In welcome news for plan sponsors and other fiduciaries considering lifetime income solutions for their defined contribution ("DC") plans, the Department of Labor ("DOL") recently issued Advisory Opinion 2025-04A ("AO") to clarify how a guaranteed lifetime income product can be used as a qualified default investment alternative ("QDIA"). The AO analyzes an in-plan custom target date account program that gradually allocates participant funds to a "secure income portfolio," which is offered through a variable annuity contract that provides a guaranteed lifetime withdrawal benefit ("GLWB"). The AO concludes that the program qualifies as a QDIA. It also highlights the availability of two fiduciary safe harbors for the prudent selection of insurers to provide lifetime income guarantees under such a program and confirms that these safe harbors apply to a section 3(38) investment manager appointed by a fiduciary.
Background
As the first generation of savers relying entirely on DC plans begins to retire, there is a growing recognition that many plan participants are at risk of outliving their savings. While Social Security provides a basic level of guaranteed income, it is often insufficient to ensure that individuals can maintain their standard of living in retirement. Consequently, many plan sponsors are considering adding lifetime income investment options to their DC plans to provide participants with a more predictable source of income in retirement.
Policymakers have sought to facilitate and encourage the availability of in-plan lifetime income options by addressing fiduciary and operational issues. For example –
- The SECURE Act of 2019 included a fiduciary safe harbor for the selection of annuities and provided new portability options. For more information, see Lifetime Income Provisions Under the SECURE Act.
- DOL previously issued (i) a regulatory safe harbor for annuity selection, (ii) an Information Letter explaining that lifetime income options can be used as default investments even if they are not technically QDIAs, and (iii) an Information Letter regarding the use of unallocated deferred annuity contracts as fixed income investments for QDIAs. For more information, see Guaranteeing a Secure Retirement: A Practical Guide for Selecting DC Plan Lifetime Income Options.
- The Treasury Department and IRS issued IRS Notice 2014-66 to address the use of deferred annuities in age-restricted target date fund suites and issued rules for qualifying longevity annuity contracts. For more information, see New Investment Opportunity for Defined Contribution Plans—Qualifying Longevity Annuity Contracts Are Here.
- Executive Order 14330 (Aug. 7, 2025) directed DOL to clarify ERISA's fiduciary duties with respect lifetime income and certain alternative asset classes. For more information, see Executive Order Directors Regulators to Expand Access to Alternative Assets in 401(k) Plans.
Advisory Opinion 2025-04A
The AO responds to a request by AllianceBernstein ("AB") to confirm that their in-plan lifetime income investment program Lifetime Income Strategy ("LIS") qualifies as a QDIA for purposes of the fiduciary safe harbor for default investments under section 404(c)(5) of ERISA and the related DOL regulation (29 CFR 2550.404c-5, "QDIA Regulation"). AB also requested that DOL opine on compliance with ERISA's fiduciary duties when selecting and monitoring insurers to provide lifetime income guarantees.
LIS is a target date program through which AB allocates participant accounts to investments on the plan's lineup in different proportions over time so that the accounts gradually become more conservative as the participants age, similar to a target date fund. When a participant reaches an age designated by a plan fiduciary (often 50), AB begins to allocate a portion of the account balance to a secure income portfolio, which is made available under a variable annuity contract that provides guaranteed income in retirement using a GLWB. Participants may specify the percentage of their account balance to be allocated to the secure income portfolio, and the fiduciary selects a default allocation percentage for participants that do not make an election.
The GLWB ensures that participants can take distributions from their account at prescribed rates for their entire life, even if the participants draw down the full value of the account. The amount of the guaranteed distribution is based on the account's high-water-mark. This means the guarantee increases as the assets grow, but it will not decrease unless the participant takes excess withdrawals from the account. The investment is fully liquid, and participants generally retain the right to withdraw amounts in excess of the prescribed rate at any time, though excess withdrawals result in a reduction of the guarantee. For more information about GLWBs and other types of lifetime income products, see our guide, Is Your DC Plan Retirement Ready? Helping Participants Get To and Through Retirement.
DOL analyzed LIS and concluded that the investment would qualify as a QDIA if offered and operated as described in the AO. Prior to the AO, the QDIA Regulation did not explicitly address lifetime income investment options, and there were questions as to whether QDIAs could offer lifetime income guarantees. The QDIA Regulation includes language stating that investment funds and model portfolio QDIAs may include annuity purchase rights, investment guarantees, death benefit guarantees, or other ancillary features. However, DOL had never confirmed that this language applied to a custom target date QDIA with income guarantees, such as a GLWB.
In addition to opining on the QDIA status of LIS, DOL provided additional information about compliance with the fiduciary duties under section 404(a)(1)(B) of ERISA when selecting annuities and insurers for LIS. DOL first confirmed that two existing fiduciary safe harbors – the 2008 regulatory safe harbor (29 CFR 2550.404a-4) and the SECURE Act safe harbor (section 404(c)(5) of ERISA – are available to AB as the investment manager for the program. DOL further stated that the prudent selection and monitoring of AB as an investment manager would shield the appointing fiduciary from "any acts of omissions of the investment manager, except any potential co-fiduciary liability under ERISA section 405(a)."
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