Home > News > Newsletter > Volume 11, Issue 4

DOL's Campbell Defends Logic Behind QDIA Regulations

Hopes that federal regulators might reverse position and designate stable value funds a Qualified Default Investment Alternative (QDIA) for 401(k) plans appeared to fade at the Stable Value Investment Association's 2007 National Forum on October 10, when Assistant Secretary of Labor Bradford Campbell defended a list of criteria that seemed to rule out stable value funds. In line with his comments, the Department of Labor (DOL) issued final regulations a week later that did not include stable value funds among the list of approved QDIAs.

On a more positive note, the final regulations, which become effective on December 24, 2006, did include a provision that 401(k) plans could still use stable value funds as default investment options if they wish, albeit without the fiduciary safe harbor that goes with using a QDIA. The DOL also included in its final rules grandfather protections for assets that had been defaulted into stable value funds prior to the new regulations becoming effective before 2008. The DOL also emphasized that the final regulation does not absolve fiduciaries of the duty to prudently select and monitor QDIAs.

The Pension Protection Act of 2006 gave the DOL responsibility for developing a list of QDIAs, which are investments that plan sponsors will be able to use, without fear of fiduciary liability, for the accounts of retirement plan participants who don't choose their own investment options. In late 2006, the DOL proposed that three types of investments would qualify: target-retirement-date or "lifecycle" funds, balanced funds, and managed accounts. The final list handed down varied only by adding that plans could use "capital preservation" products, such as money market funds, for the first 120 days of a worker's participation in their plan through default enrollment.

Stable value funds have, of course, long been one of the most popular default investment options for 401(k)s and similar defined contribution plans. Speaking at the SVIA Forum, Campbell acknowledged that stable value funds represent about 20 percent of the $2 trillion in retirement plan assets overseen at a regulatory level by the DOL's Employee Benefits Security Administration (EBSA), which he heads. Nonetheless, he said the overriding factor in the EBSA's decision-making process was the idea that retirement savings plans are long-term rather than short-term savings vehicles, and that the agency wanted to choose investment options that would best meet the needs of the greatest number of people. Accordingly, he said, the agency looked for investment alternatives that would be appropriate regardless of the investor's age, allow for the reallocation of assets based on the investor's changing circumstances, and be available at a reasonable cost.

The SVIA had argued that stable value funds are well suited to serve as a default investment option based on their track record of consistent performance above inflation levels, preservation of capital, low volatility, and low cost. It also had warned that excluding stable value funds from the safe harbor afforded other QDIAs could unduly discourage plans from offering stable value investment options. And it sponsored research indicating that stable value funds can play a key role in building efficient, risk-optimized investment portfolios for retirement plan participants. (See "Wharton Professor Concludes Stable Value Is the Fixed Income Solution for 401(k) Plans" elsewhere in this issue of Stable Times.)

Responding to a question from a Forum participant, Campbell said the EBSA did take into consideration the possibility that someone investing in a diversified portfolio heavy with equities could see their retirement nest egg irreparably harmed if the stock market tumbled badly about the time they retired—a risk that a stable value portfolio would not present. "One of the concerns we had was: yes, there would be people who fall into time periods where that would result in losses," Campbell said. "So we tried to quantify that, and balance it against those who didn't fall into such a time period. And we recognized that regardless of how this comes out, there are going to be people who lose, but the bulk of the people are going to win, meaning they will be better off, in terms of retirement security, over time."

Campbell noted that developing the QDIA regulations was just one of several regulatory initiatives it was required to undertake in the past year under the Pension Protection Act. On October 24, two weeks after Campbell spoke at the SVIA Forum, the DOL issued final rules for automatically enrolling workers in 401(k) and other defined contribution plans. Meanwhile, the EBSA is in the process of developing regulations for dispensing investment advice to participants in retirement savings plans, completing the annual Form 5500 report that plan sponsors must file with the Department of Labor and selecting annuity providers for retirement savings plans such as 401(k)s. The latter regulation, Campbell said, "should be helpful in making annuities more common in employee benefit plans."

The EBSA also is seeking comments on proposed new regulations that will likely increase the amount of detail service providers must give to plan fiduciaries about the fees those providers charge for their services. Although Congress is contemplating legislation that would govern such disclosures, Campbell said it is the view of the DOL that such legislation is not required. (See "Regulators Seeking Greater Fee Disclosure for 401(k) Plans" elsewhere in this issue of Stable Times.)

Read Next: Simplifying the Roth 401(k) Decision