Direct Contracting may offer ACOs a unique opportunity
The Direct Contracting model includes a unique feature allowing accountable care organizations the ability to contract with providers.
An institutional client sponsoring a large qualified 401(k) plan historically had a default option that consisted of a balanced fund structured as a mix of 74% stable value and 26% equity. This client wanted to qualify for fiduciary protection under the Pension Protection Act of 2006 (PPA). However, to qualify for this protection, the Plan's committee had to adopt the guidance put forth by the Pension Protection Act of 2006 (PPA). Section 404(c)(5) of the act provides that, in situations where members have an opportunity to direct their investments but fail to do so, the fiduciaries will be entitled to fiduciary protection if those members are invested in a qualified default investment alternative (QDIA).
However, the final regulation does not identify acceptable investment products. Rather, it simply describes mechanisms for investing participant contributions. Our understanding of the final regulation put forth by the Department of Labor (DOL) in October 2007 is that it aims to ensure that an investment qualifying as a QDIA is appropriate as a single investment capable of meeting a worker's long-term retirement savings needs. The final regulation provides for three types of QDIAs, two individually-based mechanisms and one group-based mechanism:
According to the plan's legal counsel, the current default option did not appear to meet the guidance from the DOL.
After reviewing possible QDIAs, the client's committee and the plan's legal counsel wanted to continue to utilize a balanced fund option as its QDIA. As such, Evaluation Associates was asked to provide a process and the quantitative justification for using a balanced option for the QDIA under the PPA.
Under the new DOL regulatory language, a plan fiduciary may utilize a balanced option as an appropriate default vehicle as long as the underlying investment structure (equity versus bonds) is appropriate based on the overall demographics of the plan, rather than an individual. Evaluation Associates worked closely with the plan’s actuary to determine the demographics of the plan's participant population. Based on information from the plan's actuary, the average age of the participants within the plan was 44.23 years. The retirement age under the plan is 60, so, on average, participants were approximately 16 years from retirement.
Under those assumptions, EAI conducted an analysis of offerings from institutional service providers of life-cycle funds that were currently available in the institutional marketplace. The analysis concluded that the current institutional offerings had an equity allocation range of 65% to 79%, with a corresponding bond allocation range of 21% to 35%.
In the end, given the conservative nature of the client's committee, Evaluation Associates recommended that the balanced fund be reconstructed utilizing the conservative ends of the equity/fixed-income targets that were identified through the analysis.
The committee and representing counsel for the oversight of this particular qualified plan determined that the analysis and recommendation put forth by Evaluation Associates was justified and appropriate as a QDIA under the PPA. As such, the default fund was reconstructed to a 65% equity and 35% fixed income asset mix. With this mix, the committee, representing counsel, and the consultant felt that the balanced fund would increase the probability that participants would meet their retirement goals over the long term.
By understanding PPA and DOL guidance, Evaluation Associates was able to create a solution that satisfied the client's needs by offering a group-level QDIA option. This involved reconstructing the existing structure from a stable value solution to an equity/fixed-income mix that was more in-line with balanced fund options available in the market place, and readily used to satisfy QDIA requirements.