The Department of Labor issued final regulations on September 27, 2006 that set standards for default investment options in defined contribution plans when participants have been offered an opportunity to select an investment option but fail to do so. This situation primarily arises when employers automatically enroll their employees in the company 401(k) and the employees do not select an investment.
The default investment options specified in the rule are not a requirement for plans. However, it is anticipated that many plans will use these investment options. Employees must be notified when a plan is using a default investment option.
Plan fiduciaries have duties to act in the best interests of the plan and its participants. The new rule waives a fiduciary’s liability for losses in the value of employees’ 401(k) accounts when the investment meets the criteria for a qualified default investment alternative. Plan participants are treated as if they had exercised control over the investment. Fiduciaries, however, are not relieved of all liability under this rule. They are still subject to the general fiduciary standards of ERISA and must prudently select the investment products offered.
According to the rule, the fiduciary cannot be liable for losses in the value of a an employee’s 401(k)s assets as long as the, fiduciary meets the following six requirements in choosing the default investment.
The Department of Labor accepted written comments on the proposed regulation through November 13, 2006. Section 624 of the Pension Protection Act required the Department of Labor to issue final regulations on default investment no later than 6 months after the bill became final law on August 17, 2006. The final rule was effective December 24, 2007.
Read the final regulation on QDIAs.
Read the Center’s Supplemental Comments
Read the Pension Rights Center’s initial comments on the proposed rules.
Read section 624 in the Pension Protection Act of 2006 (Public Law 109-280).< Back