The Pension Protection Act (PPA) has several provisions which focus on defined contribution plan investment returns. One of the most important is the new fiduciary protection under ERISA §404(c)(5) for default investments. Under this provision, a plan fiduciary investing a participant-directed account in the absence of a participant’s investment direction has fiduciary protection, provided the plan satisfies an annual participant notice requirement and invests the participant’s account according to the DOL regulations. The new rules deal with the common situation in which a participant can direct his or her investments, but does not specify an investment option. The plan then invests the funds for the participant, but until now has not had any fiduciary protection. The DOL has just released proposed regulations to implement the new default investment rules which provide that protection.

The new rules protect a fiduciary from responsibility for any loss which may occur as a result of investing participant funds in a qualified default investment alternative (QDIA). However, the fiduciary is responsible for prudently selecting the QDIA, and the regulatory preamble states that fees are a major factor to consider.

A QDIA must meet the following requirements:

1. The QDIA must be a one of the following types of diversified investments:
   A “life-cycle” or “targeted-retirement date” fund,
   A “balanced” fund or portfolio which takes into account the ages of all plan participants, or
   A “managed account” which operates in a manner similar to a “life-cycle” fund.
2. With certain exceptions, the QDIA cannot hold employer securities.
   
3. A QDIA cannot penalize or restrict a participant from transferring funds to other investment alternatives.
   
4. A registered investment company or an ERISA investment manager must manage the QDIA. The investment manager does not have ERISA §404(c)(5) protection.

To qualify for fiduciary protection, the plan must allow participant direction of investment, and must provide participants with the opportunity, at least quarterly, to transfer funds out of the QDIA to a broad range of investment options, which must include at least three diversified funds. The plan also must pass certain information through to the participant and must provide an annual notice to the participant at least 30 days before the start of the plan year. While a plan which does not provide for participant direction of investment cannot use the new ERISA §404(c)(5) protection, a plan providing participant direction of investment does not need to comply with all of the requirements of the old 404(c) regulations to have protection for QDIAs.

The statutory provision is effective for plan years beginning after December 31, 2006. The proposed regulatory effective date is 60 days after publication of final regulations.

This year’s ERISA Workshop will focus heavily on PPA, and will include further discussion of these important new regulations. For more information, please visit http://www.relius.net/products/seminarspension.asp.