6th Circuit QDIA Ruling: How Fiduciaries Can Avoid Investment Loss Liability

One of the many responsibilities of an ERISA § 3(38) Investment Manager (“IM”) is the selection, monitoring and replacement of investment alternatives including a Qualified Default Investment Alternative (“QDIA”). A QDIA was enacted as a “safe harbor” under the Pension Protection Act of 2006. The purpose of the QDIA was to mitigate fiduciary liability tied to investment losses for investment decisions made by a fiduciary on the participant’s behalf.

By establishing a QDIA, in strict adherence to the regulatory guidelines, a fiduciary automatically defaults a participant’s account balance into the QDIA if no affirmative election is made by the participant. A fiduciary can default a participant’s account balance into a QDIA upon plan entry or any time thereafter.

QDIA Responsibilities

The IM’s QDIA responsibilities include:

1. Monitoring performance and confirm the QDIA investment(s) are not subject to fees or penalties for transfers out of the QDIA within the first 90-days
2. Determining if and when to replace a QDIA
3. Drafting a QDIA notice that is written in a manner calculated to be understood by the average participant
4. Including in the QDIA notice the required information including QDIA name, investment objectives, risk and return characteristics and applicable fees and/or expenses
5. Preparing the annual QDIA notice informing participants of their right to transfer or opt out
6. Providing the plan administrator with the QDIA notice for distribution to each participant at least 30 days before each plan year
7. Providing the plan administrator with the necessary notice to distribute to participants at least 30 days prior to implementing a change that maps an existing fund to the QDIA replacement
8. Providing participants with mapping instructions and information on how to avoid being mapped to the QDIA
9. Preparing the participant blackout notices when a QDIA is implemented or replaced
10. Ensuring the plan terms and design features comply with the DOL’s QDIA requirements

The Bidwell Case

The benefit of establishing and adhering to a formal QDIA process is a reduction in fiduciary liability, as illustrated in Bidwell vs. University Medical Center, Inc. (“UMC”). The Sixth Circuit affirmed the judgment of the District Court.

According to the judgment, UMC made a decision to replace a stable value fund as the default option with a more aggressive life-cycle fund in 2008. Since UMC did not have the necessary records to identify which participants explicitly elected to invest in the stable value fund from those who were defaulted, a decision was made to transfer all dollars from the stable value fund to the life-cycle fund.

Prior to the transfer, UMC provided the required notices to all plan participants via first-class mail. The notice informed participants that their investment in the stable value fund would be transferred to the life-cycle fund unless they elected otherwise. Shortly after the change, the markets tanked and participants that held the life-cycle QDIA suffered losses. Those participants that had previously elected the stable value fund filed suit, claiming they never received the QDIA notice.

The Sixth Circuit Court determined that UMC did exercise discretionary control over plan assets as a fiduciary, but did so in compliance with the QDIA safe harbor rules. As a result, UMC did not breach its fiduciary duties and is not liable for the losses.

Conclusion

Plan sponsors are obligated to retain expertise when that expertise is lacking. Retaining a 3(38) IM is a prudent course of action that serves the best interests of the participants when internal resources are not accomplished investment experts. However, not all 3(38) IMs are alike.

To maximize risk mitigation your 3(38) IM must be intimately familiar with the QDIA requirements regardless of who prepares and disseminates the notices. If the 3(38) IM exercises investment discretion but fails to meet the QDIA safe harbor requirements, both the 3(38) IM and the plan sponsor could be held liable for investment losses.

Bottom line: If the 3(38) IM you retained is not able to articulate their ERISA expertise as it relates to QDIAs or if they are unable to prepare QDIA disclosures or coordinate the accurate preparation and timely delivery of the QDIA notices then another 3(38) IM should be considered. Remember, a safe harbor is only a benefit if you follow the requirements explicitly.