The Department of Labor last week provided “significant” relief to insurers and others who offered default investment alternatives to beneficiaries of retirement plans prior to last December through a clarification of its new rules involving these investments, according to a lawyer who advises financial institutions on laws and rules dealing with retirement plans.
And, in a statement, the American Council of Life Insurers says that while it is still evaluating the new guidance, “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 new guidance significantly broadened the definition of “grandfathered” stable value investment products that qualify for a safe harbor under the rules, explains Scott Webster, a partner at Goodwin Procter in Boston.
But it also provided further relief by clarifying what plan sponsors have to say in notifying plan beneficiaries that their money remains in default investments pending further instructions, he says.
In fact, Webster says, the guidance is very helpful because it explains that the relief will be available on an ongoing basis.
“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, he says.
“Practically, this is important because a lot of plan sponsors have been sitting and waiting because didn’t know if the plan was grandfathered, and consequently, they didn’t send out the notice,” Webster says.
An estimated $94 billion was invested in these funds before the new rule went into effect, according to calculations by EBRI.
The guidance is also helpful, Webster says, because it clarifies that the term “plan fiduciary” can also mean a committee of individuals made up mostly of employees of the plan sponsor.
“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,” he says.
The guidance was sought by the industry because it believed the final rule providing the grandfather was written too narrowly. The guidance was substantively modified to accommodate the insurance and banking industries, according to Webster.
That’s because both industries had offered so-called ‘stable value funds’ as investments in pension plans to those who had not decided how to invest these funds, or sought very conservative investment alternatives for their money.
“The DOL came up with the grandfather clause to accommodate the two 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,” he adds. “That is why the new guidance was sought.”
Webster says, “We’re talking about money that people didn’t give instructions as to how it should be invested. People have been doing this for a long time.”
But that all changed with the new rule, which said that going forward, the appropriate default investments will be investment products that include equities, including mutual fund products such as lifecycle funds.
Stable value funds, also known as Guaranteed Investment Contracts, or “GICs,” as sold by the insurance industry, can be used for new participants in 401(k) plans only for their first 120 days of participation.
But, the rule added a provision allowing funds in these plans as of Dec. 24, 2007 to remain in the stable value fund so long as the plan administrator or sponsor notified the beneficiary.