The Department of Labor is currently working on final regulations regarding default investment options in tax qualified plans subject to the Employment Retirement Income Security Act of 1974.
These regulations are likely to shape the course of employee investments in coming years, including how and whether employees can benefit from the unique ability of annuities to guarantee a lifetime income from assets accumulated in 401(k) and 403(b) plans.
By way of background, ERISA section 404 imposes standards on fiduciaries of qualified plans, including those who make investment decisions affecting plan assets. A breach can result in liability for any losses to the plan and its participants.
An important exception to this comes under section 404(c)(1) for individual account plans, such as a 401(k), where the participant directs account asset investment among diversified options. Under the exception, a fiduciary is not liable for any loss resulting from a participant’s exercise of control of those assets.
The new Pension Protection Act of 2006 has now extended this exception to fiduciaries investing participant assets in default investment alternatives (in accord with DOL regulations) where a participant fails to exercise affirmative investment control. PPA says those regulations should provide guidance on the appropriateness of designating default investments that include a mix of asset classes consistent with capital preservation, long-term capital appreciation, or a blend of both.
On Sept. 27, 2006, the DOL issued proposed regulations interpreting this new exception for default investment options. The final regulations are due Feb. 17, 2007.
The proposed regulations have attracted approximately 103 comment letters, including many from life insurance people. The insurance industry letters (as well as many others) center on the proposed definition of “qualified default investment alternatives” or “QDIAs.”
In contrast to DOL’s express rejection, in the proposed regulations, of stable value and money market funds as QDIAs, the proposal is simply silent on using annuities to provide default investments.
It appears fairly clear that, under the proposal, deferred fixed annuities would not qualify as QDIAs. On the other hand, the proposed regulations are carefully drafted to refer to “investment fund products.” It may well be reasonable to conclude that an investment in a variable deferred annuity contract separate account is an “investment fund product” that may qualify as a QDIA, if all of the applicable requirements otherwise are met.