Default Investment Alternatives Under Participant Directed Individual Account Plans, 60452-60480 [07-5147]

Agencies

• Employee Benefits Security Administration
• DEPARTMENT OF LABOR

[Federal Register Volume 72, Number 205 (Wednesday, October 24, 2007)]
[Rules and Regulations]
[Pages 60452-60480]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 07-5147]



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Part III





Department of Labor





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Employee Benefits Security Administration



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29 CFR Part 2550



Default Investment Alternatives Under Participant Directed Individual 
Account Plans; Final Rule

Federal Register / Vol. 72, No. 205 / Wednesday, October 24, 2007 / 
Rules and Regulations

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DEPARTMENT OF LABOR

Employee Benefits Security Administration

29 CFR Part 2550

RIN 1210-AB10


Default Investment Alternatives Under Participant Directed 
Individual Account Plans

AGENCY: Employee Benefits Security Administration.

ACTION: Final rule.

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SUMMARY: This document contains a final regulation that implements 
recent amendments to title I of the Employee Retirement Income Security 
Act of 1974 (ERISA) enacted as part of the Pension Protection Act of 
2006, Public Law 109-280, under which a participant in a participant 
directed individual account pension plan will be deemed to have 
exercised control over assets in his or her account if, in the absence 
of investment directions from the participant, the plan invests in a 
qualified default investment alternative. A fiduciary of a plan that 
complies with this final regulation will not be liable for any loss, or 
by reason of any breach, that occurs as a result of such investments. 
This regulation describes the types of investments that qualify as 
default investment alternatives under section 404(c)(5) of ERISA. Plan 
fiduciaries remain responsible for the prudent selection and monitoring 
of the qualified default investment alternative. The regulation 
conditions relief upon advance notice to participants and beneficiaries 
describing the circumstances under which contributions or other assets 
will be invested on their behalf in a qualified default investment 
alternative, the investment objectives of the qualified default 
investment alternative, and the right of participants and beneficiaries 
to direct investments out of the qualified default investment 
alternative. This regulation will affect plan sponsors and fiduciaries 
of participant directed individual account plans, the participants and 
beneficiaries in such plans, and the service providers to such plans.

DATES: This final rule is effective on December 24, 2007.

FOR FURTHER INFORMATION CONTACT: Lisa M. Alexander, Kristen L. Zarenko, 
or Katherine D. Lewis, Office of Regulations and Interpretations, 
Employee Benefits Security Administration, (202) 693-8500. This is not 
a toll-free number.

SUPPLEMENTARY INFORMATION:

A. Background

    With the enactment of the Pension Protection Act of 2006 (Pension 
Protection Act), section 404(c) of ERISA was amended to provide relief 
afforded by section 404(c)(1) to fiduciaries that invest participant 
assets in certain types of default investment alternatives in the 
absence of participant investment direction. Specifically, section 
624(a) of the Pension Protection Act added a new section 404(c)(5) to 
ERISA. Section 404(c)(5)(A) of ERISA provides that, for purposes of 
section 404(c)(1) of ERISA, a participant in an individual account plan 
shall be treated as exercising control over the assets in the account 
with respect to the amount of contributions and earnings which, in the 
absence of an investment election by the participant, are invested by 
the plan in accordance with regulations prescribed by the Secretary of 
Labor. Section 624(a) of the Pension Protection Act directed that such 
regulations 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. In the Department's view, this statutory language provides the 
stated relief to fiduciaries of any participant directed individual 
account plan that complies with its terms and with those of the 
Department's regulation under section 404(c)(5) of ERISA. The relief 
afforded by section 404(c)(5), therefore, is not contingent on a plan 
being an ``ERISA 404(c) plan'' or otherwise meeting the requirements of 
the Department's regulations at Sec.  2550.404c-1. The amendments made 
by section 624 of the Pension Protection Act apply to plan years 
beginning after December 31, 2006.
    On September 27, 2006, the Department, exercising its authority 
under section 505 of ERISA and consistent with section 624 of the 
Pension Protection Act, published a notice of proposed rulemaking in 
the Federal Register (71 FR 56806) that, upon adoption, would implement 
the provisions of ERISA section 404(c)(5). The notice included an 
invitation to interested persons to comment on the proposal. In 
response to this invitation, the Department received over 120 written 
comments from a variety of parties, including plan sponsors and 
fiduciaries, plan service providers, financial institutions, and 
employee benefit plan industry representatives. Submissions are 
available for review under Public Comments on the Laws & Regulations 
page of the Department's Employee Benefits Security Administration Web 
site at https://www.dol.gov/ebsa.
    Set forth below is an overview of the final regulation, along with 
a discussion of the public comments received on the proposal.

B. Overview of Final Rule

Scope of the Fiduciary Relief

    Paragraph (a)(1) of Sec.  2550.404c-5, like the proposal, generally 
describes the scope of the regulation and the fiduciary relief afforded 
by ERISA section 404(c)(5), under which a participant who does not give 
investment directions will be treated as exercising control over his or 
her account with respect to assets that the plan invests in a qualified 
default investment alternative. Paragraph (a)(2) of Sec.  2550.404c-5, 
also like the proposal, makes clear that the standards set forth in the 
regulation apply solely for purposes of determining whether a fiduciary 
meets the requirements of the regulation. These standards are not 
intended to be the exclusive means by which a fiduciary might satisfy 
his or her responsibilities under ERISA with respect to the investment 
of assets on behalf of a participant or beneficiary in an individual 
account plan who fails to give investment directions. As recognized by 
the Department in the preamble to the proposal, investments in money 
market funds, stable value products and other capital preservation 
investment vehicles may be prudent for some participants or 
beneficiaries even though such investments themselves may not generally 
constitute qualified default investment alternatives for purposes of 
the regulation. The Department further notes that such investments, 
while not themselves qualified default investment alternatives for 
purposes of investments made following the effective date of this 
regulation, may nonetheless constitute part of the investment portfolio 
of a qualified default investment alternative.
    Paragraph (b) of Sec.  2550.404c-5 defines the scope of the 
fiduciary relief provided. Paragraph (b)(1) of the proposal provided 
that, subject to certain exceptions, a fiduciary of an individual 
account plan that permits participants and beneficiaries to direct the 
investment of assets in their accounts and that meets the conditions of 
the regulation, as set forth in paragraph (c) of Sec.  2550.404c-5, 
shall not be liable for any loss, or by reason of any breach under part 
4 of title I of ERISA, that is the direct and necessary result of 
investing all or part of a

[[Page 60453]]

participant's or beneficiary's account in a qualified default 
investment alternative, or of investment decisions made by the entity 
described in paragraph (e)(3) in connection with the management of a 
qualified default investment alternative. The Department has revised 
paragraph (b)(1) of the final regulation to clarify that a fiduciary of 
an individual account plan that permits participants and beneficiaries 
to direct the investment of assets in their accounts and that meets the 
conditions of the regulation, as set forth in paragraph (c) of Sec.  
2550.404c-5, shall not be liable for any loss under part 4 of title I, 
or by reason of any breach, that is the direct and necessary result of 
investing all or part of a participant's or beneficiary's account in 
any qualified default investment alternative within the meaning of 
paragraph (e), or of investment decisions made by the entity described 
in paragraph (e)(3) in connection with the management of a qualified 
default investment alternative. The phrase ``any qualified default 
investment alternative'' in the final regulation is intended to make 
clear that a fiduciary will be afforded relief without regard to which 
type of qualified default investment alternative the fiduciary selects, 
provided that the fiduciary prudently selects the particular product, 
portfolio or service, and meets the other conditions of the regulation.
    Some commenters asked whether the relief provided by the final 
regulation covers a plan fiduciary's decision regarding which of the 
qualified default investment alternatives will be available to a plan's 
participants and beneficiaries who fail to direct their investments. As 
long as a plan fiduciary selects any of the qualified default 
investment alternatives, and otherwise complies with the conditions of 
the rule, the plan fiduciary will obtain the fiduciary relief described 
in the rule. The Department believes that each of these qualified 
default investment alternatives is appropriate for participants and 
beneficiaries who fail to provide investment direction; accordingly, 
the rule does not require a plan fiduciary to undertake an evaluation 
as to which of the qualified default investment alternatives provided 
for in the regulation is the most prudent for a participant or the 
plan. However, the plan fiduciary must prudently select and monitor an 
investment fund, model portfolio, or investment management service 
within any category of qualified default investment alternatives in 
accordance with ERISA's general fiduciary rules. For example, a plan 
fiduciary that chooses an investment management service that is 
intended to comply with paragraph (e)(4)(iii) of the final regulation 
must undertake a careful evaluation to prudently select among different 
investment management services.

Application of General Fiduciary Standards

    The scope of fiduciary relief provided by this regulation is the 
same as that extended to plan fiduciaries under ERISA section 
404(c)(1)(B) in connection with carrying out investment directions of 
plan participants and beneficiaries in an ``ERISA section 404(c) plan'' 
as described in 29 CFR 2550.404c-1(a), although it is not necessary for 
a plan to be an ERISA section 404(c) plan in order for the fiduciary to 
obtain the relief accorded by this regulation. As with section 
404(c)(1) of the Act and the regulation issued thereunder (29 CFR 
2550.404c-1), the final regulation does not provide relief from the 
general fiduciary rules applicable to the selection and monitoring of a 
particular qualified default investment alternative or from any 
liability that results from a failure to satisfy these duties, 
including liability for any resulting losses. See paragraph (b)(2) of 
Sec.  2550.404c-5.
    Several commenters asked the Department to provide additional 
guidance concerning the general fiduciary obligations of these plan 
fiduciaries in selecting a qualified default investment alternative. 
The selection of a particular qualified default investment alternative 
(i.e. a specific product, portfolio or service) is a fiduciary act and, 
therefore, ERISA obligates fiduciaries to act prudently and solely in 
the interest of the plan's participants and beneficiaries. A fiduciary 
must engage in an objective, thorough, and analytical process that 
involves consideration of the quality of competing providers and 
investment products, as appropriate. As with other investment 
alternatives made available under the plan, fiduciaries must carefully 
consider investment fees and expenses when choosing a qualified default 
investment alternative. See paragraph (b)(2) of Sec.  2550.404c-5.
    Paragraph (b)(3) of the final regulation has been modified to 
reflect changes to paragraph (e)(3)(i) regarding persons responsible 
for the management of a qualified default investment alternative's 
assets. Paragraph (b)(3) of Sec.  2550.404c-5 makes clear that nothing 
in the regulation relieves any such fiduciaries from their general 
fiduciary duties or from any liability that results from a failure to 
satisfy these duties, including liability for any resulting losses. As 
proposed, paragraph (b)(3) was limited to investment managers. The 
final regulation, at paragraph (e)(3)(i) of Sec.  2550.404c-5, broadens 
the category of persons who can manage the assets of a qualified 
default investment alternative, thereby requiring a conforming change 
to paragraph (b)(3). The changes to paragraph (e)(3)(i) are discussed 
in detail below.
    Finally, the regulation also provides no relief from the prohibited 
transaction provisions of section 406 of ERISA or from any liability 
that results from a violation of those provisions, including liability 
for any resulting losses. Therefore, plan fiduciaries must avoid self-
dealing, conflicts of interest, and other improper influences when 
selecting a qualified default investment alternative. See paragraph 
(b)(4) of Sec.  2550.404c-5.

Application of Final Rule to Circumstances Other Than Automatic 
Enrollment

    Several commenters requested clarification on the extent to which 
the fiduciary relief provided by the final regulation will be available 
to plan fiduciaries for assets that are invested in a qualified default 
investment alternative on behalf of participants and beneficiaries in 
circumstances other than automatic enrollment. Consistent with the 
views expressed concerning the scope of the relief provided by the 
proposed regulation, it is the view of the Department that nothing in 
the final regulation limits the application of the fiduciary relief to 
investments made only on behalf of participants who are automatically 
enrolled in their plan. Like the proposal, the final regulation applies 
to situations beyond automatic enrollment. Examples of such situations 
include: 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 instruction. Whenever a participant or beneficiary 
has the opportunity to direct the investment of assets in his or her 
account, but does not direct the investment of such assets, plan 
fiduciaries may avail themselves of the relief provided by this final 
regulation, so long as all of its conditions have been satisfied.

Conditions for the Fiduciary Relief

    Like the proposal, the final regulation contains six conditions for 
relief. These

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conditions are set forth in paragraph (c) of the regulation.
    The first condition of the final regulation, consistent with the 
Department's proposal, requires that assets invested on behalf of 
participants or beneficiaries under the final regulation be invested in 
a ``qualified default investment alternative.'' See Sec.  2550.404c-
5(c)(1). This condition is unchanged from the proposal.
    The second condition also is unchanged from the proposal. The 
participant or beneficiary on whose behalf assets are being invested in 
a qualified default investment alternative must have had the 
opportunity to direct the investment of assets in his or her account 
but did not direct the investment of the assets. See Sec.  2550.404c-
5(c)(2). In other words, no relief is available when a participant or 
beneficiary has provided affirmative investment direction concerning 
the assets invested on the participant's or beneficiary's behalf.
    The third condition continues to require that participants or 
beneficiaries receive information concerning the investments that may 
be made on their behalf. As in the proposal, the final regulation 
requires both an initial notice and an annual notice. The proposed 
regulation required an initial notice within a reasonable period of 
time of at least 30 days in advance of the first investment. A number 
of commenters explained that requiring 30 days' advance notice would 
preclude plans with immediate eligibility and automatic enrollment from 
withholding of contributions as of the first pay period. Commenters 
argued that plan sponsors should not be discouraged from enrolling 
employees in their plan on the earliest possible date.
    The Department agrees that plan sponsors should not be discouraged 
from enrolling employees on the earliest possible date. To address this 
issue, the Department has modified the advance notice requirements that 
appeared in the proposed regulation. For purposes of the initial 
notification requirement, the final regulation, at paragraph (c)(3)(i), 
provides that the notice must be provided (A) at least 30 days in 
advance of the date of plan eligibility, or at least 30 days in advance 
of any first investment in a qualified default investment alternative 
on behalf of a participant or beneficiary described in paragraph 
(c)(2), or (B) on or before the date of plan eligibility, provided the 
participant has the opportunity to make a permissible withdrawal (as 
determined under section 414(w) of the Internal Revenue Code of 1986 
(Code)).
    With regard to the foregoing, the Department notes that, unlike the 
proposal, the final regulation measures the time period for the 30-day 
advance notice requirement from the date of plan eligibility to better 
coordinate the notice requirements with the Code provisions governing 
permissible withdrawals. The Department also notes that if a fiduciary 
fails to comply with the final regulation for a participant's first 
elective contribution because a notice is not provided at least 30 days 
in advance of plan eligibility, the fiduciary may obtain relief for 
later contributions with respect to which the 30-day advance notice 
requirement is satisfied.
    In addition, while retaining the general 30-day advance notice 
requirement, the final regulation also permits notice ``on or before'' 
the date of plan eligibility if the participant is permitted to make a 
permissible withdrawal in accordance with 414(w) of the Code. In this 
regard, the Department believes that if participants are not going to 
be afforded the option of withdrawing their contributions without 
additional tax, such participants should be given notice sufficiently 
in advance of the contribution to enable them to opt out of plan 
participation.
    The Department notes that the phrase in paragraph (c)(3)(i)--``or 
at least 30 days in advance of any first investment in a qualified 
default investment alternative''--is intended to accommodate 
circumstances other than elective contributions. For example, although 
fiduciary relief would not be available with respect to a fiduciary's 
investment of a participant or beneficiary's rollover amount from 
another plan into a qualified default investment alternative if the 30-
day advance notice requirement is not satisfied, relief may be 
available when a fiduciary invests the rollover amount into a qualified 
default investment alternative after satisfying the notice requirement 
in paragraph (c)(3)(i)(A) as well as the regulation's other conditions.
    Finally, the phrase--``in advance of the date of plan eligibility * 
* * or any first investment in a qualified default investment 
alternative''--is not intended to foreclose availability of relief to 
fiduciaries that, prior to the adoption of the final regulation, 
invested assets on behalf of participants and beneficiaries in a 
default investment alternative that would constitute a ``qualified 
default investment alternative'' under the regulation. In such cases, 
the phrase--``in advance of the date of plan eligibility * * * or any 
first investment''--should be read to mean the first investment with 
respect to which relief under the final regulation is intended to apply 
after the effective date of the regulation.
    The timing of the annual notice requirement contained in the final 
regulation has not changed from the proposal. Notice must be provided 
within a reasonable period of time of at least 30 days in advance of 
each subsequent plan year. See Sec.  2550.404c-5(c)(3)(ii). One 
commenter requested that the Department eliminate the annual notice 
requirement. The Department retained the annual notice requirement 
because the Pension Protection Act specifically amended ERISA to 
require an annual notice. Further, the Department believes that it is 
important to provide regular and ongoing notice to participants and 
beneficiaries whose assets are invested in a qualified default 
investment alternative to ensure that they are in a position to make 
informed decisions concerning their participation in their employer's 
plan. Several commenters supported the furnishing of an annual reminder 
to participants and beneficiaries that their assets have been invested 
in a qualified default investment alternative and that participants and 
beneficiaries may direct their contributions into other investment 
alternatives available under the plan.
    Paragraph (c)(3), as proposed, provided that the required 
disclosures could be included in a summary plan description, summary of 
material modification or other notice meeting the requirements of 
paragraph (d), which described the content required in the notice. Some 
commenters expressed concern that permitting the notice requirement to 
be satisfied though a plan's summary plan description or summary of 
material modification may result in participants overlooking or 
ignoring information relating to their participation and the investment 
of contributions on their behalf. The Department is persuaded that, 
given the potential length and complexity of summary plan descriptions 
and summaries of material modifications, the furnishing of the required 
disclosures through a separate notice will reduce the likelihood of a 
participant or beneficiary missing or ignoring information about his or 
her plan participation and the investment of the assets in his or her 
account in a qualified default investment alternative. Accordingly, the 
final regulation, at paragraph (c)(3), has been modified to eliminate 
references to providing notice through a summary plan description or

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summary of material modifications. The Department notes that the notice 
requirements of ERISA section 404(c)(5)(B) and this regulation, and the 
notice requirements of sections 401(k)(13)(E) and 414(w)(4) of the 
Code, as amended by the Pension Protection Act, are similar. 
Accordingly, while the final regulation provides for disclosure through 
a separate notice, the Department anticipates that the notice 
requirements of this final regulation and the notice requirements of 
sections 401(k)(13)(E) and 414(w)(4) of the Code could be satisfied in 
a single disclosure document. Further, the Department notes that 
nothing in the regulation should be construed to preclude the 
distribution of the initial or annual notices with other materials 
being furnished to participants and beneficiaries. In this regard, the 
Department recognizes that there may be cost savings that result from 
distributing multiple disclosures simultaneously and, to the extent 
that distribution costs may be charged to the accounts of individual 
participants and beneficiaries, efforts to minimize such costs should 
be encouraged.
    The fourth condition of the proposed regulation required that, 
under the terms of the plan, any material provided to the plan relating 
to a participant's or beneficiary's investment in a qualified default 
investment alternative (e.g., account statements, prospectuses, proxy 
voting material) would be provided to the participant or beneficiary. 
See proposed regulation Sec.  2550.404c-5(c)(4). Several commenters 
asked the Department to clarify whether the phrase ``under the terms of 
the plan'' would require plan amendments to explicitly incorporate the 
proposed rule's disclosure provision. Commenters suggested that 
paragraph (c)(4) of the proposal could be read to require that the 
disclosure provisions be described in the formal plan document, and the 
commenters suggested that it is unclear what documents would suffice to 
meet this condition. The phrase ``under the terms of the plan'' was 
merely intended to ensure that plans provide for the required pass-
through of information. Taking into account both the fact that a pass-
through of information is a specific condition of the regulation and 
the comments on this provision, the Department has concluded that the 
phrase is confusing and not necessary. Accordingly, the phrase ``under 
the terms of the plan'' has been removed from paragraph (c)(4) of the 
final regulation. See Sec.  2550.404c-5(c)(4).
    Commenters also requested clarification as to the material intended 
to be included in the reference to ``material provided to the plan'' in 
paragraph (c)(4). Specifically, commenters inquired whether material 
provided to the plan includes information within the custody of a plan 
service provider or the fiduciary responsible for selecting a qualified 
default investment alternative, and whether ``material provided to the 
plan'' includes aggregate, plan-level information received by the plan. 
Commenters also asked for clarification regarding the manner in which 
information shall be ``provided to the participant or beneficiary'' in 
paragraph (c)(4) of the proposed regulation. A number of commenters 
suggested that the final regulation permit disclosure of information 
upon request; others recommended that the disclosure requirement should 
be satisfied by including a statement in the notice required by 
paragraph (c)(3) of the proposed regulation that provides direction to 
a participant or beneficiary regarding where he or she can find 
information about the qualified default investment alternatives. Other 
commenters asked whether plans could make materials available to a 
participant or beneficiary instead of affirmatively providing materials 
to them.
    Other commenters suggested that a participant or beneficiary on 
whose behalf assets are invested in a qualified default investment 
alternative should not be required to be furnished more material than 
is required to be furnished to those individuals who direct their 
investments. In this regard, commenters recommended that the Department 
apply the same standard set forth in the section 404(c) regulation for 
the pass-through of information to both participants who fail to direct 
their investments and participants who elect to direct their 
investments.
    The Department believes that participants who fail to direct their 
investments should be furnished no less information than is required to 
be passed through to participants who elect to direct their investments 
under the plan. The Department also believes there is little, if any, 
basis for requiring defaulted participants to be furnished more 
information than is required to be passed through to other 
participants. For this reason, the Department has adopted the 
recommendation of those commenters that the pass-through disclosure 
requirements applicable to section 404(c) plans be applied to the pass-
through of information under the final regulation. The Department, 
therefore, has modified paragraph (c)(4) to provide that a fiduciary 
shall qualify for the relief described in paragraph (b)(1) of the final 
regulation if a fiduciary provides material to participants and 
beneficiaries as set forth in paragraphs (b)(2)(i)(B)(1)(viii) and 
(ix), and paragraph (b)(2)(i)(B)(2) of the 404(c) regulation, relating 
to a participant's or beneficiary's investment in a qualified default 
investment alternative. The Department notes that, as part of a 
separate regulatory initiative, it is reviewing the disclosure 
requirements applicable to participants and beneficiaries in 
participant-directed individual account plans and that, to the extent 
that the pass-through disclosure requirements contained in Sec.  
2550.404c-1 are amended, the language of paragraph (c)(4), as modified, 
will ensure such amendments automatically extend to Sec.  2550.404c-5. 
The Department notes, in responding to one commenter's request for 
clarification, that the plan's obligation to pass through information 
to participants or beneficiaries would be considered satisfied if the 
required information is furnished directly to the participant or 
beneficiary by the provider of the investment alternative or other 
third-party.
    The fifth condition of the proposal required that any participant 
or beneficiary on whose behalf assets are invested in a qualified 
default investment alternative be afforded the opportunity, consistent 
with the terms of the plan (but in no event less frequently than once 
within any three month period), to transfer, in whole or in part, such 
assets to any other investment alternative available under the plan 
without financial penalty. See proposed regulation Sec.  2550.404c-
5(c)(5). This provision was intended to ensure that participants and 
beneficiaries on whose behalf assets are invested in a qualified 
default investment alternative have the same opportunity as other plan 
participants and beneficiaries to direct the investment of their 
assets, and that neither the plan nor the qualified default investment 
alternative impose financial penalties that would restrict the rights 
of participants and beneficiaries to direct their assets to other 
investment alternatives available under the plan. This provision was 
not intended to confer greater rights on participants or beneficiaries 
whose accounts the plan invests in qualified default investment 
alternatives than are otherwise available under the plan. Thus, if a 
plan provides participants and beneficiaries the right to direct 
investments on a quarterly basis, those participants and beneficiaries 
with investments in a qualified default investment alternative need 
only be afforded the opportunity to direct their

[[Page 60456]]

investments on a quarterly basis. Similarly, if a plan permits daily 
investment direction, participants and beneficiaries with investments 
in a qualified default investment alternative must be permitted to 
direct their investments on a daily basis.
    The Department received many comments requesting clarification on 
this requirement, most often concerning what the Department considers 
to be a financial penalty. Commenters asked whether investment-level 
fees and restrictions, as opposed to fees or other restrictions that 
are imposed by the plan or the plan sponsor, would be considered 
impermissible restrictions or ``financial penalties.'' Commenters 
explained that fees and limitations that are part of the investment 
product are beyond the control of the plan sponsor and should not be 
considered financial penalties for purposes of the final regulation. 
The comment letters provided many examples of investment-level fees or 
restrictions that commenters believed should not be considered 
punitive, including redemption fees, back-end sales loads, reinvestment 
timing restrictions, market value adjustments, equity ``wash'' 
restrictions, and surrender charges.
    In response to these and other comments, the Department has 
modified and restructured paragraph (c)(5) of the final regulation to 
provide more clarity with respect to limitations that may or may not be 
imposed on participants and beneficiaries who are defaulted into a 
qualified default investment alternative. As modified and restructured, 
paragraph (c)(5) of the final regulation includes three conditions 
applicable to a defaulted participant's or beneficiary's ability to 
move assets out of a qualified default investment alternative.
    The first condition, as in the proposal, is intended to ensure that 
defaulted participants and beneficiaries have the same rights as other 
participants and beneficiaries under the plan regarding the frequency 
with which they may direct an investment out of a qualified default 
investment alternative. In this regard, paragraph (c)(5)(i) provides 
that any participant or beneficiary on whose behalf assets are invested 
in a qualified default investment alternative must be able to transfer, 
in whole or in part, such assets to any other investment alternative 
available under the plan with a frequency consistent with that afforded 
participants and beneficiaries who elect to invest in the qualified 
default investment alternative, but not less frequently than once 
within any three month period. The Department received no substantive 
comments on this provision and it is being adopted unchanged from the 
proposal.
    The second and third conditions, at paragraphs (c)(5)(ii) and 
(iii), relate to limitations (i.e., restrictions, fees, etc.) other 
than those relating to the frequency with which participants may direct 
their investment out of a qualified default investment alternative, 
which are addressed in paragraph (c)(5)(i). Unlike the proposal, which 
limited the imposition of financial penalties for the period of a 
defaulted participant's or beneficiary's investment, the regulation, as 
modified, precludes the imposition of any restrictions, fees or 
expenses (other than investment management and similar types of fees 
and expenses) during the first 90 days of a defaulted participant's or 
beneficiary's investment in the qualified default investment 
alternative. At the end of the 90-day period, defaulted participants 
and beneficiaries may be subject to the restrictions, fees or expenses 
that are otherwise applicable to participants and beneficiaries under 
the plan who elected to invest in that qualified default investment 
alternative. While the condition on restrictions, fees and expenses is 
limited to 90 days, the condition, as explained below, is broad in its 
application, thereby providing defaulted participants and beneficiaries 
an opportunity to redirect or withdraw their contributions. Also, the 
Department believes that restrictions or fees on qualified default 
investment alternatives are more likely to be waived if this period is 
shortened to 90 days. The 90-day period is defined by reference to the 
participant's first elective contribution as determined under section 
414(w)(2)(B) of the Code, thereby enabling participants, if their plan 
permits, to make a permissible withdrawal without being subject to the 
10 percent additional tax under section 72(t) of the Code.
    Specifically, paragraph (c)(5)(ii) of the regulation provides that 
any transfer or permissible withdrawal described in paragraph (c)(5) 
resulting from a participant's or beneficiary's election to make such a 
transfer or withdrawal during the 90-day period beginning on the date 
of the participant's first elective contribution as determined under 
section 414(w)(2)(B) of the Code, or other first investment in a 
qualified default investment alternative on behalf of a participant or 
beneficiary described in paragraph (c)(2), shall not be subject to any 
restrictions, fees or expenses (except those fees and expenses that are 
charged on an ongoing basis for the investment itself, such as 
investment management and similar fees, and are not imposed, or do not 
vary, based on a participant's or beneficiary's decision to withdraw, 
sell or transfer assets out of the investment alternative). 
Accordingly, no restriction, fee, or expense may be imposed on any 
transfer or permissible withdrawal of assets, whether assessed by the 
plan, the plan sponsor, or as part of an underlying investment product 
or portfolio, and regardless of whether or not the restriction, fee, or 
expense is considered to be a ``penalty.'' This provision, therefore, 
would prevent the imposition of any surrender charge, liquidation or 
exchange fee, or redemption fee. It also would prohibit any market 
value adjustment or ``round-trip'' restriction on the ability of the 
participant or beneficiary to reinvest within a defined period of time. 
As long as the participant's or beneficiary's election is made within 
the applicable 90-day period, no such charges may be imposed even if, 
due to administrative or other delays, the actual transfer or 
withdrawal does not take place until after the 90-day period.
    Paragraph (c)(5)(ii)(B) makes clear that the limitations of 
paragraph (c)(5)(ii)(A) do not apply to fees and expenses that are 
charged on an ongoing basis for the operation of the investment itself, 
such as investment management fees, distribution and/or service fees 
(``12b-1'' fees), and administrative-type fees (legal, accounting, 
transfer agent expenses, etc.), and are not imposed, or do not vary, 
based on a participant's or beneficiary's decision to withdraw, sell or 
transfer assets out of the investment alternative. In response to a 
request for a clarification, the Department further notes that to the 
extent that a participant or beneficiary loses the right to elect an 
annuity as a result of a transfer out of a qualified default investment 
alternative with an annuity feature, such loss would not constitute an 
impermissible restriction for purposes of paragraph (c)(5)(ii) inasmuch 
as the annuity feature is a component of the investment alternative 
itself.
    Paragraph (c)(5)(iii) of the final regulation provides that, 
following the end of the 90-day period described in paragraph 
(c)(5)(ii)(A), any transfer or permissible withdrawal described in 
paragraph (c)(5) shall not be subject to any restrictions, fees or 
expenses not otherwise applicable to a participant or beneficiary who 
elected to invest in that qualified default investment alternative. 
This provision is intended to ensure that defaulted participants and 
beneficiaries are not subject to restrictions, fees or penalties that 
would serve to create a greater disincentive for defaulted participants 
and beneficiaries, than for other participants and

[[Page 60457]]

beneficiaries under the plan, to withdraw or transfer assets from a 
qualified default investment alternative.
    The Department notes that the final rule does not otherwise address 
or provide relief with respect to the direction of investments out of a 
qualified default investment alternative into another investment 
alternative available under the plan. See generally section 404(c)(1) 
of ERISA and 29 CFR 2550.404c-1.
    The last condition of paragraph (c) of the regulation adopts, 
without modification from the proposal, the requirement that plans 
offer participants and beneficiaries the opportunity to invest in a 
``broad range of investment alternatives'' within the meaning of 29 CFR 
2550.404c-1(b)(3).\1\ See Sec.  2550.404c-5(c)(6). The Department 
believes that participants and beneficiaries should be afforded a 
sufficient range of investment alternatives to achieve a diversified 
portfolio with aggregate risk and return characteristics at any point 
within the range normally appropriate for the pension plan participant 
or beneficiary. The Department believes that the application of the 
``broad range of investment alternatives'' standard of the section 
404(c) regulation accomplishes this objective. The Department received 
no substantive objections to this provision and, as indicated, is 
adopting the provision without change.
---------------------------------------------------------------------------

    \1\ 29 CFR 2550.404c-1(b)(3) provides that ``[a] plan offers a 
broad range of investment alternatives only if the available 
investment alternatives are sufficient to provide the participant or 
beneficiary with a reasonable opportunity to: (A) Materially affect 
the potential return on amounts in his individual account with 
respect to which he is permitted to exercise control and the degree 
of risk to which such amounts are subject; (B) Choose from at least 
three investment alternatives: (1) each of which is diversified; (2) 
each of which has materially different risk and return 
characteristics; (3) which in the aggregate enable the participant 
or beneficiary by choosing among them to achieve a portfolio with 
aggregate risk and return characteristics at any point within the 
range normally appropriate for the participant or beneficiary; and 
(4) each of which when combined with investments in the other 
alternatives tends to minimize through diversification the overall 
risk of a participant's or beneficiary's portfolio; * * *''
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Notices

    As discussed above, relief under the final regulation is 
conditioned on furnishing participants and beneficiaries advance 
notification concerning the default investment provisions of their 
plan. See Sec.  2550.404c-5(c)(3). The specific information required to 
be contained in the notice is set forth in paragraph (d) of the 
regulation.
    As proposed, paragraph (d) of Sec.  2550.404c-5 required that the 
notice to participants and beneficiaries be written in a manner 
calculated to be understood by the average plan participant and contain 
the following information: (1) A description of the circumstances under 
which assets in the individual account of a participant or beneficiary 
may be invested on behalf of the participant and beneficiary in a 
qualified default investment alternative; (2) a description of the 
qualified default investment alternative, including a description of 
the investment objectives, risk and return characteristics (if 
applicable), and fees and expenses attendant to the investment 
alternative; (3) a description of the right of the participants and 
beneficiaries on whose behalf assets are invested in a qualified 
default investment alternative to direct the investment of those assets 
to any other investment alternative under the plan, including a 
description of any applicable restrictions, fees, or expenses in 
connection with such transfer; and (4) an explanation of where the 
participants and beneficiaries can obtain investment information 
concerning the other investment alternatives available under the plan.
    A few commenters suggested expanding the content of the notice to 
include procedures for electing other investment options, a description 
of the right to request additional information, a description of any 
right to obtain investment advice (if available), a description of fees 
associated with the qualified default investment alternatives, 
information about other investment options under the plan, etc. While 
the Department did not adopt all of the changes suggested by the 
commenters, the Department has modified the notice content requirements 
to broaden the required disclosures. As modified, the Department 
intends that the furnishing of a notice in accordance with the timing 
and content requirements of this regulation will not only satisfy the 
notice requirements of section 404(c)(5)(B) of ERISA but also the 
notice requirements under the preemption provisions of ERISA section 
514 applicable to an ``automatic contribution arrangement,'' within the 
meaning of ERISA section 514(e)(2).
    ERISA section 404(c)(5)(B)(i)(I) provides for the furnishing of a 
notice explaining ``the employee's right under the plan to designate 
how contributions and earnings will be invested and explaining how, in 
the absence of any investment election by the participant, such 
contributions and earnings will be invested.'' ERISA section 514(e)(1) 
provides for the preemption of State laws that would directly or 
indirectly prohibit or restrict the inclusion in any plan of an 
automatic contribution arrangement. Section 514(e)(3) provides that a 
plan administrator of an automatic contribution arrangement shall 
provide a notice describing the rights and obligations of participants 
under the arrangement and such notice shall include ``an explanation of 
the participant's right under the arrangement not to have elective 
contributions made on the participant's behalf (or to elect to have 
such contributions made at a different percentage)'' and an explanation 
of ``how contributions made under the arrangement will be invested in 
the absence of any investment election by the participant.''
    In addition to broadening the required disclosures, the Department 
revised the disclosures relating to restrictions, fees and expenses to 
conform the notice requirements to the changes in paragraph (c)(5) 
relating to restrictions, fees or expenses. As modified, paragraph (d) 
of the final regulation provides that the notices required by paragraph 
(c)(3) shall include: (1) A description of the circumstances under 
which assets in the individual account of a participant or beneficiary 
may be invested on behalf of the participant or beneficiary in a 
qualified default investment alternative; and, if applicable, an 
explanation of the circumstances under which elective contributions 
will be made on behalf of a participant, the percentage of such 
contribution, and the right of the participant to elect not to have 
such contributions made on his or her behalf (or to elect to have such 
contributions made at a different percentage); (2) an explanation of 
the right of participants and beneficiaries to direct the investment of 
assets in their individual accounts; (3) a description of the qualified 
default investment alternative, including a description of the 
investment objectives, risk and return characteristics (if applicable), 
and fees and expenses attendant to the investment alternative; (4) a 
description of the right of the participants and beneficiaries on whose 
behalf assets are invested in a qualified default investment 
alternative to direct the investment of those assets to any other 
investment alternative under the plan, including a description of any 
applicable restrictions, fees or expenses in connection with such 
transfer; and (5) an explanation of where the participants and 
beneficiaries can obtain investment information concerning the other 
investment alternatives available under the plan.
    Other commenters suggested that the Department provide a model 
notice.

[[Page 60458]]

Because applicable plan provisions and qualified default investment 
alternatives may vary considerably from plan to plan, the Department 
believes it would be difficult to provide model language that is 
general enough to accommodate different plans and different investment 
products and portfolios and that would allow sufficient flexibility to 
plan sponsors. Accordingly, the final regulation does not include model 
language for plan sponsors. However, the Department will explore this 
concept in the future in coordination with the Department of Treasury 
concerning the similar notice requirements contained in sections 
401(k)(13)(E) and 414(w) of the Code.
    Commenters also requested guidance concerning the extent to which 
the final regulation's notice requirements could be satisfied by 
electronic distribution. The Department currently is reviewing its 
rules relating to the use of electronic media for disclosures under 
title I of ERISA. In the absence of guidance to the contrary, it is the 
view of the Department that plans that wish to use electronic means by 
which to satisfy their notice requirements may rely on either guidance 
issued by the Department of Labor at 29 CFR 2520.104b-1(c) or the 
guidance issued by the Department of the Treasury and Internal Revenue 
Service at 26 CFR 1.401(a)-21 relating to the use of electronic media.

Qualified Default Investment Alternatives

    Under the final regulation, as in the proposal, relief from 
fiduciary liability is provided with respect to only those assets 
invested on behalf of a participant or beneficiary in a ``qualified 
default investment alternative.'' See Sec.  2550.404c-5(c)(1). 
Paragraph (e) of Sec.  2550.404c-5 sets forth four requirements for a 
``qualified default investment alternative.''
    The first requirement, at paragraph (e)(1), addresses investments 
in employer securities. As indicated in the preamble to the proposal, 
while the Department does not believe it is appropriate for a qualified 
default investment alternative to encourage investments in employer 
securities, the Department also recognizes that an absolute prohibition 
against holding or investing in employer securities may be 
unnecessarily limiting and complicated. Accordingly, the proposal, in 
addition to establishing a general prohibition against qualified 
default investment alternatives holding or permitting acquisition of 
employer securities, provided two exceptions to the rule. While, as 
discussed below, the Department did receive comments generally 
requesting different or expanded exceptions to the general prohibition, 
the Department has determined it appropriate to adopt paragraph (e)(1) 
without modification from the proposal.
    The two exceptions to the general prohibition are set forth in 
paragraph (e)(1)(ii). The first exception applies to employer 
securities held or acquired by an investment company registered under 
the Investment Company Act of 1940, 15 U.S.C. 80a-1, et seq., or a 
similar pooled investment vehicle (e.g., a common or collective trust 
fund or pooled investment fund) regulated and subject to periodic 
examination by a State or Federal agency and with respect to which 
investment in such securities is made in accordance with the stated 
investment objectives of the investment vehicle and independent of the 
plan sponsor or an affiliate thereof.
    Several commenters suggested that the exception to investments in 
employer securities should extend to circumstances when the plan 
sponsor delegates investment responsibilities to an ERISA section 3(38) 
investment manager and with respect to which the plan sponsor has no 
discretion regarding the acquisition or holding of employer securities. 
The Department did not adopt this suggestion because in such instances 
the investment manager may be following the investment policies 
established by the plan sponsor, and, while the plan sponsor may not be 
directly exercising discretion with respect to the acquisition or 
holding of employer securities, the plan sponsor might indirectly be 
influencing such decision through an investment policy that requires 
the investment manager to acquire or hold various amounts of employer 
securities. In the Department's view, limiting the exception to 
regulated financial institutions avoids this type of problem.
    Another commenter suggested that the Department limit qualified 
default investment alternatives to a 10% investment in employer 
securities. The Department did not adopt this suggestion because it 
believes that a percentage limit test would effectively require that a 
plan sponsor or other fiduciary monitor on a daily, if not more 
frequent, basis the specific holdings of the qualified default 
investment alternative and fluctuations in the value of the assets in 
the qualified default investment alternative to determine compliance 
with a percentage limit. Such a test would, in the Department's view, 
result in considerable uncertainty as to whether at any given time the 
intended designated qualified default investment alternative actually 
met the requirements of the regulation. The Department believes that 
the approach it has taken to limiting employer securities provides both 
flexibility and certainty.
    The second exception is for employer securities acquired as a 
matching contribution from the employer/plan sponsor or at the 
direction of the participant or beneficiary. This exception is intended 
to make clear that an investment management service will not be 
precluded from serving as a qualified default investment alternative 
under Sec.  2550.404c-5(e)(4)(iii) merely because the account of a 
participant or beneficiary holds employer securities acquired as 
matching contributions from the employer/plan sponsor, or acquired as a 
result of prior direction by the participant or beneficiary; however, 
an investment management service will be considered to be serving as a 
qualified default investment alternative only with respect to assets of 
a participant's or beneficiary's account over which the investment 
management service has authority to exercise discretion.
    In the case of employer securities acquired as matching 
contributions that are subject to a restriction on transferability, 
relief would not be available with respect to such securities until the 
investment management service has an unrestricted right to transfer the 
securities. Although an investment management service would be 
responsible for determining whether and to what extent the account 
should continue to hold investments in employer securities, the 
investment management service could not, except as part of an 
investment company or similar pooled investment vehicle, exercise its 
discretion to acquire additional employer securities on behalf of an 
individual account without violating Sec.  2550.404c-5(e)(1).
    In the case of prior direction by a participant or beneficiary, if 
the participant or beneficiary provided investment direction with 
respect to employer securities, but failed to provide investment 
direction following an event, such as a change in investment 
alternatives, and the terms of the plan provide that in such 
circumstances the account's assets are invested in a qualified default 
investment alternative, the final regulation continues to permit an 
investment management service to hold and manage those employer 
securities in the absence of participant or beneficiary direction. 
Although the investment management service may not acquire additional 
employer securities using participant

[[Page 60459]]

contributions, the investment management service may reduce the amount 
of employer securities held by the account of the participant or 
beneficiary.
    One commenter suggested that the exception be extended to qualified 
default investment alternatives other than the investment management 
service described in paragraph (e)(4)(iii). An employer securities 
match can only constitute part of a qualified default investment 
alternative if the fiduciary selects an investment management service 
as the qualified default investment alternative, because only in the 
investment management service context is the responsible fiduciary 
undertaking the duty to evaluate the appropriate exposure to employer 
securities for a particular participant or beneficiary and undertaking 
the obligation to sell employer securities until the participant's or 
beneficiary's account reflects that appropriate exposure. Accordingly, 
the Department declines to adopt the commenter's suggestion to expand 
the second employer securities exception to other qualified default 
investment alternatives. The Department further notes that this 
regulation does not provide relief for the acquisition of employer 
securities by an investment service.
    The second requirement, at paragraph (e)(2), is intended to ensure 
that the qualified default investment alternative itself does not 
impose any restrictions, fees or expenses inconsistent with the 
requirements of paragraph (c)(5) of Sec.  2550.404c-5. While the 
provision has been redrafted for clarity, it is substantively the same 
as in the proposal and, therefore, is being adopted without substantive 
change.
    The third requirement, at paragraph (e)(3), addresses the 
management of a qualified default investment option. As proposed, the 
regulation required that a qualified default investment alternative be 
either managed by an investment manager, as defined in section 3(38) of 
the Act, or an investment company registered under the Investment 
Company Act of 1940. Several commenters suggested that requiring a 
qualified default investment alternative to be managed by an investment 
manager, or to be an investment company, is too restrictive.
    A number of commenters noted that section 3(38) of ERISA excludes 
from the definition of the term ``investment manager'' named 
fiduciaries, as defined in section 402(a)(2) of ERISA \2\ and 
trustees.\3\ With regard to named fiduciaries, commenters pointed out 
that a number of employers serve as named fiduciaries and manage their 
plan investments in-house, resulting in reduced administrative and 
investment management costs. Commenters also noted that implementation 
of the requirement as proposed would eliminate the ability of plan 
sponsors who are named fiduciaries to directly manage a qualified 
default investment alternative, use asset allocation models, develop 
asset allocations themselves, or engage investment consultants (who may 
or may not be fiduciaries) to assist in the development of asset 
allocations. Other commenters, however, suggested that the final 
regulation retain the requirement that only investment managers within 
the meaning of section 3(38) of ERISA or registered investment 
companies be permitted to manage qualified default investment 
alternatives. Commenters suggested that investment management decisions 
should be made by investment professionals who are investment managers 
within the meaning of section 3(38) of ERISA; they asserted that 
requiring a 3(38) manager is safer and more prudent than other 
alternatives, and such requirement is administratively feasible.
---------------------------------------------------------------------------

    \2\ Section 402(a)(2) of ERISA provides that the term ``named 
fiduciary'' means a fiduciary who is named in the plan instrument, 
or who, pursuant to a procedure specified in the plan, is identified 
as a fiduciary by a person who is an employer or employee 
organization with respect to the plan, or by such an employer and 
such an employee organization acting jointly.
    \3\ Section 3(38) defines the term ``investment manager'' to 
mean any fiduciary (other than a trustee or named fiduciary, as 
defined in section 402(a)(2))--(A) who has the power to manage, 
acquire, or dispose of any asset of a plan; (B) who (i) is 
registered as an investment adviser under the Investment Advisers 
Act of 1940 [15 U.S.C. 80b-1 et seq.]; (ii) is not registered as an 
investment adviser under such Act by reason of paragraph (1) of 
section 203A(a) of such Act [15 U.S.C. 80b-3a(a)], is registered as 
an investment adviser under the laws of the State (referred to in 
such paragraph (1)) in which it maintains its principal office and 
place of business, and, at the time the fiduciary last filed the 
registration form most recently filed by the fiduciary with such 
State in order to maintain the fiduciary's registration under the 
laws of such State, also filed a copy of such form with the 
Secretary; (iii) is a bank, as defined in that Act; or (iv) is an 
insurance company qualified to perform services described in 
subparagraph (A) under the laws of more than one State; and (C) has 
acknowledged in writing that he is a fiduciary with respect to the 
plan.
---------------------------------------------------------------------------

    With regard to permitting plan sponsors to manage a qualified 
default investment alternative, the Department is persuaded that a plan 
sponsor's willingness to serve as a named fiduciary responsible for the 
management of the plan's investment options in conjunction with the 
potential cost savings to plan participants that can result from such 
management, is a sufficient basis to expand the regulation to permit 
plan sponsors that are named fiduciaries to manage a qualified default 
investment alternative. This modification is reflected in paragraph 
(e)(3)(i)(C).
    A number of commenters also indicated that, under the proposal, 
investment consultants engaged by plan sponsors would have to assume 
fiduciary responsibility for asset allocations in order to obtain 
relief under the proposal. These commenters suggested that requiring an 
investment consultant to assume fiduciary responsibility for asset 
allocation would increase costs for the provision of such consulting 
services, and that these costs inevitably would be passed along to 
participants. Commenters also asserted that the use of asset allocation 
models is well-established and is often an effective way to lower costs 
and to provide a clean structure and process for the formation, 
selection and monitoring of all elements of a prudent default 
investment alternative. The commenters also noted that many plan 
sponsors develop generic asset allocations and select particular funds, 
tailored to a particular plan, with the input of an investment 
consultant who may be an investment adviser under the Investment 
Advisers Act of 1940. With regard to these comments, the Department 
continues to believe that when plan fiduciaries are relieved of 
liability for underlying investment management/asset allocation 
decisions, those responsible for the investment management/asset 
allocation decisions must be fiduciaries and those fiduciaries must 
acknowledge their fiduciary responsibility and liability under the 
ERISA. The Department notes, however, that plan sponsors who serve as 
named fiduciaries of a qualified default investment alternative may, to 
the extent they consider it prudent, engage investment consultants, 
utilize asset allocation models (computer-based or otherwise), etc. to 
carry out their investment management/asset allocation 
responsibilities. Accordingly, the Department does not believe the 
regulation in this regard should to any significant degree alter the 
availability or cost of such services.
    With regard to the exclusion of trustees from the ``investment 
manager'' definition, commenters suggested that the final regulation 
make clear that bank trustees of collective investment funds are 
permitted to manage a qualified default investment alternative. In this 
regard, commenters noted that the definition of ``investment managers'' 
recognizes that banks and other

[[Page 60460]]

institutions can be investment managers, citing ERISA section 
3(38)(B)(ii) and (iii), and should not be foreclosed from managing a 
qualified default investment alternative solely on the basis that the 
institution might otherwise serve as a trustee. These commenters noted 
that, similar to investment managers, banks as trustees of collective 
funds have fiduciary responsibility and liability under ERISA with 
respect to the funds they maintain. The Department is persuaded that an 
entity that meets the requirements of section 3(38)(A), (B) and (C) 
should not be precluded from assuming fiduciary responsibility and 
liability for the underlying investment management/asset allocation 
decisions of a qualified default investment alternative solely because 
that entity serves in a trustee capacity for the plan.\4\ The 
Department has modified the final regulation accordingly. This 
modification is reflected in paragraph (e)(3)(i)(B).
---------------------------------------------------------------------------

    \4\ This position is consistent with the Department's long-held 
view that the parenthetical language of section 3(38) was merely 
intended to indicate that in order for a person to be an investment 
manager for a plan, that person must be more than a mere trustee or 
named fiduciary. See Advisory Opinion No. 77-69/70A
---------------------------------------------------------------------------

    In response to a request from one commenter, the Department 
confirms that the provisions of the regulation do not preclude a 
qualified default investment alternative from having more than one 
fiduciary (e.g., investment manager) responsible for the investment 
management/asset allocation decisions of the investment alternative, as 
would be the case in an arrangement utilizing a ``fund of funds'' 
approach to designing a qualified default investment alternative.
    As with the proposal, the regulation permits a qualified default