The U.S. Department of Labor (DOL) has issued final regulations concerning Qualified Default Investment Alternatives (QDIA), allowing two individually-based options and one group-based option. Stable value funds were excluded as a long-term QDIA, however admitted as a short-term capital preservation option for administrative convenience.

From the DOL QDIA fact sheet:

The final regulation provides for four types of QDIAs:

• A product with a mix of investments that takes into account the individual’s age or retirement date (an example of such a product could be a life-cycle or targeted-retirement-date fund);
• An investment service that allocates contributions among existing plan options to provide an asset mix that takes into account the individual’s age or retirement date (an example of such a service could be a professionally-managed account);
• A product with a mix of investments that takes into account the characteristics of the group of employees as a whole, rather than each individual (an example of such a product could be a balanced fund); and
• A capital preservation product for only the first 120 days of participation (an option for plan sponsors wishing to simplify administration if workers opt-out of participation before incurring an additional tax).

A QDIA must either be managed by an investment manager, plan trustee, or plan sponsor who is a named fiduciary, or be an investment company registered under the Investment Company Act of 1940.

Recognizing that many employers adopted automatic enrollment prior to PPA and this regulation, the DOL included a transition rule that grandfathers contributions invested in stable value fund investments ahead of the QDIA effective date.

Final regulations also include conditions that must be satisfied in order to obtain safe harbor relief from fiduciary liability for investment outcomes:

• Assets must be invested in a “qualified default investment alternative” (QDIA) as defined in the regulation.
• Participants and beneficiaries must have been given an opportunity to provide investment direction, but have not done so.
• A notice generally must be furnished to participants and beneficiaries in advance of the first investment in the QDIA and annually thereafter. The rule describes the information that must be included in the notice.
• Material, such as investment prospectuses, provided to the plan for the QDIA must be furnished to participants and beneficiaries.
• Participants and beneficiaries must have the opportunity to direct investments out of a QDIA as frequently as from other plan investments, but at least quarterly.
• The rule limits the fees that can be imposed on a participant who opts out of participation in the plan or who decides to direct their investments.
• The plan must offer a “broad range of investment alternatives” as defined in the Department’s regulation under section 404(c) of ERISA.

More details about these regulations can be found at PLANADVISOR.com or at the U.S. Department of Labor Website.