Home > Library > Stable Times > Volume 10, Issue 4  

DOL Attorney Says Proposed Default Investment Guidelines Don’t Rule Out Stable Value

Despite excluding stable value as one of the permitted qualified default investment alternatives, a Department of Labor (DOL) attorney told attendees at the SVIA’s annual forum in Washington, D.C., that the proposed new guidelines for choosing default investment options don’t preclude employers from picking a stable value fund, or any other investment option, if they wish.

The guidelines—developed by the DOL in keeping with the recently passed Pension Protection Act of 2006—list just three types of “qualified default investment alternatives” for investors in defined contribution plans who don’t select their own investments. They are lifecycle or target-date funds, balanced funds, and professionally managed accounts. If an employer defaults plan participants into one of those three options, the guidelines say, the employer can’t be held liable for the performance of the investment, provided, as always, that it was prudently selected and monitored. However, the proposed regulations don’t actually prohibit plan sponsors from defaulting participants into other options, such as stable value funds, if they wish. Nor do they imply that doing so would be irresponsible.

“What we’ve made clear is that there’s nothing per se imprudent about a fiduciary using other investments that may not be described (in the guidelines),” said Lisa Alexander, a pension law specialist with the Office of Regulations and Interpretations in the DOL’s Employee Benefits Security Administration. “For instance, stable value funds may be perfectly prudent for the participants and fiduciaries of a given plan, and our regulation is not saying the qualified default investment alternatives (QDIAs) are the only ones that can be used. Others may be perfectly prudent.” The only caveat, of course, is that using something other than the DOL’s qualified alternatives would not provide the fiduciary safe harbor from investment performance.

The issue of what constitutes an appropriate default investment option for 401(k)s and other defined contribution plans has become a subject of great interest to employers over the past few years as increasing numbers of them have begun to enroll employees into their plans automatically. When they do that, the chance of having participants in their plan who didn’t make their own investment decisions goes up.

The Pension Protection Act endorses automatic enrollment and, under the default investment guidelines proposed by the DOL, provides employers with the first fiduciary safe harbor for investment performance that doesn’t rely on having plan participants choose their own investments.

Alexander noted that the proposed default investment guidelines are expected to be finalized in the first quarter of 2007.

Read Next: SVIA Elects Five New Board Members