q-20. A plan sponsor may generally not manage the 120-day capital preservation QDIA.
The investment fund or product must be offered by a State or federally regulated financial institution as is required by the QDIA regulation.

6. Grandfather-Type Relief For Stable Value Funds

Q-21. A plan sponsor did not have to distribute a notice 30 days before the effective date of the QDIA regulation to obtain relief for prior contributions to a stable value fund or product. However, the relief provided by the QDIA regulation generally will not take effect until 30 days after the initial notice is furnished to participants and beneficiaries.

Example 4
A plan sponsor distributes the initial notice on January 1, 2009 to participants and beneficiaries who were defaulted into a stable value fund prior to the effective date of the regulation, and assuming all other requirements of the regulation have been satisfied, the fiduciary relief provided by the regulation would be available to the plan sponsor on January 31, 2009 (i.e., 30 days later).

The relief will extend only to assets that were invested in the stable value product or fund on or before the effective date of the final regulation, regardless of when the notice is provided.

Q-22. Stable value products or funds are QDIAs for purposes of the “grandfather”-type relief. Amendment of QDIA regulations.
The description of “grandfather”-type relief for stable value products and funds provided in the regulations may limit the availability of the “grandfather”-type relief, contrary to the DOL’s intention of the Department. To correct this, the DOL amended the QDIA regulation to provide that relief is available with respect to “an investment product or fund designed to preserve principal; provide a rate of return generally consistent with that earned on intermediate investment grade bonds; and provide liquidity for withdrawals by participants and beneficiaries, including transfers to other investment alternatives.”

Two additional conditions apply: no fees or surrender charges can be imposed in connection with withdrawals from the product or fund initiated by a participant or beneficiary, and the product or fund must invest primarily in investment products that are backed by State or federally regulated financial institutions. For example, the product or fund may be issued directly by a State or federal regulated financial institution. Alternatively, the principal and accrued interest on the product or fund may be backed by contracts issued by such institutions.

Bill Grossman, QPA

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