On June 25, 2008, the Department of Labor’s Employee Benefits Security Administration (EBSA) held a webcast conference to help employers and plan administrators understand recent regulatory and interpretive guidance under the Employees Retirement Income Security Act (ERISA). During the webcast, EBSA provided updates regarding a number of regulations, including the default investment regulation, the delinquent contributions regulation, and the participant contribution safe harbor regulation.
Default Investment Regulation. 29 CFR § 2550.404c-5 allows fiduciary relief for investments in qualified default investment alternatives, or QDIAs. Under this regulation, the plan fiduciary will not be liable for any loss that is a direct and necessary result of investing in a QDIA. In order to be protected, a few general requirements must be met. First, the participant must have had the opportunity to direct the investment of assets in his or her account, but failed to do so. Second, the notice requirements in the regulation must have been complied with, including informing the participant of when the assets may be invested, their rights surrounding the investment, a description of the QDIA, and an explanation of where to find information on other investment alternatives. This notice must be made at least 30 days prior to the initial investment as well as 30 days before the beginning of each plan year. Finally, the investment must be one of the alternatives set forth in the regulation, which include both long-term and temporary QDIA alternatives.
On April 30, 2008, three Correcting Amendments (73 FR 23349) were issued regarding this regulation. Correcting Amendment No. 1 identified who can manage a QDIA. A plan sponsor that is a named fiduciary of the plan can manage a QDIA. This includes a committee comprised primarily of employees of the plan sponsor, as long as the committee is a named fiduciary under the plan documents.
Correcting Amendment No. 2 amended the provision discussing grandfather relief for stable value funds. Stable value products or funds which were default investments before the effective date of the final regulation (Dec. 24, 2007) may be QDIAs. The description originally used in the regulation could be construed to limit the availability of the grandfather relief. To rectify this problem and ensure broad application, the provision was amended and now reads “stable value products or funds must invest primarily in investment products that are backed by state or federally regulated financial institutions.” This means they can be issued directly by such institutions or the principal and accrued interest on the investment products may be backed by contracts issued by such institutions.
Correcting Amendment No. 3 dealt with certain restrictions during the 90-day period that begins on the date of the participant’s first elective contribution or other first investment in a QDIA. Originally, the regulation prohibited all restrictions, fees or expense on transfers or withdrawals from a QDIA during this period. This was intended to avoid inhibiting transfers from or liquidations out of a QDIA. However, EBSA concluded that prohibiting all restrictions is too broad, particularly “round-trip” restrictions which restrict the ability to reinvest within a defined period of time. This amendment now allows for “round-trip” restrictions that generally affect only a participant’s ability to reinvest in the QDIA for a limited period of time.
EBSA also issued a Field Assistance Bulletin (FAB 2008-03) regarding the default investment regulation. This FAB answers questions in six general areas of the regulation: (1) scope, (2) notice requirements, (3) limitation on fees and restrictions within the first 90 days, (4) management and asset allocation, (5) capital preservation investment option, and (6) grandfather relief for stable value products.
Delinquent Contributions Regulation. EBSA issued a FAB regarding delinquent contributions. This FAB covers when contributions become plan assets as well as whose responsibility it is to collect the delinquent contributions. Employer contributions become plan assets only when they have been received by the plan. If the employer fails to make contributions when due under the terms of the plan, the plan has a claim against the employer, and the claim is a plan asset. Employee, or participant, contributions become plan assets on the earliest date on which they reasonably can be segregated from the assets of the employer. Failure to collect these contributions may be a fiduciary breach by the responsible fiduciary. Failure to remit participant contributions to the plan also constitutes a prohibited transaction on the part of the employer.
A plan must have one or more named fiduciaries who have authority to control and manage the operation and administration. Additionally, it is required that all plan assets be held in the trust and that one or more trustees have exclusive authority and discretion to manage and control the assets of the plan. There are two exceptions to the trustee’s exclusive authority to manage the assets of the plan. First, if the plan provides that the trustee is subject to proper directions of a named fiduciary, then that trustee is excepted from the exclusive authority requirement. Similarly, the trustee is also exempted when the authority to manage, acquire, or dispose of plan assets is delegated to one or more investment managers.
It is the responsibility of the named fiduciary to assure that all trustee responsibilities have been properly assigned. The general rule is that the named fiduciary may assign this duty to a discretionary trustee, a directed trustee, or may appoint an investment manager to take care of these duties. The named fiduciary can enter into a trust agreement that provides that a particular trustee is not responsible for monitoring or collecting contributions. However, if no trustee or investment manager is given this responsibility, the named fiduciary will be liable for any losses due to failure to collect. If there is more than one trustee, the regulation also permits trustees to allocate responsibilities among themselves. In this case, a trustee is not liable for failure of another trustee to perform its allocated responsibilities. However, a trustee that is not responsible for collecting contributions still has an obligation to do so if (1) the trustee knows that no one has been assigned the responsibility to collect and (2) knows that delinquent contributions are not being collected.
Participant Contributions Safe Harbor. The general rule with respect to participant contributions is that they become plan assets on the earliest date that they can reasonably be segregated from the employer’s funds. The Proposed Amendment that was published on February 29, 2008 added a safe harbor for plans with fewer than 100 participants. Under this amendment, participant contributions are deemed to have been made to the plan on the earliest date on which contributions can reasonably be segregated from the employer’s general assets if they are received by the plan within seven business days of receipt of withholding by an employer. This is a way for small employers and their service providers to have the option of ensuring compliance. EBSA has allowed small employers to rely on this safe harbor while it is still in proposed form. Small plans can now look to the safe harbor and choose if they wish to forward, deposit, or remit the contribution to the plan. So long as this is done within seven days, EBSA will not take action with respect to the participant contribution requirements.