As noted in our last blog post, for many years retirement plan sponsors have faced a dilemma: How should they invest contributions from employees who won’t affirmatively choose at least one investment vehicle for their contributions? More to the point: how to do it without exposing the company to fiduciary liability?
As more companies have added automatic-enrollment (AE) features to their 401k and other defined-contribution plans, a growing number of employees have neither opted out of their company’s 401k (or other IRS-qualified plan) nor specified where they want their contributions invested. For this reason, the federal Pension Protection Act, signed into law in August 2006, included a “safe harbor” provision for Qualified Default Investment Alternatives. These QDIA regulations spell out what companies must do to protect themselves against liability claims that could arise from how they invest these “non-directed” participant contributions.
And it’s a good thing it does, because — as a recent court case illustrates — there’s more to the issue than just how to invest the contributions of passive participants. Acting on the QDIA regulations issued in 2008, University Medical Center Inc (UMC) changed the default investment in its 403b plans from the Lincoln stable value fund to the more aggressive Lincoln Retirement Services life cycle fund. This move was in keeping with the regulations, which seek to minimize or eliminate the use of QDIAs focused solely on capital preservation.
Because UMC could not determine which participants had affirmatively chosen to invest in the stable value fund versus those placed in it by default, UMC reasoned that it should move all of its participants’ dollars from the stable value fund to the life cycle fund. Using postal mail, UMC notified all of these participants that their contributions would be move to the new QDIA unless they elected within 30 days to stay invested in the stable value fund.
In Bidwell et. al. versus University Medical Center, two participants who had elected to invest in the stable value fund alleged that UMC breached its fiduciary duty by moving their contributions to the new QDIA. They claimed they never received the mailing, but if they had they would not have allowed their funds to go into the new QDIA, where they later decreased (significantly) in value.
In late July, the Sixth Circuit Court of Appeals upheld a U.S. district court’s April 2011 decision that neither UMC nor Lincoln Retirement Services Company (the third-party administrator of UMC’s plans) had breached its fiduciary duties in this case, noting that:
- The QDIA “safe harbor” provision applies to both employer-selected and employee-selected investment vehicles. It also covers situations beyond automatic enrollment, “whenever a participant or beneficiary has the opportunity to direct [his or her plan] investments.”
- DOL regulations clearly state that “the ‘opportunity to direct investment’ includes scenarios where a plan administrator requests participants who previously had elected a particular investment vehicle to confirm whether they wish for their funds to remain in that investment vehicle.”
- Although UMC did not use delivery-confirmation service in sending the notices, its documented use of first-class mail was sufficient to prove that UMC had informed participants of the QDIA change and allowed them to decide on whether to transfer their funds.
Safety precautions during consumption of Kamagra: When consuming the product it is always essential that the person should take another tablet soon after. cialis price online It reenergizes the nerves and boosts male libido. cialis 10mg price In addition, condition like chronic alcoholism can cause liver and nerve damage, and alteration in sexual hormones that can lead to ED. levitra sample Many medical expert suggest its use for certain diseases and/or disease purchase levitra online discover over here prevention.
Plan sponsors should understand that this decision does not mean that they need not worry about the procedural details of investing participants’ contributions in a QDIA. Instead, they should revisit the QDIA regulations frequently and evaluate their company’s internal processes to ensure they are in compliance with them. As this case shows, some plan participants will not hesitate to make an issue of how their company invests their contributions.
For an in-depth review of your company’s QDIA compliance, or of other aspects of your retirement plans, please contact us.