401(k) Plans – Fiduciary Protection is Now Available for Default Investment Options

Final regulations recently issued by the Department of Labor provide valuable new fiduciary protection for 401(k) plan default investment options. Regulations issued in the early 1990s provide fiduciary protection where participants affirmatively make an investment election, but no protection where participants fail to make an election and wind up in the plan's default investment option. Prior to these new regulations, the DOL took the position that plan sponsors and other fiduciaries had a duty to prudently select and diversify investments for participants who fail to make investment elections, and could be held liable for investment losses.

Most 401(k) plans designate one "default" investment option (typically a money market or balanced fund) for participants who do not make investment elections. Existing default investment options may or may not provide prudent and adequately diversified investments for all affected participants and plan fiduciaries may not be fully protected.

Under the new regulations, fiduciaries are relieved of responsibility for default investments if the plan's default investment option is "qualified" and written notice is provided to participants. Qualified default investments generally include "life cycle" type funds, which become more conservative as participants grow older, and balanced investment funds that provide diversification and acceptable levels of investment risk.

Employers with 401(k) plans should:

All changes to the plan investment policies should be documented in writing. Please contact Jim Paul or Jenni Krengel at (916) 444-1000 if you have questions or need assistance.

Please note that the information contained in this newsletter is not intended to provide specific legal advice. You should consult with an attorney and not rely on any information contained herein regarding your specific situation.