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New Default Investment Guidance Gets Good Reviews

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Industry experts are welcoming the moves the U.S. Department of Labor made this week to clarify new regulations that govern use of default investment options in retirement plans.

“Grandfather” provisions for existing default investment arrangements based on stable value investment products will be especially helpful, according to Scott Webster, a partner at Goodwin Procter L.L.C., Boston.

“Practically, this is important because a lot of plan sponsors have been sitting and waiting because they didn’t know if the plan was grandfathered,” Webster says.

The American Council of Life Insurers, Washington, says it is still evaluating the guidance but likes the efforts the Labor Department has made to clarify the default investment option regulations.

“Plan fiduciaries should find the department’s latest guidance helpful in determining whether a particular investment qualifies for ‘grandfather’ treatment under the qualified default investment alternatives rules,” the ACLI says.

The qualified default investment alternative regulations affect efforts by sponsors and administrators of retirement plans to invest the assets of participants who have not indicated how they want to allocate their plan assets.

The Labor Department came up with QDIA safe harbor regulations that encourage plans to put uncommunicative participants’ assets in balanced funds, “target date” funds, “target risk” funds, and other funds that give participants some ability to share in investment market gains. Although plans may be able to justify using “stable value” funds and other low-risk, low-return investment funds as default options in some circumstances, the regulations have kept those funds off the QDIA safe harbor list.

Under normal circumstances, a plan now can use a stable value fund as a safe harbor default investment option for only 120 days after a new, uncommunicative participant joins the plan, officials say.

But, in December 2007, the Labor Department said plans with existing arrangements for putting unallocated participant assets in stable value funds can keep the assets in the stable value funds. To benefit from the grandfather provision, the plan sponsors or administrators must notify the beneficiaries.

The new batch of guidance and a companion regulation correction significantly broaden the definition of “grandfathered” stable value investment products that qualify for safe harbor treatment, Webster says.

The guidance also helps by explaining what plan sponsors have to say in the beneficiary notices, Webster says.

Up till now, many plan sponsors have not sent out notices because they were not sure whether the QDIA grandfather provision would apply to their stable value fund arrangements, Webster says.

Now, “even if you didn’t give notice as a plan sponsor or administrator in December when this rule went into effect, you will still have access to the safe harbor for default investments provided by the regulation 30 days after you notify the beneficiary” that the funds remain in the default investment, Webster says.

The guidance also helps because it clarifies that the term “named fiduciary” or “plan sponsor” also can mean a committee of individuals made up mostly of employees of the plan sponsor, Webster says.

“This is important because a lot of companies are shying away from being the ‘plan fiduciary’ and are naming a committee of employees to handle this job,” Webster says.

The Labor Department came up with the QDIA regulations to implement provisions of the Pension Protection Act of 2006.

Originally, the department left stable value funds out of the QDIA regulations altogether.

“The DOL came up with the grandfather clause to accommodate the [insurance and banking] industries at the last minute,” Webster says. “But the original guidance was very narrow and the final rule went into effect rather quickly, on Dec. 24. That is why the new guidance was sought.”


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