Wednesday, September 27, 2006

401(k) Safe Harbor Default Rules

The DOL provides the following overview of their Investment Default Safe Harbor proposal. The full Proposal is available here.

ERISA provides relief from liability for investment outcomes to fiduciaries of individual account plans that allow participants to exercise control over the investment of assets in their plan accounts.The proposed regulation deems a participant to have exercised control over assets in his or her account if, in the absence of investment direction from the participant, the plan fiduciary invests the assets in a qualified default investment alternative (QDIA).Assets must be invested in a “qualified default investment alternative” as defined in the proposal.
  • Participants and beneficiaries must have been given an opportunity to provide investment direction, but failed to do so.
  • A notice must be furnished to participants and beneficiaries 30 days in advance of the first investment, and at least 30 days in advance of each subsequent plan year, and must include: a description of the circumstances under which assets will be invested in a QDIA; a description of the investment objectives of the QDIA; and an explanation of the right of participants and beneficiaries to direct investment of the assets out of the QDIA.
  • Any material, such as investment prospectuses and other notices, provided to the plan by the QDIA must be furnished to participants and beneficiaries.
  • Participants and beneficiaries must have the opportunity to direct investments out of a QDIA with the same frequency available for other plan investments but no less frequently than quarterly, without financial penalty.
  • The plan must offer a “broad range of investment alternatives” as defined in the Department’s regulation under section 404(c) of ERISA.
  • Plan fiduciaries would not be relieved of liability for the prudent selection and monitoring of a QDIA.

Qualified Default Investment Alternatives
Under the proposed regulation, a QDIA must satisfy the following requirements:
  • A QDIA may not impose financial penalties or otherwise restrict the ability of a participant or beneficiary to transfer the investment from the qualified default investment alternative to any other investment alternative available under the plan.
  • A QDIA must be either managed by an investment manager, or an investment company registered under the Investment Company Act of 1940.
  • A QDIA must be diversified so as to minimize the risk of large losses.
  • A QDIA may not invest participant contributions directly in employer securities.
  • A QDIA may be a Life-cycle or targeted-retirement-date fund;Balanced fund; or Professionally managed account.

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