403(b) QDIA/Custodial Agreement Amendment

May 22, 2008

403b Outlook Archive 403(b) Outlook Archive

Read about Qualified Default Investment Alternatives (QDIAs).

Read about Custodial Agreement Amendments.

Next week’s issue: Plan Document Requirements


What is the rule? The Pension Protection Act amended section 404(c) of ERISA to provide relief for plan fiduciaries who, in the absence of affirmative investment instructions, invest participant plan assets in qualified default investment alternatives (“QDIAs”). A plan fiduciary who invests participants’ assets in a QDIA will not be liable for any investment losses of participants and beneficiaries if the participants are provided with advance notice of the circumstances under which investments in QDIAs will be made, the QDIAs’ investment objectives, and their right to move assets out of the QDIAs.

Under the regulation, QDIAs include:

  • lifecycle funds
  • certain balanced funds and
  • certain managed accounts that act like lifecycle funds

In addition there is limited QDIA treatment for money market funds for 120 days after the first contribution and stable value funds for investments made prior to Dec. 24, 2007 (the effective date of the final QDIA regulation).

Participant notices: Written notices must be provided to participants by plan sponsors 30 days before plan eligibility; or first investment in a QDIA; or on or before the date of plan eligibility (provided the participant can opt out of the plan pursuant to the Internal Revenue Code provisions permitting participants the right to opt out of an automatic enrollment plan during the first 90 days of participation) and at least 30 days in advance of each plan year.

The notice must contain:

  • a description of the circumstances in which default investments will be made
  • the participant’s right to direct the investments
  • a description of the QDIA including investment objectives, risk and return characteristics, and fees and expenses
  • the transfer rights from the QDIA to other plan investment alternatives
  • an explanation of where the participant may obtain information about the plan’s other investment alternatives

TIAA-CREF has prepared sample participant notices designed to meet the Department of Labor’s final QDIA notice requirements.

Effective date: The QDIA final regulation went into effect on Dec. 24, 2007.

What happens if you fail to comply: ERISA covered plans can only obtain the fiduciary protection for default investments by following the conditions set forth in the final QDIA regulation.

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Custodial Agreement Amendment 

What is the rule? Those 403(b) plan sponsors who already offer mutual funds under a 403(b)(7) custodial agreement with JPMorgan Chase, may soon receive an amendment to their custodial agreement that is needed in order to assure compliance with the new IRS 403(b) regulation that will go into effect on Jan. 1, 2009.

The amendment specifies that their Code section 403(b)(7) custodial account will comply with the following requirements applicable to all 403(b) plans:

(1) minimum distribution rules requiring distributions of benefits at the later of age 70½ or retirement

(2) limitations on plan contributions (both employer and employee)

(3) rules applicable to rollover distributions

The new 403(b) regulation specifies that these provisions must not only be in the sponsoring institution’s 403(b) plan but also must be in any custodial agreement meeting the requirements of Code section 403(b)(7). This is a formal amendment only and 403(b) plans are currently required to follow these provisions. This amendment does not impose any new obligations upon a plan sponsor, its plan participants or their beneficiaries. Plan administrators who receive this amendment will be asked to sign and return three copies to TIAA-CREF.

Effective date: The amendment must be in place prior to Jan. 1, 2009.

What happens if you fail to comply? Failure to sign the amendment to the 403(b)(7) custodial agreement could result in the disqualification of the agreement.

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