Two Groups Suggest Changes to QDIA Proposal

A Washington Employee Retirement Income Security Act (ERISA) group and the largest banking trade association in the nation asked the Department of Labor (DoL) to clarify and tailor certain parts of the safe harbor rule that would govern qualified default investment alternatives (QDIAs).

The ERISA Industry Committee (ERIC) said in a November letterto the Department that the QDIA proposal was overreaching.

“The sweep of the regulations is quite broad,” said the group’s president, Mark Ugoretz, in a press release. “While the most pronounced effect will be on plans with automatic enrollment features, the regulations would also affect other circumstances where participants fail to provide investment direction, including incomplete enrollment forms, rollovers, removals of investment options, beneficiary and alternative payee balances, disputes, and missing persons.”

The group asked the department to be clear that employers may consider factors other than employees’ ages when determining which investment options to use, and gives the example of a firm with high employee turnover that might want to choose a stable value fund or money market fund to ensure that employees with short tenures are not caught losing money in a stock market downturn. The group urged DoL to make clear that such arrangements are permissible.

ERIC’s letter also urged the department to confirm that ERISA preempts any state law that would inhibit plan sponsors from implementing automatic enrollment features in their plans.

In its letter, the American Bankers Association applauded the Department of Labor’s flexible definition regarding QDIA, which provides relief from liability for fiduciaries who invest participant assets in a certain type of default investment alternatives in the absence of participant investment direction.

The association proposed clarification on the following points:

  • The prohibition on imposing financial penalties does not preclude compliance with SEC Rules 22c-2;
  • That bank trustees are not precluded from serving as investment managers of a QDIA
  • That the 30-day notice requirement would not apply under certain limited circumstances (such as in the case of new hires) where such notice may not be practical; and
  • That there is no requirement to provide to QDIA participants investment materials that are not normally provided to non-QDIA participants.

The department released in late September its proposal for a safe harbor rule that would govern default investment options that plan sponsors can choose for circumstances in which employees fail to submit investment options, such as qualified investment alternatives (QDIAs) – target date funds, balanced funds, and managed accounts.

Under the proposal, employers would be protected from suits about the default investment option’s market performance, but it stopped short of freeing them for any litigation stemming from how the specific options were chosen within the broad categories and how they were later monitored.