Plan Default Investments Ruling Issued by DOL

December 10, 2007

In October, the U.S. Department of Labor (DOL) issued the final regulation related to Qualified Default Investment Alternatives (QDIA) in 401(k) and other defined contribution retirement plans that permit participants to direct the investment of their accounts.

The permitted types of QDIAs are life cycle, managed account options and balanced funds. Stable value and other capital preservation funds are given only short-term QDIA status, however. The regulation provides fiduciary relief for covered plans when the participant or beneficiary does not make an affirmative investment election, provided the specified QDIAs are used. The new regulation will become effective on Dec. 24, 2007.

While these regulations apply to ERISA plans, non-ERISA plans such as 457 plans have generally viewed the principles contained in ERISA as guidelines. Recognizing that some plan sponsors adopted stable value products as their default investment prior to passage of the Pension Protection Act of 2006 (PPA) and this final regulation, the new regulation provides a transition rule that “grandfathers” these arrangements. While providing relief for contributions invested in stable value products prior to the effective date of the final rule, the transition rule does not provide relief for future long-term contributions to stable value products. Stable value type funds are only given short-term QDIA status under the regulations and may only be used for up to the first 120 days after a participant’s first contribution. After 120 days, the plan must transfer the amounts to another QDIA

For more information about the QDIA Regulation read ICMA-RC's Pension Protection Act coverage.