When a plan permits participant-directed accounts for all or a portion of the plan’s assets, it is not uncommon for that plan to offer a set of “designated investment alternatives (“DIA’s”).  This set of DIA’s represents a menu of choices for the participant, carefully selected by the fiduciaries.  Further, it is not uncommon for the plan fiduciaries to designate one of the DIA’s to be used as a “default” fund.  In the event the participant fails to make an investment election with respect to some or all of the funds they are entitled to direct, those funds are invested in the “default” fund.

A fiduciary of a plan that complies with the qualified default investment alternative (“QDIA”) regulation will not be liable for any loss, or by reason of any breach, that is the direct or necessary result of investing all or part of a participant’s or beneficiary’s account in any QDIA.  However, the fiduciary(ies) remain responsible for the prudent selection and monitoring of the QDIA.  A participant will be deemed to have exercised control over assets in his or her account if, in the absence of investment directions from the participant, the plan invests in a QDIA.

At a minimum, relief is conditioned upon the following:

• Advance notice to participants and beneficiaries;
  • Describe the circumstances under which contributions or other assets will be invested on their behalf in a QDIA;
  • The right of participants and beneficiaries to direct investments out of the QDIA.
• As with other investment alternatives, fiduciaries must carefully consider investment fees and expenses when choosing a QDIA.
• The fund selected must meet the requirements outlined in the regulation, 2550.404c-5(e).
• Requires the participant be provided with a Notice informing them of the default investment:
  • Initial notice – must be provided:
    • At least 30-days in advance of the date of plan eligibility, or at least 30-days in advance of any first investment in a QDIA; or
    • In the case of an automatic enrollment plan, on or before the date of plan eligibility, provided the participant has the opportunity to make a permissible withdrawal under 414(w) (with respect to EACA’s).

If the QDIA isn’t provided at least 30 days in advance of plan eligibility, the fiduciary may obtain relief for later contributions with respect to which the 30-day advance notice requirement is satisfied.  So, the 30-day advance notice is required for full relief unless the plan is an automatic contribution arrangement that permits withdrawal within the first 90-days that is not subject to the early withdrawal penalty.  Under this EACA option, the 30-day advance notes becomes “on or before the date of plan eligibility”.

• Annual notice – must be provided:
  • Within a reasonable period of time of at least 30-days in advance of each subsequent plan year. (2550-404c-5(c)(3)(ii)).

The notice may be combined with the any “safe harbor notice” requirement, but may not form part of the Summary Plan Description or Summary of Material Modifications, though the DOL does recognize that the disclosures can be served all at one time to eliminate costs.

As with any decision, the costs and benefits of the QDIA should be evaluated.  Certainly there are fiduciaries who would suggest that the cost of serving the notices is minor in comparison to the personal liability protection they seek.  Others may find that default investments typically occur on small account balances and, therefore, the risk in terms of losses is minimal relative to the burden of providing notices, including notices to terminated participants.

If the fiduciaries opt to obtain the protection, collaboration is typically needed between the financial advisor and the third-party administrator.  TPA’s typically prepare participant notices and disclosures, yet the financial advisor will have the fund information necessary for inclusion in the notice itself.  What we want to avoid is the TPA thinking the advisor prepared the QDIA, and the advisor thinking the TPA prepared the notice.  Therefore, if this fiduciary protection is something you seek, Pinnacle Plan Design is certainly happy to coordinate efforts to provide you with a complete and accurate notice.

 T.J. Orr is a principal with Pinnacle Plan Design, LLC