Automatic enrollment (AE) in company retirement plans can help workers increase their retirement savings, but it presents a challenge: How should the employer invest the dollars of employees who do not affirmatively choose an investment vehicle for their contributions to the plan?
This longstanding issue has become even more prominent in recent years as a growing number of companies have added auto-enrollment to their plans. Nearly a third of all of all eligible employees show no interest in joining their firm’s 401k, so when they are “drafted” into a plan via AE, it’s especially difficult to get them to specify where the employer should invest their contributions.
In addition, employers have long feared the fiduciary liability they could face by investing employee dollars in a poor-performing vehicle the employee didn’t choose.
Fortunately for employers, the Pension Protection Act of 2006 included a “safe harbor” provision for Qualified Default Investment Alternatives (QDIAs), the investment vehicle(s) chosen by employers for contributions from employees who have not affirmed where they want their funds invested.
In late 2007 the Department of Labor issued regulations specifying how employers must handle QDIAs in order to protect themselves from fiduciary liability. Key points of the regulations include:
- QDIA criteria: Acceptable QDIA investment options must meet at least one of these criteria:
- investments that consider age, life expectancy and projected retirement age (life-cycle or target-date funds)
- a balanced fund that takes into account the investment risk of the participants as a whole
- a professionally managed account that is diversified based on the age, life expectancy and projected retirement age of the participants.
- Option not to use QDIA: Before investing an employee’s dollars in the QDIA, the company must give her the opportunity to choose vehicles other than the QDIA.
- Notifications: The company must inform the employee that his first investment into the QDIA is about to occur, and must provide prospectuses and other plan information as usual about the QDIA.
- Opt-out opportunities: Participants must be allowed to direct investments out of a QDIA as often as they may from other plan investments, but at least quarterly.
- Fees: In general, employees who are invested by default in the QDIA must not be charged more than others who affirmatively chose that vehicle.
- Variety of non-QDIA choices: The employer must offer a “broad range of investment alternatives” other than the QDIA, as defined under section 404(c) of ERISA.
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In addition to meeting these “safe harbor” requirements, the plan’s fiduciary remains responsible for carefully selecting the plan’s QDIA and continuously monitoring it for acceptable performance.
What if . . . your company has been placing employees’ contributions into a default investment that does not meet these QDIA rules? You may transfer those assets into a new QDIA if the conditions of the regulation are met, including giving the participants proper notice.