The Spark Institute Asks DOL to Clarify QDIA Regulations
SIMSBURY, CT, December 5, 2007 -- The SPARK Institute has submitted a formal request to the U.S. Department of Labor (DOL) asking for clarification of several aspects of the agency's recently issued final qualified default investment alternatives (QDIA) regulations.
"We are pleased that the final rules address many of the concerns of retirement plan record keepers and provide guidance for incorporating QDIAs in auto enrollment programs," said Larry Goldbrum, General Counsel of The SPARK Institute. "However, we believe there are a number of areas where clarification of the DOL's positions will help plan sponsors comply with the regulations and enable service providers to better facilitate compliance," he added.
Among the key issues addressed in The SPARK Institute's letter is the definition of certain capital preservation funds and products for the grandfathering relief provisions. The SPARK Institute notes that with regard to the grandfathering provision, the regulations describe the capital preservation (i.e., stable value) investment products eligible for safe harbor as those that are "designed to guarantee principal and a rate of return."
"We are concerned that absent additional clarification, the current definition can be interpreted to exclude a significant percentage of the stable value products that the DOL presumably intended to cover. Many plans invest directly in stable value products that only guarantee principal, or indirectly through pooled vehicles (e.g., collective investment funds) that do not guarantee principal or a rate of return for plan investors. Pooled funds are subject to withdrawal and redemption restrictions and penalties for early cancellation of the underlying stable value contracts which could result in severe financial penalties for plan investors if too many tried to liquidate their positions at the same time."
Goldbrum said The SPARK Institute has requested that the DOL clarify the language at issue to provide that stable value products must only be designed to guarantee principal in order to qualify for the grandfathered safe harbor relief. "Additionally, we have asked the DOL to clarify that the grandfathered relief cover stable value pooled funds that are not, per se, principal guaranteed provided that they are designed to invest in the stable value products otherwise described in the regulations, have as their goal the guarantee of principal consistent with common investment practices for diversification and liquidity, and restrict or limit plan sponsors from transferring or withdrawing all or a portion of their assets from the fund for a specified period of time of at least 12 months," he said.
The SPARK Institute also raised certain practical concerns that may limit plan sponsors' ability to use the 120 day capital preservation safe harbor. Goldbrum said that in order for a plan sponsor to continue to benefit from the long term safe harbor protections, any assets defaulted into a capital preservation fund must be transferred to one of the other three default investment options when the 120 day protection period ends. "This requirement creates new aging, tracking and transfer requirements and building the functionality to facilitate compliance will require significant software development on the part of record keepers," he said.
"Many of our members have advised us that the necessary systems and technology to support this feature and the requirements under the regulations are not currently available. Plan sponsors that wish to take advantage of the QDIA safe harbor as soon as possible will likely not be able to use a 120 day capital preservation fund safe harbor," Goldbrum stressed. "We anticipate that most plan sponsors that elect to proceed by using one of the other types of safe harbor funds will likely not be willing to add the 120 day capital preservation fund later on, if and when their plan record keeper makes the system functionality available."
The SPARK Institute also requested clarification of several other aspects of the regulations, including the timing of notice for safe harbor relief for existing balances, delivery of the QDIA notice with other notices and information, QDIA notice compliance through references to other documents, penalties on transfers, defining participant direction in certain instances, and the definition of life cycle and target date retirement funds.
About SPARK Institute
The SPARK Institute is the leading voice in Washington for the retirement services industry. Through the combined expertise of its member companies, The SPARK Institute provides research, education, testimony and comments on pending legislative and regulatory issues to members of Congress and relevant government agency officials. This disciplined process and resulting solutions help shape America's retirement future.
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