Say you wanted to build a custom target-date fund that had an annuity component and would qualify as a qualified default investment alternative. How would you do it?
The answer – or at least a framework for the answer – can be drawn from a response by the Labor Department to a request by TIAA regarding the firm’s “Income for Life Custom Portfolios,” which TIAA told the DOL “meets all the conditions of a qualified default investment alternative (QDIA) under ERISA section 404(c)(5) and 29 CFR 2550.404c-5, except that the ILCP contains certain liquidity and transferability restrictions attributable to an annuity component that fail the frequency of transfer requirement described in paragraph (c)(5)(i) of the regulation.”
The response, signed by Louis J. Campagna, Chief, Division of Fiduciary Interpretations of the Labor Department’s Office of Regulations and Interpretations, notes that one of the conditions for qualifying as a QDIA is that any participant or beneficiary on whose behalf assets are invested must be able to transfer such assets “in whole or in part” to any other investment alternative available under the plan with a frequency consistent with that afforded participants and beneficiaries who elect to invest in the QDIA, but not less frequently than once within any three month period. It notes that the ILCP’s Annuity Sleeve1 does not meet this requirement, and, accordingly, the ILCP would not constitute a QDIA.
The DOL goes on, however, to note that the QDIA regulation states that the QDIA standards “are not intended to be the exclusive means by which a fiduciary might satisfy his or her responsibilities with respect to selection of a default investment for assets in the individual account of a participant or beneficiary,” and that, in the Department’s view, “a fiduciary may be able to conclude, without regard to the fiduciary relief available under ERISA section 404(c)(5) and the regulation, that an investment product or portfolio is a prudent default investment for a plan.”
A Lifetime Income Focus
By way of background, the DOL notes that while its overarching focus when developing the QDIA regulation, including the types of investment alternatives that could be QDIAs, was on the long-term accumulation of retirement savings as a way to ensure adequate retirement income, but that following the publication of the final rule, a national discussion surfaced around the availability, need for and importance of lifetime income products and features. In the letter, DOL noted that it, “along with the Treasury Department and other stakeholders, identified the need for lifetime income as an important public policy issue and has supported initiatives that could lead to broader use of lifetime income options in defined contribution plans as a supplement to and enhancement of accumulation of retirement savings,” going on to state that “It is the view of the Department that a fiduciary of a participant-directed individual account plan could, consistent with the provisions of Title I of ERISA, prudently select an investment with lifetime income elements as a default investment under the plan if it complies with all the requirements of 29 CFR 2550.404c-5 except for reasonable liquidity and transferability conditions beyond those permitted in paragraph (c)(5)(i) of the regulation.”
The DOL then noted that in evaluating whether it is prudent to use this type of investment alternative as a default investment alternative, the fiduciary must engage in an objective, thorough and analytical process that considers all relevant facts and circumstances, that would be “important to evaluate the demographics of the plan and make a considered decision about how the characteristics of the investment alternative align with the needs of plan participants and beneficiaries,” taking into account, among other things:
- the nature and duration of the liquidity restrictions;
- the level of the guarantees of principal and minimum interest rates;
- any opportunities for the guaranteed minimum interest rates to be supplemented with additional credited amounts; and
- the expected lifetime income to be provided in retirement.
The DOL also noted that the costs (including fees and investment expenses) associated with the investment alternative should be considered reasonable in relation to the benefits and administrative services to be provided, and because the notice and disclosure provisions in the QDIA regulation were designed for default investments that would be generally liquid and freely transferable, “the fiduciary should also consider what additional notice should be provided to participants of the liquidity and transferability restrictions in advance of their becoming applicable as well as the need for more education for affected participants and beneficiaries regarding the features of the investment alternative.”
- TIAA’s Annuity Sleeve in the ILCP is subject to certain liquidity restrictions, according to the DOL letter. Specifically, the ILCP will allow participants to transfer or withdraw from the Annuity Sleeve without restriction for 12 months after the initial investment, after which any funds invested in the Annuity Sleeve of the ILCP would be available for transfer to another investment option only in installments over an 84-month period. All other funds in the ILCP would be liquid and transferable. According to the DOL letter, during this 12-month opt-out period, the plan directly or through TIAA would furnish educational materials periodically to participants defaulted into the ILCP. These materials would explain the features of the ILCP, including the Annuity Sleeve, and the delayed liquidity provision following the initial 12-month opt-out period. After the initial 12-month period, participant education about the ILCP will continue on at least an annual basis. ↩