Default Investments

In 2006, the government has added a new subdivision to the ERISA of 1974, which states that a plan need not necessarily receive funds from contributors, without supplementary investment control from the given individual.

Section 404 of this act states that a contributor in an individual retirement account, should be treated as though he has control over the funds that he has saved in his individual account. There are however some conditions for this to be true:

• The contributor does not put forward his investment selection
• The contributor’s plan covers the notice needs in section 404c 5B and
• That the plan invests the contributor’s account, in agreement with the default investment rules that have been produced by the Labour Secretary.

Now the PPA needs the DOL to circulate the rules that give guidance regarding the appropriate kind of default investments, which comprise of a mixture of various assets that are in consistence with

• Appreciation of capital in the long term
• Capital protection and
• A mixture of capital protection and appreciation of the capital in the longer term.

Therefore the new ERISA subsection allows default investment portfolios to be made of investments that are regarded to as very conservative.

These rules are definitely controversial, since they go against the ERISA which says that default investments should be excluded if the portfolio is made entirely of stable investments that allow capital protection. The regulations also state that it is the fiduciary that is able to determine what the default investment should be for the participant, since he is always in obligation to do so.

In conclusion, the ERISA regulations should not be interpreted as giving a list of the cautious investments. The regulations also do not in any way restrict the fiduciary, from adopting the alternatives he thinks suit best the needs of his default participants.

http://www.401khelpcenter.com/401k/whitehouse_qdia.html