In Notice 2014-66, the Internal Revenue Service (the “IRS”) provides guidance which enables a qualified defined contribution plan (such as a 401(k) plan) to provide lifetime income by offering, as investment options, a series of target date funds (“TDFs”) that include deferred annuities, even if some of the TDFs in the series are available only to older participants. This guidance provides that, if certain conditions are satisfied, a series of TDFs in a defined contribution plan is treated as a single right or feature for purposes of the nondiscrimination requirements of § 401(a)(4) of the Internal Revenue Code. This permits the TDFs to satisfy those nondiscrimination requirements as they apply to rights or features, even if one or more of the TDFs considered on its own would not satisfy those requirements.
Under the Notice, the condition for such treatment are:
1. The series of TDFs is designed to serve as a single integrated investment program under which the same investment manager manages each TDF and applies the same generally accepted investment theories across the series of TDFs. Thus, the only difference among the TDFs is the mix of assets selected by the investment manager, which difference results solely from the intent to achieve the level of risk appropriate for the age-band of individuals participating in each TDF. In accordance with the consistent investment strategy used to manage the series of TDFs, the design for the series is for the mix of assets in a TDF currently available for older participants to become available to each younger participant as the asset mix of each TDF for younger participants changes to reflect he increasing age of those participants.
2. Some of the TDFs available to participants in older age-bands include deferred annuities, and none of the deferred annuities provide a guaranteed lifetime withdrawal benefit (GLWB) or guaranteed minimum withdrawal benefit (GMWB)
3. The TDFs do not hold employer securities, as described in section 407(d)(1) of ERISA, that are not readily tradable on an established securities market.
4. Each TDF in the series is treated in the same manner with respect o rights or features other than the mix of assets. For example, the fees and administrative expenses for each TDF are determined in a consistent manner, and the extent to which those fees and expenses are paid from plan assets (rather than by the employer) is the same.
The Notice includes and analyzes an example of a plan offering a series of TDFs-to be discussed in tomorrow’s blog.