Qualified Default Investment Alternatives for Participant-Directed Individual Account Plans

The Pension Protection Act of 2006 (the PPA) added Section 404(c)(5) to the Employee Retirement Income Security Act of 1974, as amended (ERISA), effective for plan years beginning after December 31, 2006, which provides that a participant in a participant-directed individual account plan 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 the assets in a qualified default investment alternative (QDIA). On October 24, 2007, the Department of Labor (DOL) issued final regulations that provide guidance with respect to QDIAs under such plans. A plan fiduciary that complies with the final regulations will not be liable for any loss, or by reason of any breach, that results from investments in a QDIA. The final regulations will be effective as of December 24, 2007.

The QDIA structure was introduced in large part to encourage automatic enrollment in 401(k)-type plans. According to a DOL Fact Sheet issued last month, approximately one-third of eligible employees do not participate in their employers’ 401(k)-type plans, and studies suggest that automatic enrollment plans (in which employees “opt out” of plan participation rather than “opt in”) could increase participation rates to more than 90%, significantly increasing retirement savings. By facilitating the adoption of automatic enrollment plans, and by encouraging investments appropriate for long-term retirement savings, the DOL estimates the provision will result in between $70 billion and $134 billion in additional retirement savings by 2034. While the regulations are not limited to automatic enrollment situations, the regulations provide greater certainty with respect to automatic enrollment programs and help alleviate employer fears about legal liability for market fluctuations.

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