U.S. Department of Labor
Employee Benefits Security Administration
Approximately one-third of eligible workers do not participate in their
employer-sponsored defined contribution plans (such as 401(k) plans).
Studies suggest that almost all of these workers would choose to remain
participants if they were automatically enrolled. The increased savings
would significantly improve their retirement security.
Some employers have adopted automatic enrollment plans and many more
are interested, but the fact that they are potentially liable for
investment losses that may occur in such plans has been a major impediment
to wider adoption of this plan design.
The Pension Protection Act of 2006, signed by President Bush on August
17, 2006, removes several impediments to automatic enrollment plans. A key
one of these is amending the Employee Retirement Income Security Act (ERISA)
to provide a safe harbor for plan fiduciaries investing participant assets
in certain types of default investment alternatives in the absence of
participant investment direction.
The Labor Department’s Employee Benefits Security Administration (EBSA)
has proposed a regulation implementing the default investment amendments
made to ERISA by the Pension Protection Act.
ERISA provides relief from liability for investment outcomes to
fiduciaries of individual account plans that allow participants to
exercise control over the investment of assets in their plan accounts.
The proposed regulation deems a participant to have exercised control
over assets in his or her account if, in the absence of investment
direction from the participant, the plan fiduciary invests the assets in a
qualified default investment alternative (QDIA).
The Department estimates that the proposal will increase aggregate
401(k) plan account balances by between $45 billion and $90 billion.
The proposal establishes the following conditions for fiduciary relief:
Assets must be invested in a “qualified default investment
alternative” as defined in the proposal.
Participants and beneficiaries must have been given an opportunity to
provide investment direction, but failed to do so.
A notice must be furnished to participants and beneficiaries 30 days in
advance of the first investment, and at least 30 days in advance of each
subsequent plan year, and must include: a description of the circumstances
under which assets will be invested in a QDIA; a description of the
investment objectives of the QDIA; and an explanation of the right of
participants and beneficiaries to direct investment of the assets out of
Any material, such as investment prospectuses and other notices,
provided to the plan by the QDIA must be furnished to participants and
Participants and beneficiaries must have the opportunity to direct
investments out of a QDIA with the same frequency available for other plan
investments but no less frequently than quarterly, without financial
The plan must offer a “broad range of investment alternatives” as
defined in the Department’s regulation under section 404(c) of ERISA.
Plan fiduciaries would not be relieved of liability for the prudent
selection and monitoring of a QDIA.
Under the proposed regulation, a QDIA must satisfy the following
A QDIA may not impose financial penalties or otherwise restrict the
ability of a participant or beneficiary to transfer the investment from
the qualified default investment alternative to any other investment
alternative available under the plan.
A QDIA must be either managed by an investment manager, or an
investment company registered under the Investment Company Act of 1940.
A QDIA must be diversified so as to minimize the risk of large losses.
A QDIA may not invest participant contributions directly in employer
A QDIA may be:
For questions about the proposed regulation, contact EBSA’s Office of
Regulations and Interpretations at 202.693.8500. Comments on the
proposed regulation should be directed to the U.S. Department of Labor,
Employee Benefits Security Administration, Room N-5669, 200 Constitution
Ave., N.W., Washington, D.C. 20210, Attention: Default Investment
Regulation; or electronically to e-ORI@dol.gov or www.regulations.gov.
This fact sheet has been developed by the U.S. Department of Labor, Employee
Benefits Security Administration, Washington, DC 20210. It will be made
available in alternate formats upon request: Voice phone: 202.693.8664;
TTY: 202.501.3911. In addition, the information in
this fact sheet constitutes a small entity compliance guide for purposes of
the Small Business Regulatory Enforcement Fairness Act of 1996.