There was a sneak preview of the Dept of Labor’s preliminary guidance on setting up 401k default investment options. These situations occur when 401k participants fail to select an investment option for their 401k contributions or a 401k default fund is used in 401k plans with automatic enrollment features.
Currently, 401k plan sponsors are rethinking their default fund decisions because they are concerned about the risk associated with their fiduciary responsibility and about the risk of the earnings performance of the default investments of those participants who failed to choose any.
When a participant fails to make a choice, the default fund is the choice made for them by the plans fiduciaries. And because the participant is NOT making the decision when a default investment is used, the plan fiduciaries are responsible to prudently invest their funds.
Many plan sponsors feel that their decision on the default investment is protected by the safe harbor exemption of Internal Revenue Code Section 404c. Section 404c provides an exemption to plan sponsors from liability for investment decisions when participants are given the choice to choose their own...
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