McKay Hochman has an excellent list of effective dates for PPA. You can find it at:
http://www.mhco.com/Commentary/2006/PPA_Effective_Date_083106.htm
Monday, October 16, 2006
PPA Part 2-Qualified Default Investment Alternatives
If you are concerned only about non-ERISA plans and arrangements, you can stop reading here if you want. Otherwise, you have to learn another acronym, QDIA, for Qualified Default Investment Alternatives.
Once again, the Department of Labor has chosen to make a directed investments rule too complex. This time, it is the QDIA.
Section 624 of the Pension Protection Act amended ERISA 404(c) to create the QDIA concept and required that the Department of Labor issue regulations defining a QDIA by 2/1/2007. The DOL has now issued proposed regulations.
The function of a QDIA is to solve a problem created in the overly complex existing ERISA 404(c) regulations. The protection from fiduciary duties under ERISA 404(c) applies only "if a participant or beneficiary exercises control over the assets in his account (as determined under regulations of the Secretary)". It seems clear that the parenthetical clause would have allowed a decision not to exercise after notice to be treated as an exercise, but the DOL did not do so. This meant that all the participants who got notice and did nothing were not subject to ERISA 404(c) and left the question of what to do with their accounts.
The answer seemed pretty clear, invest it how you would invest the plan that did not have a directed investments provision-de facto meaning invest it in a balanced portfolio. However, many plan sponsors decided that putting the money in a stable value or money market investment would reduce their actual risk because the participants' accounts would never show losses. And, given how people normally behave, it may have been the safest answer.
Theoretically, there were three ways to resolve this issue. The first alternative, and the cleanest, easiest one, would have been for the DOL to issue Regulations modifying the 404(c) regulations to treat inactivity after notice as an exercise of control. The second alternative was for the DOL to say that the funds had to be invested in an investment that would be appropriate for the plan as a whole, which would have in effect mandated a balanced fund in each plan. The third, and worst, option was the creation of the QDIA, because its enactment and definition have been an occasion to increase the administrative burdens on plans.
The QDIA rules have two parts. One defines the sort of investments that can be a QDIA. This part is not too complex for a 403(b) plan or arrangement. Essentially, the investment has to (1) be a mutual fund or managed by an investment manager under ERISA 3(38), and (2) be (a) a target retirement date or lifestyle fund, (b) a balanced fund, or (c) a fund managed by an investment manager taking into account, individually, the participant's age, target retirement date and life expectancy. The choice between the first and second types of mutual funds is easy, based on what funds are available and how many funds the plan wants to offer (a general balanced fund being one fund and an array of lifestyle funds being more than one). The managed fund option is a viable option only if you can find an investment manager willing to look at all the small (since those with large accounts will likely make their own decisions) accounts in the plan and take responsibility for them. My opinion has always been that every plan should have a sound, well-managed balanced fund, so my general recommendation would likely be to use that as the default investment before or after the QDIA rules become effective.
The second part of the QDIA rules is procedural, and more complex and burdensome than it needs to be. First, and pretty obvious, is that there should not be too many barriers to moving out of the QDIA; specifically, transfers out must be allowed at least quarterly and must not cost the participant more money. Second, the participant must be given an opportunity to direct investments-this will never be an issue because the QDIA rules only apply where a participant with the right to direct investments doesn't. Third, the participant has to be given a notice at least 30 days before amounts are invested in the QDIA and 30 days before each plan year; this is duplicative of the normal notices given in plans with directed investments and plans using a 401(k) safe harbor and the requirements can be met by extending the coverage of existing notices.
Fourth, the plan document must require that the plan, and the plan must in fact, send to the participant all material received by the plan relating to the QDIA or a participant's investment in the QDIA, presumably within a reasonable time. This one is potentially a problem, because of the vagueness of the word "material." All we know is that it includes account statements, any prospectus and voting proxy materials; we do not know if it includes e-mails from brokers, periodic reports by TPAs, Morningstar or other similar items, or even the contents of phone calls (unless we assume that the received "material" has to be material). You can safely bet that lawyers will be asking, sooner or later, for everything anybody involved with the plan receives from anybody any time. This requirement is not contained in the PPA, and so the ambiguity is a gratuitous part of a gratuitous requirement. In addition, since the IRS takes the position that failure to administer a plan in compliance with its terms is a qualification issue, it has the effect of adding the IRS as an enforcer of fiduciary duties in this context.
The last requirement is that the plan offer investments, including the QDIA, which meet the requirements of ERISA 404(c). Since QDIA status only matters as a fix to a hole in the 404(c) regulations, this is wholly unnecessary.
Once again, the Department of Labor has chosen to make a directed investments rule too complex. This time, it is the QDIA.
Section 624 of the Pension Protection Act amended ERISA 404(c) to create the QDIA concept and required that the Department of Labor issue regulations defining a QDIA by 2/1/2007. The DOL has now issued proposed regulations.
The function of a QDIA is to solve a problem created in the overly complex existing ERISA 404(c) regulations. The protection from fiduciary duties under ERISA 404(c) applies only "if a participant or beneficiary exercises control over the assets in his account (as determined under regulations of the Secretary)". It seems clear that the parenthetical clause would have allowed a decision not to exercise after notice to be treated as an exercise, but the DOL did not do so. This meant that all the participants who got notice and did nothing were not subject to ERISA 404(c) and left the question of what to do with their accounts.
The answer seemed pretty clear, invest it how you would invest the plan that did not have a directed investments provision-de facto meaning invest it in a balanced portfolio. However, many plan sponsors decided that putting the money in a stable value or money market investment would reduce their actual risk because the participants' accounts would never show losses. And, given how people normally behave, it may have been the safest answer.
Theoretically, there were three ways to resolve this issue. The first alternative, and the cleanest, easiest one, would have been for the DOL to issue Regulations modifying the 404(c) regulations to treat inactivity after notice as an exercise of control. The second alternative was for the DOL to say that the funds had to be invested in an investment that would be appropriate for the plan as a whole, which would have in effect mandated a balanced fund in each plan. The third, and worst, option was the creation of the QDIA, because its enactment and definition have been an occasion to increase the administrative burdens on plans.
The QDIA rules have two parts. One defines the sort of investments that can be a QDIA. This part is not too complex for a 403(b) plan or arrangement. Essentially, the investment has to (1) be a mutual fund or managed by an investment manager under ERISA 3(38), and (2) be (a) a target retirement date or lifestyle fund, (b) a balanced fund, or (c) a fund managed by an investment manager taking into account, individually, the participant's age, target retirement date and life expectancy. The choice between the first and second types of mutual funds is easy, based on what funds are available and how many funds the plan wants to offer (a general balanced fund being one fund and an array of lifestyle funds being more than one). The managed fund option is a viable option only if you can find an investment manager willing to look at all the small (since those with large accounts will likely make their own decisions) accounts in the plan and take responsibility for them. My opinion has always been that every plan should have a sound, well-managed balanced fund, so my general recommendation would likely be to use that as the default investment before or after the QDIA rules become effective.
The second part of the QDIA rules is procedural, and more complex and burdensome than it needs to be. First, and pretty obvious, is that there should not be too many barriers to moving out of the QDIA; specifically, transfers out must be allowed at least quarterly and must not cost the participant more money. Second, the participant must be given an opportunity to direct investments-this will never be an issue because the QDIA rules only apply where a participant with the right to direct investments doesn't. Third, the participant has to be given a notice at least 30 days before amounts are invested in the QDIA and 30 days before each plan year; this is duplicative of the normal notices given in plans with directed investments and plans using a 401(k) safe harbor and the requirements can be met by extending the coverage of existing notices.
Fourth, the plan document must require that the plan, and the plan must in fact, send to the participant all material received by the plan relating to the QDIA or a participant's investment in the QDIA, presumably within a reasonable time. This one is potentially a problem, because of the vagueness of the word "material." All we know is that it includes account statements, any prospectus and voting proxy materials; we do not know if it includes e-mails from brokers, periodic reports by TPAs, Morningstar or other similar items, or even the contents of phone calls (unless we assume that the received "material" has to be material). You can safely bet that lawyers will be asking, sooner or later, for everything anybody involved with the plan receives from anybody any time. This requirement is not contained in the PPA, and so the ambiguity is a gratuitous part of a gratuitous requirement. In addition, since the IRS takes the position that failure to administer a plan in compliance with its terms is a qualification issue, it has the effect of adding the IRS as an enforcer of fiduciary duties in this context.
The last requirement is that the plan offer investments, including the QDIA, which meet the requirements of ERISA 404(c). Since QDIA status only matters as a fix to a hole in the 404(c) regulations, this is wholly unnecessary.
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