Labor Dept. nixes 401(k) default

The U.S. Department of Labor announced today that stable value accounts will not be allowed as qualified default investment alternatives in 401(k) plans, despite heavy lobbying efforts from the insurance industry. The 2006 Pension Protection Act allows plan sponsors to direct employees automatically to a QDIA if the participant fails to provide an investment choice. Many in the financial services industry were eagerly waiting guidance from the Labor Department concerning what is considered a QDIA. The Labor Department will allow the following types of accounts as QDIAS: A product such as a target date or lifecycle fund that takes into account the individual’s age or retirement date, an investment service that allocates contributions among existing plan options such as a professionally managed account and a product with a mix of investments such as a balanced fund. Meanwhile, for the first 120 days of participation the Labor Department will allow a capital preservation product to be used as a QDIA. This is an option for plan sponsors wishing to simplify administration if workers opt-out of participation before incurring an additional tax. The Labor Department also provided a caveat for plan sponsors that may have used stable value products as their default option before the Pension Protection Act. Officials will “grandfather” those previous arrangements and protect them from being sued. The U.S. Department of Labor projects that revenue from having QDIAs is projected to increase retirement savings in defined contribution plans by as much as $134 billion by 2034. “This is a key component of the Pension Protection Act and will help many more workers and their families build a nest egg for a secure and comfortable retirement,” said U.S. Secretary of Labor Elaine L. Chao in a statement.