There are many terrifying aspects of being a parent – but perhaps none as intellectually daunting as being asked to help with your children’s homework. See, even if you did well in school once upon a time – even if you can (or think you can) still remember how to solve a certain type of problem, the only way to “know” is to see if you have the “right” answer. And thank goodness, for parents (and, no doubt, students) everywhere, most math texts still carry the answers to the odd problems in the back.
Last week, the Department of Labor provided a similar service – the “right” answer to a dilemma that has plagued plan sponsors and advisers for many years: the choice of an appropriate investment fund for participants who fail to designate one. In announcing the proposed rules, the DOL threw its support behind this solution – a qualified default investment alternative - as a means to foster programs like automatic enrollment (particularly the new safe harbor version contained in the Pension Protection Act) that facilitate not only plan participation, but a better investment diversification by participants. And, to no one’s surprise, when it unveiled its proposal, the DOL formally sanctioned the use of asset allocation funds as default investment options in those circumstances. Moreover, while the DOL’s proposal sanctions the use of professionally managed asset allocation accounts, it leaves the choice of a particular product solution open, acknowledging the applicability of lifecycle funds as well as more traditional balanced funds and the more recently popularized “managed accounts.”
Not only did the DOL place its imprimatur on such designs, it also acknowledged the longstanding use of other options such as money market funds and stable value accounts. However, the DOL noted that “it is possible that at least some plan sponsors strongly prefer to use as default investments such instruments rather than any of the three types embraced by the proposed rule.” Those potential preferences notwithstanding, the DOL noted that “The proposed rule, by providing relief from fiduciary liability, is both intended and expected to tilt plan sponsors' default investment preferences AWAY FROM SUCH INSTRUMENTS AND TOWARD THE THREE TYPES IT EMBRACES (emphasis added),” though the DOL goes on to acknowledge that the proposed rule leaves intact the current legal provisions applicable to the use of such instruments as default investments (basically that the plan fiduciary is responsible for the choice).
The DOL’s proposal also contains some interesting product-centric nuggets that advisers may find instructive. For example, in discussing the lifestyle/lifecycle choice, “The Department presumes that, in those instances when a participant or beneficiary chooses not to direct the investment of the assets in their account, the only objective and readily available information relevant to making an investment decision on behalf of the participant is age,” and then goes on to note that QDIAs are not required to take into account other factors, such as risk tolerances, other investment assets, etc. – and it extends this flexibility to the managed-account alternative. (Ironically, the proposal says that the age of individual participants does not have to be considered in the use of a “balanced fund” alternative, but rather the “demographics of the participant population as a whole.”)
Note that the DOL proposal says that “a qualified default investment alternative must be either managed by an investment manager, as defined in section 3(38) of the Act, or an investment company registered under the Investment Company Act of 1940.” Why? Quite simply, the DOL “believes that when plan fiduciaries are relieved of liability for underlying investment management/asset allocation decisions, those responsible for the investment management/asset allocation decisions must be investment professionals who acknowledge their fiduciary responsibilities and liability under ERISA.”
We are similarly reminded that, “like other investment alternatives made available under a plan, a plan fiduciary would be required to carefully consider investment fees and expenses in choosing a qualified default investment alternative for purposes of the proposed regulation.” Of course, the “silver bullet” in the proposed rules lies in the fact that “a fiduciary of a plan that complies with this proposed regulation will not be liable for any loss, or by reason of any breach that occurs as a result of such investments.” However, the proposal reminds us all that “plan fiduciaries remain responsible for the prudent selection and monitoring of the qualified default investment alternative.”
To some questions, the answers never change, IMHO – nor should they.
- Nevin Adams email@example.com
You can read more about the proposed rules at http://www.plansponsor.com/pi_type11/?RECORD_ID=35012