Information Center

Default Investments

01/02/11
Bill
Request for Information

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.

  1. The assets must be invested in a “qualified default investment alternative” (QDIA).  A QDIA is an investment fund product or portfolio managed by an investment manager, investment company, plan trustee or sponsor, or committee primarily comprised of employees that are named fiduciaries of the plan.  The QDIA must be diversified and cannot include employer securities unless they are part of an employer matching contribution or a pooled investment vehicle.  Finally the QDIA must be designed to provide varying degrees of long-term appreciation and preservation of capital.
  2. The participant must have had the chance to direct the investment but did not make an affirmative investment election.
  3. The plan must furnish an initial notice and an annual notice to participants. The initial notice must be furnished at least 30 days prior to the investment in the QDIA, or at least 30 days before plan eligibility. However, the plan can provide later notice on or before the date of plan eligibility only if the participant can withdraw the money within 90 days. The plan must furnish the annual notice at least 30 days prior to the start of any subsequent plan year.  The Pension Rights Center submitted comments on the timing and form of the required notices.
  4. The plan must provide the same materials and information to a defaulted participant with a QDIA investment as those given to participants who choose to direct their investments.
  5. Participants must be permitted to transfer amounts out of the QDIA into any other investment offered by the plan at least once a quarter.  During the first 90 days of investment in a QDIA no fees or restrictions may be applied that specifically relate to the transfer or withdrawal of funds.  After the first 90 days participants in a QDIA may only be charged fees and expenses that apply to all plan participants with similar investments.
  6. The plan must provide a broad range of investment alternatives.

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

Sign up to receive updates from us:

Do you want to stay up to date on the latest retirement news and recent happenings at PRC?

Sign up to receive emails from us:

Click here >

Support the Pension Rights Center:

In today’s challenging pension environment, our work is more important than ever. Your contribution will help make it possible for the Center to continue its crucial role as a national consumer organization committed to protecting and promoting retirement security.

Donate >