Recently, a client contacted us because they wanted to grandfather their plan’s current default investment in accordance with the DOL’s qualified default investment alternative (“QDIA”) final regulation. Defaults in a qualifying stable value investment on the date the regulation was issued, plus any additional amounts deposited on or before December 23, 2007, will be grandfathered as a QDIA. However, not every stable value investment is eligible for the enhanced fiduciary protection afforded to QDIAs. Section 2250.404(c)(5) of the final regulation defines “stable value” to mean:
an investment product or fund designed to guarantee principal and a rate of return generally consistent with that earned on intermediate investment grade bonds, while providing liquidity for withdrawals by participants and beneficiaries, including transfers to other investment alternatives.
For us to determine whether the plan’s default investment satisfied that definition, we requested additional information about the investment. The plan’s recordkeeper, which also sponsored the “stable value” investment, provided us with descriptive information about the characteristics of the investment. The information stated that the investment was managed as a collective trust and “...strives to maintain a stable $1 unit value (although this is not guaranteed)...” Since the investment did not guarantee the principal, much less the interest, it did not appear to satisfy the regulation’s definition of stable value.
We contacted the recordkeeper, which confirmed our conclusions. The recordkeeper had also recognized the issue and was working with the DOL to determine if the vehicle could qualify or if the criteria might be changed. We discussed our findings with the client and their alternatives.
Simply stated, the plan committee could either keep pre-December 23, 2007 defaulted amounts in the stable value investment, but probably without the grandfathered fiduciary protection, or move all pre-December 23, 2007 default investments into a new QDIA, and at least have fiduciary protection prospectively. The plan chose a balance fund as the QDIA for future deferrals on or after December 24, 2007.
The DOL has indicated it will issue additional guidance on QDIAs, most likely in the form of questions and answers. Such guidance will be informal (and thus less authoritative than a regulation). Nonetheless, the committee members decided to wait until the additional guidance is issued before making a decision.
If the new guidance does not change the eligibility of the stable value for QDIA grandfathering, the plan committee may re-default pre-December 23, 2007 investments into a long-term QDIA. Since the stable value collective trust has a transfer restriction for plan-initiated transfers of over one million dollars and the defaulted accounts are in excess of that amount, it may take several years to transfer all of the old default money.
There are two “morals” to this story. First, don’t assume that all stable value investments are eligible for grandfathering—compare the investment against the definition in the regulation. Second, make sure you—and the plan’s fiduciaries—are aware of all transfer restrictions and charges for the plan’s investments.
Disclaimer Required by IRS Rules of Practice:
Any discussion of tax matters contained herein is not intended or written to be used, and cannot be used, for the purpose of avoiding any penalties that may be imposed under Federal tax laws.