Safe Harbor Is Safe for Secure Lifetime Income Default Investments

The new frontier in US defined contribution (DC) plans involves qualified default investment alternatives (QDIAs) with a secure lifetime income component. Will such vehicles retain their safe-harbor protections? Yes.

That’s not just our opinion on this topic; it’s outlined in the October 24, 2007 Final Rule issued by the US Department of Labor (DOL), “Default Investment Alternatives Under Participant Directed Individual Account Plans.”

The regulation clearly states that a vehicle that otherwise meets the QDIA requirements will not fail to be a QDIA merely because it’s offered through a variable annuity or similar contract, or makes available such features as annuity purchase rights, death benefits or investment guarantees. Consequently, such a vehicle preserves plan sponsors’ fiduciary safe-harbor protection.

Whether lifetime income comes through a QDIA that has a target-date fund structure or a more individualized, managed-account format, the safe-harbor protection remains.

In the preamble to the Final Rule, the DOL notes, “it is the view of the Department that the availability of annuity purchase rights, death benefit guarantees, investment guarantees or other features common to variable annuity contracts will not themselves affect the status of a fund, product or portfolio as a qualified default investment alternative when the conditions of the regulation are satisfied.”

DOL Encourages Innovation for Better Retirement Outcomes

The DOL often provides guidance to help improve DC plans for better retirement outcomes for workers. We believe that was the case with the Department’s recently issued "tips" for plan sponsors in selecting target-date funds. February’s tips encouraged plan sponsors to inquire whether a custom or nonproprietary target-date fund would be a better fit for their plan than an off-the-shelf strategy.

Like customization, lifetime income is an innovation that seeks better retirement outcomes—the reason plan sponsors incorporate it within a DC plan’s qualified default. Research, surveys and studies all beat the drum about the damaging effects of behavioral pitfalls that stymie most DC plan participants from achieving good retirement savings results.

It’s likely that Congress understood this when it passed the Pension Protection Act of 2006. So, the 2007 Final Rule’s preamble underscores a desire to provide guidance to the retirement industry that’s “sufficiently flexible to accommodate future innovations and developments in retirement products.”

In all likelihood, the DOL will provide additional guidance that will encourage DC plans to add lifetime income options and the Department will continue to clarify its message as guaranteed lifetime income QDIAs gain momentum. But the intention is already clear: help Americans achieve better retirement outcomes…for as long as they live.

“Target date” in a fund’s name refers to the approximate year when a participant expects to retire and begin withdrawing from his or her account. Target-date funds gradually adjust their asset allocation, lowering risk as participants near retirement. Investments in target-date funds are not guaranteed against loss of principal at any time, and account values can be more or less than the original amount invested ¾ including at the time of the fund’s target date. Also, investing in target-date funds does not guarantee sufficient income in retirement.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AllianceBernstein portfolio-management teams.

Daniel A. Notto

Senior Retirement Plan Counsel—AllianceBernstein Investments
Daniel A. Notto provides legal support for AllianceBernstein’s retirement plan and Section 529 college savings plan businesses. He has focused on the legal matters relating to tax-favored savings plans such as 401(k)s, IRAs and Section 529 plans for over 25 years. Before joining AllianceBernstein, Notto held several positions, including vice president and general counsel and consulting practice director, with Universal Pensions (now Ascensus), a national retirement plans consulting firm. There, he helped some of the country’s largest financial-services organizations build or refine their retirement plan services, and authored retirement plan documents used by thousands of employers throughout the nation. Prior to that, Notto worked in the legal department of Investors Diversified Services (now Ameriprise Financial). He has been a frequent speaker and author on retirement plan and Section 529 plan topics. Notto holds a BS in pharmacy from the University of Minnesota and received his JD (cum laude) from William Mitchell College of Law. He has received the Certified Pension Consultant (CPC) designation from the American Society of Pension Professionals & Actuaries (ASPPA). Notto is a member of the bar of New York. Location: New York

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