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CAPITAL CITIES Pension Protection Act Can Shield Fiduciaries |
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Like grandma with a fresh batch of cookies, the Pension Protection Act of 2006 (PPA) holds out some sweet treats for fiduciaries of 401(k) plans. But you'll have to get your chores done first.
Enacted August 17, 2006, the PPA promises relief from one of a 401(k) plan's thornier issues: ERISA 404(c) protection for fiduciaries of plans in which participants choose their own investments. Such protection was inadequate before the PPA in the three circumstances we'll examine here - default investments, blackout periods and mapping of participant accounts.
Default investments
In plans where participants direct their own investments, plan fiduciaries must exercise prudence in selecting which investments to offer. 404(c) protects fiduciaries from liabilities arising from the participants' own poor choices, as long as proper prudence was exercised by the plan fiduciaries in choosing which investments to offer. However, to enjoy the relief provided by 404(c), a participant must exercise control over the investment of his assets in the plan. In cases where a participant failed to make an election, he did not "exercise control," so 404(c) relief did not apply. For plan years beginning after December 31, 2006, 404(c)(5) is added to ERISA, extending the protection to fiduciaries who place these contribution amounts in a qualified default investment alternative (QDIA).
A QDIA is used when a participant has the opportunity to choose his own investments but fails to do so. Among other requirements, the QDIA must not include employer securities, must not restrict the ability of the participant to transfer the account to another investment, and must be diversified. The Department of Labor issues guidance on which investments qualify as QDIAs.
The 404(c) relief for QDIAs will be important for plans using auto-enrollment, because they tend to have greater numbers of participants who fail to select an investment. By utilizing a QDIA, plan fiduciaries can avail themselves of the 404(c) protections.
Blackout periods
During a blackout period, participants cannot change any of their plan selections. Before the PPA, it was unclear what protections would be afforded to plan fiduciaries against investment losses incurred during a blackout period. The PPA provides that 404(c) protection is generally not available during a blackout period. However, for plan years beginning after December 31, 2007, the PPA allows for the protection in cases where a blackout period occurs in accordance with ERISA. ERISA section 101(i) requires a 30-day advance notice of a blackout period, which must include such things as the reason for the blackout; a description of the rights, suspended during the blackout, that are normally available to participants; and the expected beginning and ending date of the blackout.
Mapping
The term 'mapping' refers to the substitution by the plan's fiduciaries of an investment vehicle with one that is substantially equivalent, and the transfer of participant accounts from one to the other. 404(c) protection was not available before the PPA in cases where participant monies were mapped to a different investment. The PPA calls this kind of change a qualified change in investment options.
To maintain the protection of section 404(c), a qualified change in investment options must use an investment option that is reasonably similar in terms of risk and rate of return, among other requirements. But questions arise. Who will decide what is reasonably similar? According to the PPA, participants must be notified in writing at least 30 days, but not more than 60 days, before the change is effective, comparing the old and new options, and stating that if participants don't choose otherwise, their funds will be moved to the new investment vehicle. Who will draft the notice? Someone with the technical expertise to compare the two investments is obviously needed; will that person be a consultant? An accountant? An investment advisor? The plan's fiduciaries must decide.
To protect themselves from future claims that the two investments were not reasonably similar, fiduciaries will want to make sure to properly document the decision-making process, even as far as how they chose the individuals or company that drafted the notice.
The Pension Protection Act can, indeed, offer protections for fiduciaries of participant-directed plans. However, like those cookies from grandma, there are things you need to do before you can enjoy them. As always, seek the advice of the plan's attorneys when making decisions about the plan.
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Information provided in partnership with 401khelpcenter.com, LLC.
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