institution.
As a practical matter, we believe plans will use money market accounts or
similar short-term vehicles for this purpose. posted by Brad Richdale
The long-term QDIAs are
target maturity funds or models (e.g., lifecycle or target date funds),
balanced funds or models (including risk-based lifestyle funds) and managed
accounts.
The grandfathered QDIA is
a stable value investment. The regulation defines it generally as a product
“designed to guarantee principal and a rate of return generally consistent with
that earned on intermediate investment grade bonds.” (Note that there are
additional limitations in the definition.) Defaults in this grandfathered
option on the date the regulation was issued (October 24, 2007), plus any
additional amounts that are deposited into the stable value option on or before
December 23, 2007, will be grandfathered as a QDIA. However, to obtain
fiduciary protection for deposits for those previously defaulted participants
that are made after December 23, the new amounts must be placed in a long-term
QDIA.
In a future bulletin, we
will discuss each of these QDIAs in more detail.
Q: What must fiduciaries do after
selecting a particular category or type of QDIA investment?
Once
a fiduciary has identified the type of QDIA that will be used by the plan, the
fiduciary must engage in a prudent process to select the particular investment
fund, model portfolio, or managed account service. In addition, the fiduciary
must monitor that selection to ensure that it remains a prudent choice.
The preamble states the
general rule regarding a fiduciary’s duties and provides an example to
illustrate the application of those duties: “the plan fiduciary must prudently
select and monitor an investment fund, model portfolio, or investment
management service within any category of qualified default investment
alternatives in accordance with ERISA’s general fiduciary rules. For example, a
plan fiduciary that chooses an investment management service that is intended
to comply with paragraph (e)(4)(iii) [the investment manager alternative] of
the final regulation must undertake a careful evaluation to prudently select among
different investment management services.”
Similar standards would
apply to other forms of QDIAs, for example, to the selection of a suite of
target maturity funds.
Q: Were there any surprises in the
regulation?
- 120-Day Short-Term Investment Option – The money market QDIA – for the limited period of 120 days – was not in the proposed regulation. As a result, it was somewhat of a surprise. We assume it is primarily intended to coordinate with the provision in the Internal Revenue Code allowing automatically enrolled participants to request the withdrawal of their accounts within 90 days. However, it will also be helpful for avoiding transfer fees (e.g., redemption fees) for withdrawals and transfers within the first 90 days.
written by Brad Richdale copyright 2011 all rights reserved
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