Recent amendments to the Employee Retirement Benefit Security Act (ERBSA) will require sponsors of defined contribution (DC) retirement plans to establish one or more investment options within the plan from which each member must choose one as their pre-designated (or default) investment option. Currently, the majority of DC plan assets are invested in principal interest guaranteed products (PIGPs), largely due to plan members’ indifference in selecting an investment fund. PIGPs provide stable, but low, investment returns, and the new requirement aims to promote DC plan investment in other types of funds that are expected to provide higher, if more volatile, long-term returns to support retirement savings.
The amendments are effective July 12, 2022, and plan documents must be updated by July 11, 2023, with one or more potential default investment options, from which members will be required to pre-designate as their chosen default investment option. Within this time frame, employers must select the default investment fund option(s) to be offered by the plan, update the plan document accordingly with agreement of employees’ representatives, obtain approval of the Ministry of Employment and Labor, and notify plan members. The plan’s default options are required to be a PIGP or a variable risk/return product (e.g., target-date fund, long-term investment fund, money market fund, real estate investment trust).
A member’s plan investments will be directed to his or her pre-designated default investment option in the event he or she fails to provide investment direction — for example, upon joining the plan (after a two-week grace period), or upon the maturity of a fixed-term investment product. In the latter case, he or she will be notified four weeks after the maturity that the default will be triggered (after a further two-week grace period).
Though pension providers are still in the process of developing new potential investment fund options, employers should begin considering how they will comply with the new requirements. Employers with a single retirement plan provider may want to consider adding another provider for diversity or evaluate their current provider’s offering of such products.