It has been one year since the Department of Labor (DoL) came out with a proposal for qualified default investment alternatives (QDIAs) allowing sponsors to invest retirement plan assets for participants who are automatically enrolled in the plan or who do not choose an investment for their deferrals without fearing legal retaliation by participants, and the final guidance is still not out from the regulators.
However, Quana Jew, Partner at Arent Fox law firm in Washington, DC, says the final regulations are close. The OMB has the final guidance and is two-thirds into its 90-day period for questioning the DoL. If the OMB does not ask for an extension on the period, we could expect final guidance by the end of October or beginning of November.
Jew says QDIAs should be looked at as not just default funds, but as good fund recommendations for all participants who do not want to worry about managing their retirement assets. However good QDIAs are for sponsors and participants though, the picture is not all rosy.
The DoL received comments during the comment period following the announcement of the proposed QDIAs pointing out some of the problems. Jew said there was a push to include stable value investments in the list of QDIAs, as these vehicles are prudent for companies with a high turnover employee population.
The letters also pointed out there would be a problem giving participants the required 30-day notice that their funds will be defaulted if a plan calls for automatic enrollment as of a participant’s hire date, according to Jew. In addition, those offering comments pointed out there were cost and administrative issues regarding redemption fees and other disclosure requirements within the proposal.
Barbara Delaney, President of Financial Foundations of America, an NRP Member Firm, says advisers will have to provide a benchmarking service for those plans that choose asset allocation funds as their QDIA, as there are no good benchmarks out there currently. Advisers and vendors will need to work out which approach to benchmarking these funds are best: using a fund-of-funds approach, indexes, or benchmarking each underlying asset in the allocation mix.
Delaney says there could also be a problem if plans are to move assets that are currently defaulted into stable value funds. When liquidating these funds, firms may encounter a market value decrease.
Panel member Douglas G. Prince, Managing Director of Stifel Nicolaus & Company, also pointed out there is a problem in measuring alpha with asset allocation funds. In addition, some recordkeepers do not have the capability in place to default participants into the appropriate target-date or asset allocation fund default, and if currently defaulted participants will have to be moved to a new option, how will the recordkeeper recognize which participants have been previously defaulted.
Prince also reminded conference audience members that the Investment Policy Statements and service provider contracts will have to be changed to reflect the new default fund for plans.
In spite of the faults with defaults, Delaney said the regulation is a positive and advisers should present it as such while educating sponsors of the potential issues as part of the QDIA selection process.