Retirement plan sponsors may offer prudently selected mutual funds and investment education on the false assumption that plan participants know how to invest their funds; many don’t realize that they are still responsible and liable for participant investing, according to a new white paper from law firm Drinker Biddle.
One solution is to offer target-date funds, according to the paper. When paired with an ERISA safe harbor, TDFs can shield plan sponsors and fiduciaries from liabilities associated with participant investing.
When a participant does not indicate how he or she wants to invest assets in a retirement plan, fiduciaries have an obligation to invest those assets, the paper states, by selecting an appropriate default option.
In a re-enrollment, participants may redirect their assets into other investments; if they don’t they can be defaulted into a qualified default investment alternative.
“In light of the benefit to participants of using TDFs and the fiduciary protections offered by the QDIA rules, fiduciaries are well advised to add TDFs to the investment lineup and to take steps to cause as many participants as possible to be invested in those funds,” according to the paper.
Re-enrollment is one strategy to increase target-date fund adoption. Participants who have previously directed how to invest their accounts may be offered a choice between directing new investments or defaulting into a QDIA. If they are defaulted into the QDIA after re-enrollment and the QDIA conditions are satisfied, QDIA safe harbor protection will apply.
Drinker Biddle comes to this conclusion by studying the preamble to ERISA, in which the DOL explains that if it’s unclear whether participants were defaulted into the plan’s prior default investment or affirmatively elected that investment, it may default participants into a QDIA, according to the paper.
Furthermore, the DOL states that whenever plan participants have the opportunity to direct their assets but fail to do so, fiduciaries may default participants into a QDIA.
“The QDIA safe harbor is especially valuable because of the simplicity of complying and the breadth of the protection,” according to the paper. “The fiduciaries’ responsibility extends to the prudent selection and monitoring of the investment vehicle, but not to whether the TDF is appropriate for the particular participant. Absent a re-enrollment process, however, the QDIA safe harbor protection may not cover many participants and, therefore, may afford only limited protection to the fiduciaries.”