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5500 Preparer's Manual for 2012 Plan Years
The premier resource in the field of Form 5500 preparation, 5500 Preparer's Manual will help you handle the required annual Form 5500 filings for both pension benefits and welfare benefit plans.
Following the October 24, 2007 issuance of the final Qualified Default Investment Alternatives (QDIAs) regulations (CCH Pension Plan Guide ¶24,807N ), practitioners raised various questions concerning the interpretation of those regulations. Consequently, as we reported last week, the Employee Benefits Security Administration (EBSA) has now issued a Field Assistance Bulletin (FAB) with answers to some of the inquiries, and has also amended portions of the regulations for clarity.
The final QDIA regulations, reflecting the Pension Protection Act of 2006 (PPA; P.L. 109-280), are intended to encourage employers to adopt automatic enrollment (“opt-out”) procedures for their 401(k) plans by providing employers a safe harbor from fiduciary liability for investments made for participants who do not direct their own investments, where the contributions are invested in Qualified Default Investment Alternatives.
Without identifying specific investment products, the QDIA regulations are intended to provide guidelines for default investments which are single investments capable of meeting participants’ long-term retirement needs. A QDIA, which cannot invest in employer securities, may be: (1) a product with a mix of age-appropriate investments periodically adjusted to reflect the participant’s expected retirement date (i.e., life cycle or target date funds); (2) an investment service which allocates a participant’s investments among existing plan options to achieve the same objectives as (1) above; or (3) a product with a mix of investments reflecting the characteristics of the group as a whole rather than an individual participant. In addition, for the first 120 days of participation only, employers are permitted to invest contributions in a capital preservation product, i.e. a stable value fund, in case the participant does decide to opt-out during that period.
The recently issued FAB clarifies that when a plan sponsor chooses to create and manage a QDIA using a mix of the plan’s available investment alternatives, the plan sponsor will not qualify for the QDIA safe harbor unless it is a named fiduciary of the plan. The plan sponsor would remain liable for the management and monitoring of the QDIA.
For default investments made prior to the effective date of the regulations, the FAB states, the fiduciary will generally be relieved of liability with respect to all assets invested in the QDIA, if the notice and other requirements for relief under the QDIA regulations are satisfied. This protection from liability will not extend, however, to fiduciary decisions, such as the decision to invest assets in a default investment, made prior to the effective date of the QDIA regulations.
According to the FAB, the relief available under the QDIA regulations would extend to all assets invested in a QDIA on behalf of participants who, on or after the effective date of the regulations, failed to give investment directions after being provided the required notice, without regard to whether the participant made an affirmative election to invest in the default investment prior to the issuance of the QDIA regulations. This result may be significant, the FAB states, when plan records cannot establish that an investment was the direct and necessary result of a participant’s exercise of control for purposes of ERISA §404(c)(1)(A) .
The Department of Labor (DOL) is currently working on proposed regulations that would establish the disclosure requirements for participant directed individual account plans. The proposed regulations are expected to satisfy the fee and expense disclosure requirements of the QDIA regulations. Pending the issuance of those regulations, the FAB states that disclosures would satisfy the requirements of the QDIA regulations if they included: (1) the amount and a description of any shareholder-type fees such as sales loads, sales charges, deferred sales charges, redemption fees, surrender charges, exchange fees, account fees, purchase fees, and mortality and expense fees and (2) for investments with respect to which performance may vary over the term of the investment, the total annual operating expenses of the investment expressed as a percentage (e.g., expense ratio). These fee and expense disclosures may be furnished in a separate, simultaneously furnished document such as a prospectus.
The QDIA regulations provide that for a 90-day period following the first investment in a QDIA (the time period during which those who opt out of the plan are most likely to do so), any transfer or withdrawal of assets from the QDIA by a participant cannot be subject to any restrictions, fees, or expenses. This policy is intended to prevent the inhibition of a participant’s decision to opt out of the plan. The FAB clarifies that payment of such fees during this period by the plan sponsor or a service provider are not prohibited, because such payment would not inhibit a participant’s decision to opt out of the plan. The FAB also clarifies that the 90-day restriction on fees and expenses does not apply to participants with existing assets invested in the plan prior to the effective date of the QDIA regulations.
The DOL has also concluded that “round-trip” restrictions on the ability of a participant to reinvest within a defined period of time, referenced in the preamble to the QDIA regulations, were too broad. The amended regulations now state that “roundtrip” restrictions generally affect only a participant’s ability to reinvest in the qualified default investment alternative for a limited period of time. This time restriction is unlike fees and expenses assessed directly upon the liquidation of, or transfer from, an investment, and thus should not be restricted, the DOL has concluded.
The QDIA regulations do not establish a minimum fixed income exposure or minimum equity exposure. However, the FAB states, an investment with no fixed income exposure, or one with no equity exposure, cannot qualify as a QDIA. The FAB also states that nothing in the QDIA regulations prohibits a plan sponsor from using more than one QDIA, as long as each satisfies the regulatory requirements.
The DOL has amended the QDIA regulations to clarify that a committee that is comprised primarily of employees of the plan sponsor can manage a QDIA when that committee, pursuant to plan documents, is a named fiduciary.
Plan sponsors who already had automatic enrollment programs in place prior to the issuance of the final QDIA regulations, and who had used stable value funds as their default investment, expressed the concern that these investments would fall outside the safe harbor.
The FAB states that, in such situations, the plan sponsor is not required to distribute a notice 30 days before the effective date of the QDIA regulations in order to obtain relief for assets that were invested in a stable value fund on or before the effective date of the final regulations. However, the relief provided by the QDIA regulations generally will not take effect until 30 days after the initial notice required by the regulations is furnished to participants. For example, if a plan sponsor distributes the initial notice on January 1, 2008 to participants and beneficiaries who were defaulted into a stable value fund prior to the effective date of the regulations, and assuming all other requirements of the regulations have been satisfied, the fiduciary relief provided by the regulations would be available to the plan sponsor on January 31, 2008 (i.e., thirty days later).
Finally, the regulations have been amended to clarify that the relief provided for investments made into stable value funds prior to the effective date of the QDIA regulations will apply even in cases where the stable value fund in question does not meet the current definition for such funds contained in the QDIA regulations. The amended regulations provide such relief for “…investment product(s)…designed to preserve principal; provide a rate of return generally consistent with that earned on intermediate investment grade bonds; and provide liquidity for withdrawals…” as long as no fees or charges are imposed on withdrawals and the fund invests primarily in State or federally regulated financial institutions.
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