ERISA-DOL Discusses The Selection Of A Default Investment For A Participant-Directed Account Plan
In an Information Letter, the DOL responded to a request regarding the application of ERISA to TIAA’s “Income for Life Custom Portfolios” (the “ILCPs”). TIAA had represented that the ILCP product meets all the conditions of a “qualified default investment alternative” (a “QDIA”) under ERISA section 404(c)(5) and 29 CFR 2550.404c-5, except that the ILCP contains certain liquidity and transferability restrictions attributable to an annuity component that fail the frequency of transfer requirement described in paragraph (c)(5)(i) of the regulation. TIAA asked the DOL whether: (1) the ILCPs nonetheless should still be appropriate for a plan fiduciary to select as a default investment alternative, because the annuity component allows the ILCP to provide in-plan access to an investment with a guaranteed rate of return and guaranteed lifetime income at retirement and (2) whether Title I of ERISA prohibits a plan fiduciary from selecting the ILCP as a default investment alternative for a participant-directed individual account plan.
The DOL responded to these questions, by stating that since the ILCPs failed to meet the frequency of transfer requirement in the regulations, the ILCPs could not qualify as QDIAs. Nevertheless, the QDIA regulation, at 29 CFR 2550.404c-5(a)(2) and 2550.404c-5(f)(4), states that the QDIA standards are not intended to be the exclusive means by which a fiduciary might satisfy his or her responsibilities with respect to selection of a default investment for assets in the individual account of a participant or beneficiary. In the DOL’s view, a fiduciary may be able to conclude, without regard to the fiduciary relief available under ERISA section 404(c)(5) and the regulation, that an investment product or portfolio is a prudent default investment for a plan.
In it’s view, the DOL continued, a fiduciary of a participant-directed individual account plan could, consistent with the provisions of Title I of ERISA, prudently select an investment with lifetime income elements-such as the ILCPs- as a default investment under the plan, if it complies with all the requirements of 29 CFR 2550.404c-5 except for reasonable liquidity and transferability conditions beyond those permitted in paragraph (c)(5)(i) of the regulation. When evaluating whether it is prudent to use this type of investment alternative as a default investment alternative, the fiduciary must engage in an objective, thorough and analytical process that considers all relevant facts and circumstances.
For example, continued the DOL, it would be important to evaluate the demographics of the plan and make a considered decision about how the characteristics of the investment alternative align with the needs of plan participants and beneficiaries taking into account, among other things, the nature and duration of the liquidity restrictions, the level of the guarantees of principal and minimum interest rates, any opportunities for the guaranteed minimum interest rates to be supplemented with additional credited amounts, as well as the expected lifetime income to be provided in retirement. As another example, the fiduciary should also consider whether the costs (including fees and investment expenses) associated with the investment alternative are reasonable in relation to the benefits and administrative services to be provided.
Further, said the DOL, because the notice and disclosure provisions in the QDIA regulation were designed for default investments that would be generally liquid and freely transferable, the fiduciary should also consider what additional notice should be provided to participants of the liquidity and transferability restrictions in advance of their becoming applicable as well as the need for more education for affected participants and beneficiaries regarding the features of the investment alternative. Whether the selection of any particular investment alternative, including the ILCP, as a default investment alternative satisfies the fiduciary duties of prudence and loyalty in ERISA section 404(a) with respect to any particular plan would depend on the facts and circumstances.