- that would be caused by large amounts of stable value investments being liquidated and moved to other QDIAs. posted by Brad Richdale
- No Redemption Fees or Expenses – The regulation provides that (a) any transfers or withdrawals within 90 days from the QDIA by a participant “shall not be subject to any restrictions, fees or expenses (including surrender charges, liquidation or exchange fees, redemption fees and similar expenses charged in connection with the liquidation of, or transfer, from the investment)...”, but (b) that restriction “shall not apply to fees and expenses that are charged on an ongoing basis for the operation of the investment itself (such as investment management fees, distribution and/or service fees, ‘12b-1’ fees, or legal, accounting, transfer agent and similar administrative expenses) and are not imposed, or do not vary, based on a participant’s....decision to withdraw, sell or transfer assets out of the qualified default investment alternative...”
The proposed
regulation had prohibited any penalties on transfers or withdrawals, without
time limit. This limits any transfer fees or restrictions, but only for 90
days. As a result, plans need to determine whether their default investments
impose redemption fees for short-term trading; if so, those investments will
not be QDIAs and will not have the fiduciary safe harbor.
- 100 Percent Equity Funds Are Not QDIAs – The regulation provides “...the Department believes that when an investment is a default investment, the investment should provide for some level of capital preservation through fixed income investments. Accordingly, the final regulation, like the proposal, continues to require that the qualified default investment alternatives, defined in paragraph (e)(4)(i), (ii) and (iii), be designed to provide degrees of long-term appreciation and capital preservation through a mix of equity and fixed income exposures.” In other words, as we interpret it, for lifecycle, lifestyle or balanced funds, or managed accounts, to be QDIAs, they must have an allocation to fixed income. The unanswered question is whether a lifecycle, or target maturity, fund’s “glidepath” to an allocation in fixed income satisfies this condition. This discussion also raises the issue of how much is enough? For example, is a three percent allocation to fixed income satisfactory for a 2050 fund? We have posed these questions to the Department of Labor (DOL).
- Asset Allocation Models – The proposed regulation, in effect, required that asset allocation models be managed by a fiduciary investment manager. The final regulation changes that requirement and allows plan sponsors to manage the asset allocation models for participants, which is consistent with existing practices. This is a welcome “surprise.” (As a disclosure, we commented to the DOL that this change should be made, as models are used successfully for many participants. Also, in large plans, the models incorporate the plans’ low-cost funds – such as institutional shares and collective trusts, thereby substantially reducing the cost to the employees.)
As you can see there were many
requirements that these corporations were given to comply to. The biggest issue
they had was handing this responsibility off to the mutual fund companies who
were yearning to get the extra assets, which allowed for more fees. The burden
was on the corporations and unfortunately they believed the mutual fund
companies had kept them in compliance. In many cases they weren’t kept in
compliance, which opened them up to massive amounts of liability.
written by Brad Richdale copyright 2011 all rights reserved
