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November 5, 2007

PPA Notices Re-visited

Qualified Default Investment Alternatives

On October 24, 2007, the DOL issued final regulations relating to the use of qualified default investment alternatives (QDIA).  Generally, if a plan offers a default investment option that complies with these rules, then plan fiduciary(ies) are granted relief from certain fiduciary responsibilities for investment gains and losses.  However, the plan fiduciaries remain responsible for prudent plan management. 

To be eligible for relief, six conditions must be satisfied:

1.  Participant assets must be invested in the QDIA, unless the participant directs otherwise.

2.  The participant must have been given the opportunity to give investment instructions and had not done so.

3.  A notice of minimum requirements of the QDIA must be provided:

  • Within 30 days prior to plan eligibility, or, at least 30 days before any investment is made on behalf of a participant; or
  •   If participants are given the right to make permitted withdrawals, on or before the eligibility date.

In addition, a QDIA notice must be given annually, prior to the beginning of each plan year. 

Contents of Notice

The QDIA must include the following information:

  • A description of when a QDIA can be used, including an explanation of automatic enrollment rights and the right to decline automatic enrollment;
  • A description of the right to give investment direction;
  • A description of the QDIA investment objectives, including risk and return characteristics, and fees and expenses;
  • A description of the right to re-direct assets into other investments, including any restrictions that may apply; and
  • An explanation of where to get investment information.

4.  All materials regarding the QDIA, such as investment prospectuses,  must be passed through to plan participants.

5.  The right to transfer out of an investment in the same manner as other participants in the QDIA, but such right must be made available at least quarterly.  No fees or expenses can be charged in the first 90 days of the investment.

6.  Offer a broad range of investment alternatives.  For a QDIA, the types of investments available are:

  • Life-cycle funds;
  •   Balanced fund; or
  • Professionally-managed account funds.

There are limited instances in which capital preservation products and stable-value products can be used.

Since these rules become effective for plan years beginning on or after January 1, 2008, plan sponsors should review their plan documents to ensure compliance.  It should also be noted that the first annual notice for calendar year plans must be provided by December 1, 2007.

Related Information:

Annual Benefit Statements

The Pension Protection Act requires defined contribution (DC) and defined benefit plans to provide periodic benefit statements.  For DC plans in which the investments are participant-directed, the benefit statement must be provided quarterly, within 45 days following the close of the quarter. 

For DC plans in which the investment is not participant-directed, the benefit statement must be provided annually.  Due to several comments that indicated the difficulty creating the benefit statements within the previously prescribed timeframe, the DOL issued Field Assistance Bulletin 2007-03, providing that these benefit statements can be provided on or before the plan’s Form 5500 due date, including extensions, for the plan year to which the benefit statement relates.

Background information about benefits statements:

 

The information contained in this Benefit Beat is not intended to be legal, accounting, or other professional advice, nor are these comments directed to specific situations.

As required by U.S. Treasury rules, we inform you that, unless expressly stated otherwise, any U.S. federal tax advice contained in this Benefit Beat is not intended or written to be used, and cannot be used, by any person for the purpose of avoiding any penalties that may be imposed by the Internal Revenue Service.

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