The Pension Protection Act Blog

One of the big automatic enrollment questions was answered today with the release of the Final Regulations on Default Investment Alternatives Under Participant Directed Individual Account Plans. Plans have been permitted to automatically enroll employees in 401(k) plans for years. Before the Pension Protection Act, employers could include a provision in their 401(k) plans to automatically enroll employees who failed to return their enrollment forms, and then automatically increase their deferral percentage each year. Deferrals from such automatically enrolled employees were still subject to testing each year.

An employee becomes automatically enrolled by not completing their enrollment forms. The enrollment forms provide the employer not only with information on what amount the employee wants to defer, but also how the employee would like that deferred money invested. Without instructions from the automatically enrolled employee, and without specific regulations from the IRS and Dept. of Labor, the plan sponsor was left with the decision, and a lot of discretion, on how to invest money for the automatically enrolled employees.

With the Pension Protection Act last year, Congress added more specific provisions on automatic enrollment, including Section 624 on the Treatment of Investment of Assets by Plan Where Participant Fails to Exercise Investment Election. Section 624 doesn’t actually provide the necessary information on how a plan sponsor should invest the deferrals, and any matching contributions, of an automatically enrolled employee. Instead, Section 624 punted, and instructed the Secretary to issue regulations by February 17, 2007, which would provide guidance on the appropriateness of designating default investments that include a mix of asset classes consistent with capital preservation or long-term capital appreciation, or a blend of both.

The Secretary did not make the February 17, 2007, date for issuing the regulations but the time was not wasted. The Secretary issued proposed regulations and then received over 120 comments. Today, the Secretary issued the final regulations.

Effective December 24, 2007, these final regulations go beyond the scope of automatically enrolled employees and will be applied by the Dept. of Labor to situations beyond automatic enrollment, including:

• the failure of a participant or beneficiary to provide investment direction following the elimination of an investment alternative or a change in service provider;

• the failure of a participant or beneficiary to provide investment instruction following a rollover from another plan; and

• any other failure of a participant to provide investment instructions.

The preamble to the Regs state that plan fiduciaries can avail themselves of the relief provided in these final regulations whenever a participant or beneficiary has the opportunity to direct the investment of assets in his or her account, but does not do so, and the plan fiduciary has satisifed all of the conditions in these final regulations.

Additional Information:

• Dept. of Labor Fact Sheet on Regulation Relating to Qualified Default Investment Alternatives in Participant-Directed Individual Account Plans, October, 2007, 3 pages.

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