Labor Department takes its time on 401(k) investment default rules

By Susan Kelly

The federal government is trying company executives' patience. Again.

This time, it's the Department of Labor, which has yet to issue final regulations on default investments for 401(k) plans. And, according to some experts, it's going to be a couple more months.

What could be worse for some employers, stable-value funds are not likely to be included as a qualified default option. A recent Watson Wyatt survey showed that 27% of defined contribution retirement plans used a stable-value fund as their default investment.

"My own gut tells me that DOL will not go for stable value as a default option," James M. Delaplane Jr., a partner at Washington law firm Davis and Harman, told attendees during a speech Feb. 12 at Pensions & Investments' Defined Contribution Conference in Palm Beach Gardens, Fla.

He also said it's likely to take the Labor Department until April to put out the final regulations, which will take effect 60 days after being issued.

While not confirming Mr. Delaplane's time frame, a Labor Department official acknowledged the final rule on qualified default investment alternatives wasn't published by the mid-February deadline.

"We are making significant progress on the final rule, and we are working hard to publish it as close to the statutory deadline as possible, consistent with the legal requirements of the regulatory process," Bradford Campbell, acting assistant secretary of labor, said in an e-mail.

The default option regulations stem from the Pension Protection Act of 2006 and its provisions encouraging automation of 401(k) plans.

The PPA offers safe harbor from discrimination testing for companies that automatically enroll employees in their 401(k) plan and meet certain other requirements, including the use of a qualified default option.

The Profit Sharing/401(k) Council of America's annual survey showed that just 77.7% of eligible employees participated in their company's plan in 2005, down from 80.2% in 2000.

Mr. Campbell said the Labor Department received "more than 100 detailed comments from individuals, employee benefits practitioners, trade groups, financial institutions and members of Congress" following publication of the proposed regulations.

Back then, the proposed regulations created an uproar.

The biggest sticking point for companies was the fact that stable-value funds and money-market funds — two widely used default options — were excluded from the proposed list of qualified default options.

Before the Pension Protection Act provided legislative backing for automatic enrollment, many companies used stable-value and money-market funds as defaults specifically because of their conservative style. But that strategy appears to have backfired because the government has argued that those funds are too conservative to be useful for employees.

The best that companies can hope for now, according to industry observers, is that, under the final rules, their earlier choices of stable-value and money-market funds as defaults are deemed OK.

Big companies also disliked a requirement in the regulations that a QDIA be managed by an investment manager or an investment company registered under the Investment Company Act of 1940, a requirement that would prevent companies from putting together their own target-date funds, an option many are considering.