401(k) Default Investments for Participants Who Fail to Direct

By Fred Reish, Bruce Ashton, and Marge Paul

Part I of a two-part series.

Most 401(k) plans permit participants to direct the investment of their accounts. Typically, the participants may choose from a selection of mutual funds (or mutual fund-type vehicles, for example, separate accounts and collective trusts—described as “look-through” investments in the DOL’s 404(c) regulations). And, in most cases, the plan sponsors and the plan fiduciaries (who typically are the directors and officers of the plan sponsors) intend to transfer the responsibility—and liability—for selecting among the investment options to the participants under ERISA §404(c).

However, even if all of the 404(c) requirements are satisfied, that responsibility cannot be legally transferred until a participant gives his or her first voluntary affirmative investment instruction. The 404(c) regulations state that the protections of that section:

“... apply only with respect to a transaction where a participant or beneficiary has exercised independent control in fact with respect to the investment of assets in his individual account....”

Some plan sponsors have dealt with this issue by providing that, when a participant does not give instructions for the investment of his or her account, these funds will, by default, be invested in a money market account (or other low risk investment option). In some cases, the plan document specifies the default account; in other cases, the default is a written or unwritten policy.

Next Month: Part II includes an analysis of the DOL’s regulations under 404(c).