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News from, July 25, 2012
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QDIA Safe Harbor Applies to Fiduciary's Transfer of Participant Accounts

[Bidwell v. Univ. Med. Ctr., Inc., 2012 WL 2477588 (6th Cir. 2012)]

In this case involving a fiduciary’s investment of participants’ retirement plan accounts in a qualified default investment alternative (QDIA), the appellate court upheld the trial court’s decision in favor of the plan fiduciary holding that the DOL’s safe harbor for QDIA investments applied to the fiduciary’s actions. As background, a plan fiduciary can limit its liability with respect to participants (or beneficiaries) who fail to give investment instructions by investing their accounts in a QDIA in accordance with DOL regulations. The participants here had chosen to invest their accounts in the plan’s stable value fund, which happened to be the plan’s default investment before the QDIA rules were implemented. The plan did not keep track of which accounts were invested in the stable value fund by default and which were the result of an affirmative election.

Once the QDIA rules took effect, the plan administrator designated a different investment as the QDIA and transferred the plan’s stable value fund investments into it. Plan records showed that the fiduciary followed applicable requirements, including that participants be provided with notice and the choice to direct their accounts to an investment other than the QDIA. These participants, asserting that they did not receive the notices and thus were not afforded the opportunity to keep their accounts in the stable value fund, sued to recover losses sustained in connection with the transfers. They argued that the safe harbor provided by the regulations could only protect fiduciaries when investing funds on behalf of individuals who had failed to make any investment election. Because they had affirmatively elected the stable value fund, they contended, moving their accounts constituted a fiduciary breach regardless of whether the safe harbor requirements were met. The court disagreed, noting that the preamble to the safe harbor regulations expressly indicates that a participant who does not respond to a properly provided notice may be treated as failing to give investment directions, whether the participant elected to invest in the original default investment vehicle or was defaulted into that vehicle. Because the situation fell within the safe harbor, and the fiduciary adhered to the safe harbor’s requirements, there was no fiduciary breach.

EBIA Comment: The fundamental issue addressed in this appeal was not whether the plan had complied with the safe harbor requirements, but whether the safe harbor even applied in this particular situation. The participants, based on the outcome in the trial court, may have chosen to focus on that angle in the appeal since it appeared that the fiduciary’s actions met the safe harbor requirements. In any event, this case underscores the importance of adhering to prudent procedures—and documenting those procedures—when carrying out fiduciary functions.

Source: EBIA Weekly


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