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ERIC Updates

THE ERISA COMMITTEE

<nobr>Sep 26, 2006</nobr>

Department of Labor Issues Proposed Regulation on Default Investments

The Department of Labor has issued proposed regulations that would implement recent default investment provisions found in the Pension Protection Act (PPA). The proposed regulations provide that a participant in a participant directed individual account plan will be deemed to have exercised control over assets in his or or account (for section 404(c) purposes) if, in the absence of investment directions from the participant, the plan invests assets in a "qualified default investment alternative". A fiduciary of a plan that complies with the notice and investment requirements under the regulations will not be liable for any investment losses associated with the default investment alternative.

A draft copy of the proposed regulations is attached. The final copy will be available at ERIC OnLine once it is published in the Federal Register.

Conditions for Fiduciary Relief

In order to receive fiduciary relief, the default investment arrangement must meet six conditions:


  • The assets invested on behalf of the participant must be invested in a "qualified default investment alternative";

    • There are five requirements for a "qualified default investment alternative":

      1. A qualified default investment alternative (QDI) may not hold or permit the acquisition of employer securities. There are two exceptions to this rule: pooled investment vehicles and employer stock received as a match or by participant direction.
      2. A QDI may not impose financial penalties or otherwise restrict the ability of a participant or beneficiary to transfer his or her investment from the QDI to any other investment alternative available under the plan.
      3. The QDI must be managed by a investment manager or a registered investment company.
      4. A QDI must be diversified so as to minimize the risk of large losses.
      5. A QDI must use one of three types of investment products:

        • An investment fund or model portfolio that is designed to provide varying degrees of long-term appreciation and capital preservation through a mix of equity and fixed income exposures based on the participant's age, target retirement date, or life expectancy (a "life-cycle" or "targeted-retirement-date" fund or account).
        • An investment fund product or model portfolio that is designed to provide long-term appreciation and capital preservation through a mix of equity and fixed income exposures consistent with a target level of risk appropriate for participants in the plan as a whole (a "balanced" fund).
        • An investment management service in which the investment manager allocates the assets of a participant's individual account to achieve varying degrees of long-term appreciation and capital preservation through a mix of equity and fixed income exposures, offered through investment alternatives available under the plan, based on the participant's age, target retirement date, or life expectancy (a "managed account").

  • The participant or beneficiary on whose behalf assets are being invested must have had the opportunity to direct the investment of assets in his account;
  • The participant or beneficiary must be furnished notice within at least 30 days in advance of the first default investment, and within a reasonable period of time in advance of each subsequent plan year;
  • The terms of the plan must provide that any material provided to the plan relating to a participant or beneficiary's investments will be provided to the participant or beneficiary;
  • Any participant or beneficiary on whose behalf assets are invested must be afforded the opportunity to transfer, in whole or in part, such assets to any other investment alternative available under the plan without financial penalty; and
  • The plan must offer participants and beneficiaries the opportunity to invest in a "broad range of investment alternatives".

Vanessa A. Scott, Legislative Counsel
The ERISA Industry Committee
1400 L Street, NW Suite 350
Washington, DC 20005
Tel: 202.789.1400 Fax 202.789.1120


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