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In Advisory Opinion 2025-04A, issued on September 23, the Department of Labor amplified its regulatory guidance regarding the ability to include lifetime income products in investment options intended to be "qualified default investment alternatives" ("QDIAs"), as defined in ERISA section 404(c)(5) and the Department's regulation at 29 CFR 2550.404c-5 (the "QDIA regulation").
The guidance was issued to Alliance Bernstein ("AB") in connection with a managed account solution—referred to as the Lifetime Income Strategy ("LIS") program—offered as an investment option in participant-directed defined contribution plans. To oversimplify somewhat, under the LIS program, AB, as an ERISA 3(38) investment manager, allocates a participant's accounts among plan investment options, with the mix of equities and fixed income becoming more conservative as a participant grows older. Around the time that a participant reaches age 50, AB gradually begins allocating participant funds to a separate portfolio (the "Secure Income Portfolio" or "SIP"), which is offered through a variable annuity contract with a guaranteed lifetime withdrawal feature. Participants may specify the percentage of their account balance to be allocated to the SIP.
For participants who do not make a selection, the plan sponsor selects a default allocation percentage. Upon retirement, a participant may elect to make lifetime annual withdrawals from the SIP at a rate based upon the insurance guarantees provided and the amount of assets allocated to the SIP. Provided that the participant adheres to the prescribed withdrawal strategy, the payments are guaranteed for life, even if the participant's account is exhausted due to poor investment returns or longevity.
AB requested that the DOL address whether the LIS program would meet the requirements of a QDIA.
Key Takeaways
- The guidance clarifies that, as in the case of a target date fund or balanced fund, a managed account solution that includes a lifetime income product can qualify as a QDIA provided it satisfies the transferability requirements and other provisions of the QDIA regulations.
- More specifically, the guidance takes the position that a managed account solution offered by AB, as described in the Advisory Opinion, will not fail to be a QDIA solely because it is offered through a variable annuity contract with a guaranteed lifetime withdrawal benefit.
- The guidance clarifies that a fiduciary, such as AB, will be able to satisfy its fiduciary responsibility with respect to the prudent selection and monitoring of an insurer issuing a lifetime income product, by making the selection in accordance with either the regulatory safe harbor issued by the Department of Labor as Section 2550.404a-4 or the statutory safe harbor added by the SECURE Act to ERISA Section 404(e). In other words, both safe harbors are available for this purpose.
- The guidance notes that, after AB is appointed as investment manager by a plan's named fiduciary, AB is responsible for the prudent management of the plan's assets, including the selection of the insurers. The guidance confirms that provided that the plan's named fiduciary has acted prudently in its selection and monitoring duties, it will not be liable for any acts or omissions of the investment manager, except for any potential co-fiduciary liability under ERISA section 405(a). This is consistent with a prior information letter issued by the Department of Labor in 2014 with respect to deferred annuity contracts included in a target date fund.
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