Target date funds that include lifetime income options through the use of annuities and similar products can now be counted as qualified default investment alternatives in 401k plans, according to the Department of Labor.
Subject to certain provisions, “it is the view of the Department that a fiduciary of a participant-directed individual account plan could, consistent with the provisions of Title I of ERISA, prudently select an investment with lifetime income elements as a default investment under the plan if it complies with all the requirements,” the DOL wrote in response to an inquiry on the subject from investment and annuity giant TIAA.
“When evaluating whether it is prudent to use this type of investment alternative as a default investment alternative, the fiduciary must engage in an objective, thorough and analytical process that considers all relevant facts and circumstances,” the department continued.
The issue arose when TIAA asked about the application of the Employee Retirement Income Security Act of 1974 (ERISA) to the company’s “Income for Life Custom Portfolios (ILCP).”
TIAA argued that its custom portfolio product meets all the conditions of a under ERISA and is therefore appropriate for a 401k plan fiduciary to select as a default investment alternative. It said the annuity component allows the ILCP to provide in-plan access to an investment with a guaranteed rate of return and guaranteed lifetime income at retirement.
“The ILCP, like many traditional target-date funds, uses mutual funds as one part of the portfolio,” the DOL noted in its response, citing information provided by TIAA. “However, unlike traditional TDFs, the ILCP allocates investment funds to a fixed guaranteed annuity.”
When initially developing the QDIA regulation DOL, along with the Treasury Department and other stakeholders, “identified the need for lifetime income as an important public policy issue and has supported initiatives that could lead to broader use of lifetime income options in defined contribution plans as a supplement to and enhancement of accumulation of retirement savings.”
The full text of the letter can be found here.