DOL ISSUES FINAL RULES ON DEFAULT INVESTMENT ALTERNATIVES UNDER PARTICIPANT-DIRECTED INDIVIDUAL ACCOUNT PLANS
On October 24, 2007, the Department of Labor released final regulations under which the fiduciary liability protection of ERISA section 404(c) can be extended to investments made under the plan’s default investment rules.
Employers sponsoring plans with default investments should review their default investment funds in light of the new regulations. In most instances a money market or stable value investment fund will not satisfy the new rules.
A plan fiduciary will not be liable for the decision to make an investment in the plan’s default fund if the plan complies with the following rules:
- The participant is permitted to direct the investment of contributions among a broad range of investment alternatives.
- Default contributions are invested in a “qualified default investment.” The plan sponsor provides notice of the qualified default investment at least 30 days in advance of the first default investment and annually thereafter (at least 30 days before the start of each new plan year).
- The plan sponsor distributes investment material related to the qualified default investment, such as annual summaries and prospectuses.
- Participants can transfer all or a portion of assets invested in the qualified default investment to any other investment available under the plan, with a limit on fees that can be imposed.
Qualified Default Investments
A qualified default investment must be one of the following investment products:
- Lifestyle or target-retirement date fund
- Balanced fund
- Professionally managed account
- It is important to note that a money market-type fund or stable value fund is not a qualified default investment. A stable value fund may be used as a temporary investment for up to 120 days after the participant’s initial contribution. After that, the plan must move the money into a qualified default investment.
The qualified default investment notice must explain the employer’s qualified default investment and participant rights and responsibilities. To comply with the requirements for default investments made on or after January 1, 2008, plan sponsors will need to distribute the notice to participants by December 1, 2007.
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