DOL Releases Guidance on Default Investment Options:


The U.S. Department of Labor (“DOL”) recently released an Information Letter (“IL”), dated December 22, 2016, addressing default investment options in plans covered by ERISA. As background, many individual account retirement plans (e.g., 401(k) plans) provide that if a participant fails to designate how his or her account is invested, then his or her account is invested in the plan’s “default” investment option. To help limit plan fiduciaries’ exposure to liability if any participant’s account loses money while invested in the “default” option, many plans have a qualified default investment alternative (“QDIA”) as the plan’s default option. Under DOL regulations, several investment options qualify as a QDIA if specific requirements are satisfied. Notably, when a plan complies with the regulations, although plan fiduciaries remain responsible for the prudent selection and monitoring of the QDIA, they are not liable for any loss that occurs as a result of a participant’s investment in the QDIA.

In the IL, the DOL addressed the question of whether a default investment option that does not satisfy the QDIA regulations’ criteria can still serve as a plan’s default investment option. (The investment option addressed in the IL apparently satisfies the conditions for a QDIA, with the one exception that it contains certain liquidity and transferability restrictions attributable to an annuity component that fail the regulations’ frequency-of-transfer requirement.) In the IL, the DOL began its answer to this question by stating that the QDIA standards are not the only means by which a fiduciary can satisfy his or her responsibilities with respect to the selection of a default investment option. Rather, a fiduciary might be able to conclude that a non-QDIA investment product or portfolio is a prudent default investment for a plan after engaging in an objective, thorough, and analytical process. More specifically, a plan fiduciary can potentially prudently select an investment option with lifetime income elements as a default investment if it complies with all the requirements of the QDIA regulation except for reasonable liquidity and transferability conditions.

Not surprisingly, the IL goes on to state that whether the selection of any particular default investment alternative satisfies ERISA’s fiduciary duties of prudence and loyalty with respect to any particular plan will depend on all relevant facts and circumstances.

It remains the case that the most conservative approach for maximizing fiduciaries’ protection from liability in this regard is to have the plan’s default investment option be a QDIA. However, this IL serves as a helpful reminder that non-QDIA default options might provide fiduciaries’ with suitable protection if such options are selected in a prudent manner and if they continue to constitute prudent options during their time in a plan.

Here is a link to the IL: