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September 27, 2006
Rule Proposed for Automatic Enrollment in 401(k)

The Department of Labor has proposed a rule to make it easier for employers to adopt automatic enrollment in 401(k) plans.

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The proposal implements provisions of the Pension Protection Act of 2006 to provide a safe harbor for plan fiduciaries who invest the assets of participants in "qualified default investment alternatives" in the absence of participant investment direction. The department estimates that the proposal will increase aggregate 401(k) plan account balances by between $45 billion and $90 billion.

"The new default options will help workers accumulate larger nest eggs for retirement," says Assistant Secretary of Labor Ann L. Combs. "Workers who don't feel equipped to make investment decisions will be automatically invested in a mix of stocks and bonds appropriate for long term savings."

According to a Department of Labor fact sheet, the proposal would establish the following conditions for the safe harbor:

  • 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 the QDIA.
  • Any material, such as investment prospectuses and other notices, provided to the plan by the QDIA must be furnished to participants and beneficiaries.
  • 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 penalty.
  • 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.

Qualified Default Investment Alternatives

Under the proposed regulation, a QDIA must satisfy the following requirements:

  • 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 securities.
  • A QDIA may be:
    • Life-cycle or targeted-retirement-date fund;
    • Balanced fund; or
    • Professionally managed account.

The Department is accepting public comments on the proposal. Public comments should be submitted 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 .

The proposed regulation is published in the September 27, 2006 Federal Register .

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