Proposed Class Exemption for the Establishment, Investment and
Maintenance of Certain Individual Retirement Plans Pursuant to an
Automatic Rollover of a Mandatory Distribution [03/02/2004]
Volume 69, Number 41, Page 9846-9852
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DEPARTMENT OF LABOR
Employee Benefits Security Administration
[Application No. D-11203]
Proposed Class Exemption for the Establishment, Investment and
Maintenance of Certain Individual Retirement Plans Pursuant to an
Automatic Rollover of a Mandatory Distribution
AGENCY: Employee Benefits Security Administration, Labor.
ACTION: Notice of proposed class exemption.
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SUMMARY: This document contains a notice of pendency before the
Department of Labor (the Department) of a proposed class exemption from
certain prohibited transaction restrictions of the Employee Retirement
Income Security Act of 1974 (ERISA) and from certain taxes imposed by
the Internal Revenue Code of 1986 (the Code). If granted, the proposed
exemption would permit a fiduciary of a plan who is also the employer
maintaining the plan to establish, on behalf of its separated
employees, an individual retirement plan at a financial institution
which is the employer or an affiliate, in connection with an automatic
rollover of a mandatory distribution described in section 401(a)(31)(B)
of the Code. Relief is also being proposed to permit a plan fiduciary
to select a proprietary product as the initial investment for such
individual retirement plan. Finally, relief is proposed for the receipt
of certain fees by the individual retirement plan provider in
connection with the establishment or maintenance of the individual
retirement plan and the initial investment of the mandatory
distribution. If granted, the proposed exemption would affect plan
sponsors, plan fiduciaries, individual retirement plan providers and
individual retirement plan account holders.
DATES: Written comments and requests for a public hearing must be
received by the Department on or before April 1, 2004.
ADDRESSES: All written comments and request for a public hearing should
be sent to: Office of Exemption Determinations, (Attention: D-11203),
Employee Benefits Security Administration, Room N-5649, U.S. Department
of Labor, 200 Constitution Ave, NW., Washington, DC 20210. Comments and
requests for a hearing also may be submitted to EBSA via fax at (202)
219-0204, or by e-mail to moffitt.betty@dol.gov by the end of the
comment period. The application and comments received will be available
for public inspection in EBSA's Public Documents Room, U.S. Department
of Labor, Room N-1513, 200 Constitution Ave, NW., Washington, DC.
FOR FURTHER INFORMATION CONTACT: Allison Padams Lavigne or Karen Lloyd,
Office of Exemption Determinations, Employee Benefits Security
Administration, U.S. Department of Labor, Washington, DC 20210, at
(202) 693-8540 (this is not a toll-free number).
SUPPLEMENTARY INFORMATION: Notice is hereby given of the pendency
before the Department of a proposed class exemption from the
restrictions of sections 406(a), 406(b)(1) and 406(b)(2) of ERISA and
from the taxes imposed by section 4975(a) and (b) of the Code, by
reason of section 4975(c)(1)(A) through (E) of the Code.
The Department is proposing this class exemption on its own motion
pursuant to section 408(a) of ERISA and section 4975(c)(2) of the Code,
and in accordance with the procedures set forth in 29 CFR 2570, subpart
B (55 FR 32836, August 10, 1990).\1\
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\1\ Section 102 of Reorganization Plan No. 4 of 1978 generally
transferred the authority of the Secretary of the Treasury to issue
exemptions under section 4975(c)(2) of the Code to the Secretary of
Labor.
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[[Page 9847]]
I. Executive Order 12866
Under Executive Order 12866, the Department must determine whether
the regulatory action is ``significant'' and therefore subject to the
requirements of the Executive Order and subject to review by the Office
of Management and Budget (OMB). Under section 3(f), the order defines a
``significant regulatory action'' as an action that is likely to result
in a rule (1) having an annual effect on the economy of $100 million or
more, or adversely and materially affecting a sector of the economy,
productivity, competition, jobs, the environment, public health or
safety, or State, local or tribal governments or communities (also
referred to as ``economically significant''); (2) creating serious
inconsistency or otherwise interfering with an action taken or planned
by another agency; (3) materially altering the budgetary impacts of
entitlement grants, user fees, or loan programs or the rights and
obligations of recipients thereof; or (4) raising novel legal or policy
issues arising out of legal mandates, the President's priorities, or
the principles set forth in the Executive Order. Pursuant to the terms
of the Executive Order, it has been determined that this action is
``significant'' and therefore subject to review by the Office of
Management and Budget (OMB). Accordingly, this action has been reviewed
by OMB.
The proposed prohibited transaction class exemption is being
published concurrently with a proposed regulation on Fiduciary
Responsibility under the Employee Retirement Income Security Act of
1974 Automatic Rollover Safe Harbor. The proposed exemption will permit
plan fiduciaries that are also employers maintaining a pension plan to
establish, for separated employees, individual retirement plans at
financial institutions that are the employer or an affiliate, in
connection with an automatic rollover of a mandatory distribution
described in section 401(a)(31)(B) of the Code. The proposed exemption
also permits plan fiduciaries to select a proprietary product as the
initial investment for an individual retirement plan. Finally, the
proposed exemption provides relief from what would otherwise be a
prohibited transaction for the receipt of certain fees by Individual
Retirement Plan Providers in connection with the establishment or
maintenance of the individual retirement plan and the initial
investment of the mandatory distribution.
In general, the costs and benefits that may accrue to fiduciaries
have been described and quantified in connection with the economic
impact of the proposed regulation describing the safe harbor for
automatic rollovers of mandatory distributions also published in
today's issue of the Federal Register. Fiduciaries of pension plans who
are also employers maintaining the plan who would establish these
individual retirement plans at a financial institution which is the
employer or affiliate are included within the estimates of affected
plans and separated participants presented in the proposed regulations.
Certain additional costs may accrue to plan fiduciaries that select
the proprietary products of an employer or an affiliate for investment
of individual retirement plans. Specifically, in connection with the
acquisition of an Eligible Investment Product, section I(h) of the
proposed exemption provides that plan fiduciaries are not permitted to
charge a sales commission to the individual retirement plans of their
separated employees. In contrast to individual retirement plans not
described in section 401(a)(31)(B) of the Code, individual retirement
plans that do not generate sales commissions may result in a cost to
some Individual Retirement Plan Providers. Because the Department has
no basis for determining the extent to which plan fiduciaries will use
one or more proprietary products, the number of accounts that could be
rolled over into such products, or the lost income, if any, that may
result from unpaid sales commissions, the Department has not estimated
a cost for this provision of the proposed exemption. However, many of
the proprietary products permitted under the exemption generally do not
charge a sales commission in connection with an initial purchase. In
any case, it is likely that a plan fiduciary will use a proprietary
product for these individual retirement plans only if it is financially
beneficial to do so, for example, as a way to retain deposits and
increase earnings. The Department requests comments on benefits and
costs that pertain specifically to the conditions of this proposed
exemption.
II. Paperwork Reduction Act
The proposed exemption permits a fiduciary of a pension plan that
is also the employer maintaining the plan to establish, on behalf of
its separated employees, an individual retirement plan at a financial
institution that is the employer or an affiliate, in connection with an
automatic rollover of a mandatory distribution described in section
401(a)(31)(B) of the Code. Relief is also being provided that would
permit a plan fiduciary to select a proprietary product as the initial
investment for such an individual retirement plan. Finally, relief is
proposed for the receipt of certain fees by the Individual Retirement
Plan Provider and the initial investment of the mandatory distribution.
The proposed exemption includes certain notice and recordkeeping
requirements that are meant to inform separated employees and allow for
verification by interested persons that the terms of the exemption have
been met with respect to the automatic rollover of mandatory
distributions and investments. Specifically, prior to an automatic
rollover of a mandatory distribution, a plan fiduciary is required to
notify a participant that the distribution may be rolled over into a
proprietary investment selected by the plan fiduciary. Notification
that a proprietary investment may be selected is to be provided in
connection with a written explanation required under section 402(f) of
the Code or in the plan's summary plan description or summary of
materials modifications thereto.
In the Department's view, neither alternative will result in a
measurable burden. The additional information required to be included
to meet this condition, though important, would require only a minor
alteration to an existing disclosure. The fiduciary would also retain
flexibility under the proposed exemption as to the most efficient
method of conveying the required information. As such, no burden for
plan fiduciaries is expected to arise from the notice requirement in
the proposed exemption.
The Individual Retirement Plan Provider is also required to
maintain or to cause to be maintained, for a period of six years,
records relating to the automatic rollover that are necessary to enable
certain described persons to determine whether the conditions of the
proposed exemption had been met. Because these records would
customarily be maintained as a part of usual business practices, this
condition is not expected to impose a burden on Individual Retirement
Plan Providers.
Because no burden is expected to arise in connection with the
notice and recordkeeping requirements in the proposed exemption, the
Department has not made a submission for OMB approval of an information
collection request in in connection with the proposed exemption. The
Department requests comments on any potential impact of the notice and
recordkeeping requirements of the proposed exemption.
[[Page 9848]]
III. Background
Under the Code, tax-qualified retirement plans are permitted to
incorporate provisions requiring an immediate distribution to a
separating participant without the participant's consent if the present
value of the participant's vested accrued benefit does not exceed
$5,000.\2\ A distribution by a plan in compliance with such a provision
is termed a mandatory distribution, commonly referred to as a ``cash-
out.'' Separating participants may choose to roll the cash-out, which
is an eligible rollover distribution,\3\ into an eligible retirement
plan,\4\ or they may retain the cash-out as taxable distribution.
Within a reasonable period of time prior to making a mandatory
distribution, plan administrators are required by section 402(f) of the
Code to provide a separating participant with a written notice
explaining, among other things, the following: the Code provisions
under which the participant may elect to have the cash-out transferred
directly to an eligible retirement plan and that if an election is not
made, such cash-out is subject to the automatic rollover provisions of
Code section 401(a)(31)(B); the provision requiring income tax
withholding if the cash-out is not directly transferred to an eligible
retirement plan; and the provisions under which the distribution will
not be taxed if the participant transfers the account balance to an
eligible retirement plan within 60 days of receipt.\5\
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\2\ Code sections 411(a)(11) and 417(e). See Code section
411(a)(11)(D) for circumstances where the amount of a cash-out may
be greater than $5,000, based on a participant's prior rollover
contribution to the plan.
\3\ See Code section 402(f)(2)(A).
\4\ See Code section 402(f)(2)(B).
\5\ Code section 402(f)(1).
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As part of the Economic Growth and Tax Relief Reconciliation Act of
2001 (EGTRRA),\6\ section 401(a)(31) of the Code was amended to require
that, absent an affirmative election by the participant, certain
mandatory distributions from a tax-qualified retirement plan be
directly transferred to an individual retirement plan \7\ of a
designated trustee or issuer. Specifically, section 657(a) of EGTRRA
added a new section 401(a)(31)(B)(i) to the Code to provide that, in
the case of a trust that is part of an eligible plan,\8\ the trust will
not constitute a qualified trust unless the plan of which the trust is
a part provides that if a mandatory distribution of more than $1,000 is
to be made and the participant does not elect to have such distribution
paid directly to an eligible retirement plan or to receive the
distribution directly, the plan administrator must transfer such
distribution to an individual retirement plan. Section 657(a) of EGTRRA
also added a notice requirement in section 401(a)(31)(B)(i) of the Code
requiring the plan administrator to notify the participant in writing,
either separately or as part of the notice required under section
402(f) of the Code, that the participant may transfer the distribution
to another individual retirement plan.\9\
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\6\ Pub. L. 107-16, June 7, 2001, 115 Stat. 38.
\7\ Section 401(a)(31)(B)(i) of the Code requires the transfer
to be made to an ``individual retirement plan,'' which section
7701(a)(37) of the Code defines to mean an individual retirement
account described in section 408(a) and an individual retirement
annuity described in section 408(b).
\8\ Section 657(a)(1)(B)(ii) of EGTRRA defines an ``eligible
plan'' as a plan which provides for an immediate distribution to a
participant of any ``nonforfeitable accrued benefit for which the
present value (as determined under section 411(a) of the Code) does
not exceed $5,000.'' The Treasury and the IRS have advised the
Department that the requirements of Code section 401(a)(31)(B) apply
to a broad range of retirement plans including plans established
under Code sections 401(a), 401(k), 403(a), 403(b) and 457.
\9\ Conforming amendments to Code sections 401(a)(31) and
402(f)(1) were also made by section 657 of EGTRRA.
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Section 657(c)(2)(A) of EGTRRA directed the Department to issue
regulations providing safe harbors under which (1) a plan
administrator's designation of an institution to receive the automatic
rollover and (2) the initial investment choice for the rolled-over
funds would be deemed to satisfy the fiduciary responsibility
provisions of section 404(a) of ERISA. Section 657(c)(2)(B) of EGTRRA
states that the Secretaries of Labor and Treasury may provide, and
shall give consideration to providing, special relief with respect to
the use of low-cost individual retirement plans for purposes of Code
section 401(a)(31)(B) automatic rollovers and for other uses that
promote the preservation of assets for retirement income.
Where the plan administrator (or other fiduciary) \10\ of a plan is
a financial institution or an affiliate, and is an individual
retirement plan provider,\11\ the plan administrator may determine to
designate itself or its affiliate as the individual retirement plan
provider. In addition, the plan administrator may determine to invest
the mandatory distribution in an investment product in which it or its
affiliate has an interest. In this regard, section 406(a)(1) prohibits
in part, a fiduciary of a plan from causing the plan to engage in a
transaction that constitutes a direct or an indirect sale, exchange or
leasing of any property between the plan and a party in interest;
lending of money or other extension of credit between the plan and a
party in interest; furnishing of goods, services, or facilities between
the plan and a party in interest; and a transfer to, or use by or for
the benefit of, a party in interest of any assets of the plan. Section
406(b)(1) and (b)(2) prohibits a fiduciary with respect to a plan from
dealing with the assets of the plan in his own interest or for his own
account; and from acting in his individual or in any other capacity in
any transaction involving the plan on behalf of a party (or
representing a party) whose interests are adverse to the interests of
the plan or the interests of its participants or beneficiaries.
Accordingly, a violation of section 406(a) and/or (b) may occur if the
plan administrator or other fiduciary designates itself or an affiliate
as the provider of the individual retirement plan. Also, additional
violations may occur if the plan fiduciary determines to invest the
mandatory distribution in an investment which it or its affiliate has
an interest. Section 408(b)(2) of ERISA provides a conditional
statutory exemption for the provision of services by a party in
interest to a plan and the payment of reasonable compensation to the
party in interest. However, section 408(b)(2) of ERISA does not provide
relief from the prohibitions described in section 406(b) of ERISA.\12\
If a plan fiduciary uses the authority, control or responsibility which
makes such person a fiduciary to cause the plan to pay an additional
fee to such fiduciary or to a person in which he has an interest which
may affect the exercise of such fiduciary's best judgment as a
fiduciary, then a violation of section 406(b) of ERISA would occur.
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\10\ Although the provisions of section 401(a)(31)(B) of the
Code state that the ``plan administrator'' will make the transfer to
an individual retirement plan, the Department has determined to
provide relief for any plan fiduciary affiliated with the plan
sponsor who makes the decisions described herein with respect to the
automatic rollover.
\11\ The Department uses the term individual retirement plan
provider, defined in section IV(d), to refer to the entity that is
providing the rollover individual retirement plan. For purposes of
this exemption, the individual retirement plan provider will either
be the plan fiduciary that is the sponsor of the plan from which the
rollover was made, or an affiliate.
\12\ See 29 CFR 2550.408b-2(e).
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The Department notes that this proposed class exemption provides
relief for a plan fiduciary's designation of itself or an affiliate as
individual retirement plan provider to receive automatic rollovers of
mandatory distributions from plans for which it or an affiliate serves
as the plan sponsor.\13\ In addition, relief is provided for the
selection of the plan fiduciary's (or an
[[Page 9849]]
affiliate's) proprietary investment products as the initial investment
designation for the mandatory distributions of its plan participants.
The proposed exemption does not cover any subsequent investment
decisions made by the individual retirement plan provider on behalf of
the individual retirement plan account holder.\14\ Additionally, the
Department anticipates that, where a plan fiduciary which is unrelated
to the plan sponsor recommends itself as individual retirement plan
provider, and recommends its own proprietary investments as the initial
investment of the mandatory distribution, such determinations will
ultimately be subject to the independent approval of the plan sponsor
and, therefore, may not result in prohibited transactions.\15\
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\13\ See ERISA section 3(16)(B).
\14\ The Department notes that where a distribution constitutes
the entire benefit rights of a participant, the participant will
cease to be a participant covered under the plan within the meaning
of 29 CFR 2510.3-3(d)(2)(ii)(B), and the distributed assets will
cease to be plan assets within the meaning of 29 CFR 2510.3-101 for
purposes of Title I of ERISA. Nevertheless, if the assets are rolled
over into an individual retirement plan, the prohibitions of section
4975 of the Code will continue to apply. See 29 CFR 2510.3-
101(a)(1).
\15\ To the extent that an independent plan fiduciary provides
investment advice to a plan within the meaning of regulation 29 CFR
2510.3-21(c)(1)(ii)(B), and recommends an investment in its own
proprietary investment product, the presence of an unrelated second
fiduciary (e.g., plan sponsor) acting on the investment advisor's
recommendations on behalf of the plan is not sufficient to insulate
the advisor from fiduciary liability under section 406(b) of ERISA.
See Advisory Opinions 84-03A and 84-04A issued by the Department on
January 4, 1984.
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Discussion of the Proposed Exemption
Section I of the proposal describes the transactions that are
covered by the exemption. The plan fiduciary who provides the notice in
section II(a) and meets the additional requirements described below
would be able to be the individual retirement plan provider for its
separated employees and to make an initial decision to invest the
mandatory distribution in an investment product in which such plan
fiduciary or its affiliate has an interest. Additionally, relief is
provided for the receipt of fees by the individual retirement plan
provider for the receipt of fees by the individual retirement plan
provider in connection with the establishment or maintenance of the
individual retirement plan, and as a result of the investment of the
mandatory distribution in an investment product in which the plan
fiduciary or its affiliate has an interest.
Under the proposal, a plan fiduciary must, in connection with the
written explanation provided pursuant to section 402(f) of the Code or
in the plan's summary plan description or summary of material
modifications thereto, notify the participant prior to the mandatory
rollover distribution that, absent his or her election, the mandatory
distribution will be rolled over to an individual retirement plan
provided by the plan fiduciary or an affiliate, and that the plan
fiduciary may select its own proprietary investment as the initial
investment of the mandatory distribution. In any case, the plan's
summary plan description or summary of material modifications thereto
will describe the plan's rollover provisions effectuating the
requirements of section 401(a)(31)(B) of the Code.
The plan fiduciary must comply with the requirements of the
Automatic Rollover Regulation. The term ``Automatic Rollover
Regulation'' refers to the regulation promulgated by the Department at
29 CFR 2550.401a-2, which is proposed elsewhere in this issue of the
Federal Register.
The plan fiduciary must be the employer, any of whose employees are
covered by the plan from which the automatic rollover of the mandatory
distribution is made, or an affiliate.
Under the proposal, the individual retirement plan must be
established and maintained for the exclusive benefit of the account
holder of the individual retirement plan, his or her spouse or their
beneficiaries. Under section IV(a) of the proposed exemption, the term
individual retirement plan is defined in section 7701(a)(37) of the
Code. Section 7701(a)(37) defines individual retirement plan as an
individual retirement account described in section 408(a) of the Code
and an individual retirement annuity described in section 408(b) of the
Code. For purposes of this exemption, the term individual retirement
plan shall not include an individual retirement plan which is an
employee benefit plan covered by Title I of ERISA.\18\
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\18\ See 29 CFR 2510.3-2(d).
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The proposal requires that the terms of the individual retirement
plan, including the fees and expenses for establishing and maintaining
the individual retirement plan, be no less favorable than those
available to comparable individual retirement plans for distributions
not described in section 401(a)(31)(B) of the Code.
Under the proposed exemption, the individual retirement plan must
be invested in an ``Eligible Investment Product.'' Section IV(e)
defines the term ``Eligible Investment Product'' to mean an investment
product designed to preserve principal and provide a reasonable rate of
return, whether or not such return is guaranteed, consistent with
liquidity. For this purpose, the product must be offered by a Regulated
Financial Institution and must seek to maintain a stable dollar value
equal to the amount invested in the product by the individual
retirement plan. Such term includes money market funds maintained by
registered investment companies, and interest-bearing savings accounts
and certificates of deposit of a bank or a similar financial
institution.\19\ In addition, the term includes ``stable value
products'' issued by a financial institution that are fully benefit-
responsive to the individual retirement plan account holder, i.e., that
provide a liquidity guarantee by a financially responsible third party
of principal and previously accrued interest for liquidations or
transfers initiated by the individual retirement plan account holder
exercising his or her right to withdraw or transfer funds under the
terms of an arrangement that does not include substantial restrictions
to the account holder's access to the assets of the individual
retirement plan. The Department requests comments as to whether an
annuity provider described in section 408(b) of the Code currently
offers Eligible Investment Products as defined herein.
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\19\ The investment of plan assets in bank deposits may be
covered by ERISA section 408(b)(4) and Code section 4975(d)(4).
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The exemption would not apply to the initial investment transaction
entered into by an individual retirement plan unless the Eligible
Investment Product is provided by a Regulated Financial Institution. A
Regulated Financial Institution is defined under the exemption as an
entity that: (i) Is subject to state or federal regulation, and (ii) is
a bank or savings association, the deposits of which are insured by the
Federal Deposit Insurance Corporation; a credit union, the member
accounts of which are insured within the meaning of section 101(7) of
the Federal Credit union Act; an insurance company, the products of
which are protected by state guarantee associations; or an investment
company registered under the Investment Company Act of 1940.
The Department expects that a Regulated Financial Institution whose
investment product is selected by the plan fiduciary on behalf of the
individual retirement plan will be a solvent institution capable of
honoring its ultimate financial obligation to the account holder.
In addition, the proposal requires that the rate of return or the
investment performance of the individual retirement plan investment(s)
be no less
[[Page 9850]]
favorable than the rate of return or investment performance of an
identical investment that could have been made at the same time by a
comparable individual retirement plan for distributions not described
in section 401(a)(31)(B) of the Code.
The proposal does not permit the individual retirement plan to pay
a sales commission in connection with the acquisition of an Eligible
Investment Product.
Under the proposed exemption, the individual retirement plan
account holder must be able to, within a reasonable time after request
and without penalty to the principal amount of the investment, transfer
his individual retirement plan balance to a different investment
offered by the individual retirement plan provider, or transfer his or
her individual retirement plan balance to another individual retirement
plan sponsored at a different financial institution. The Department
wants to ensure that, once the account holder discovers that an
individual retirement plan has been established on his or her behalf,
he or she is able to make appropriate investment decisions with respect
to the assets of the individual retirement plan or to change individual
retirement plan providers without penalty.
The proposal limits the fees that may be paid by the individual
retirement plan, as follows: (i) The fees and expenses attendant to the
individual retirement plan, including the investment of the assets of
such plan, (e.g., establishment charges, maintenance fees, investment
expenses, termination costs, and surrender charges) shall not exceed
the fees and expenses charged by the individual retirement plan
provider for comparable individual retirement plans established for
eligible rollover distributions that are not subject to the automatic
rollover provisions of section 401(a)(31)(B) of the Code; (ii) the fees
and expenses, other than establishment charges, attendant to the
individual retirement plan, may be charged only against the income
earned by the individual retirement plan; and (iii) the fees and
expenses shall not exceed reasonable compensation with in the meaning
of section 4975(d)(2) of the Code. Accordingly, establishment fees for
the individual retirement plan may be paid out of the principal of the
mandatory distribution, provided that such fees do not exceed the fees
charged to comparable individual retirement plans containing rollover
distributions not described in section 401(a)(31)(B) of Code.
The proposed exemption applies only to the automatic rollover of a
mandatory distribution described in section 401(a)(31) (B) of the Code.
At present, such distributions are limited to nonforfeitable accrued
benefits, the present value of which is in excess of $1,000, but is
less than or equal to $5,000. For purposes of determining the present
value of such benefits, section 401(a)(31)(B) references Code section
411(a)(11). Section 411(a)(11)(A) of the Code provides that, in
general, if the present value of any nonforfeitable accrued benefit
exceeds $5,000, such benefit may not be immediately distributed without
the consent of the participant. Section 411(a)(11)(D) of the Code also
provides a special rule that permits plans to disregard that portion of
a nonforfeitable accrued benefit that is attributable to amounts rolled
over from other plans (and earnings thereon) in determining the $5,000
limit. Inasmuch as section 401(a)(31)(B) of the Code requires the
automatic rollover of mandatory distributions, as determined under
section 411(a)(11), which would include prior rollover contributions,
the proposed exemption, if granted, would provide relief in the case of
automatic rollovers of mandatory distributions containing such prior
rollover contributions.
Lastly, the proposal contains a recordkeeping requirement. The
individual retirement plan provider must maintain records to enable
certain persons to determine whether the applicable conditions of the
exemption have been met. The records must be available for examination
by the IRS, the Department, and account holders and their beneficiaries
for at least six years from the date of each automatic rollover.
General Information
The attention of interested persons is directed to the following:
(1) Before an exemption may be granted under section 408(a) of
ERISA and section 4975(c)(2) of the Code, the Department must find that
the exemption is administratively feasible, in the interests of the
plan and of its participants and beneficiaries and protective of the
rights of participants and beneficiaries of such plan.
(2) The proposed exemption, if granted, will be supplemental to,
and not in derogation of, any other provisions of ERISA and the Code
including statutory or administrative exemptions and transitional
rules. Furthermore, the fact that a transaction is subject to an
administrative or statutory exemption is not dispositive of whether the
transaction is in fact a prohibited transaction;
(3) The proposed exemption, if granted, will not extend to
transactions prohibited under section 406(b)(3) of ERISA and section
4975(c)(1)(F) of the Code; and
(4) If granted, the pending class exemption will be applicable to a
particular transaction only if the transaction satisfies the conditions
specified in the exemption.
Written Comments
All interested persons are invited to submit written comments or
requests for a hearing on the proposed exemption to the address and
within the time period set forth above. All comments and requests for a
hearing will be made a part of the record. Comments and requests for a
hearing should state the reasons for the writer's interest in the
proposed exemption. Comments received will be available for public
inspection at the address set forth above.
Proposed Exemption
The Department has under consideration the granting of the
following class exemption, under the authority of section 408(a) of
ERISA and section 4975(c)(2) of the Code, and in accordance with the
procedures set forth in 29 CFR 2570, subpart B (55 FR 32836, August 10,
1990).
I. Transactions
The restrictions of sections 406(a)(1)(A) through (D), 406(b)(1)
and 406(b)(2) of the Act, and the taxes imposed by section 4975(a) and
(b) of the Code, by reason of section 4975(c)(1)(A) through (E) of the
Code, shall not apply to (i) the fiduciary of an Employee Pension
Benefit Plan (plan) using its authority to designate itself or an
affiliate as Individual Retirement Plan Provider to receive the
automatic rollover of a mandatory distribution described in section
401(a)(31)(B) of the Code, (ii) the initial investment of the mandatory
distribution by the plan fiduciary in an investment product in which
the plan fiduciary or its affiliate has an interest, (iii) the receipt
of fees by the Individual Retirement Plan Provider in connection with
the establishment or maintenance of the individual retirement plan, and
(iv) the receipt of investment fees by the Individual Retirement Plan
Provider or an affiliate as a result of the investment of the mandatory
distribution in an investment product in which the plan fiduciary or an
affiliate has an interest, provided that the conditions set forth in
sections II and III are satisfied.
II. Conditions
(a) In connection with the written explanation provided to the
separating
[[Page 9851]]
participant pursuant to section 402(f) of the Code, or in the plan's
summary plan description or summary of material modifications thereto,
the plan fiduciary notifies the participant that, absent his or her
election, the mandatory distribution will be rolled over to an
individual retirement plan offered by the plan fiduciary or an
affiliate, and that the plan fiduciary may select its own proprietary
investment for the initial investment of the mandatory distribution.
(b) The requirements of the Automatic Rollover Regulation are met.
(c) The plan fiduciary is the employer any of whose employees are
covered by the plan from which the automatic rollover of the mandatory
distribution is made, or an affiliate.
(d) The individual retirement plan is established and maintained
for the exclusive benefit of the individual retirement plan account
holder, his or her spouse or their beneficiaries.
(e) The terms of the individual retirement plan, including the fees
and expenses for establishing and maintaining the individual retirement
plan, are no less favorable than those available to comparable
individual retirement plans for distributions not described in section
401(a)(31)(B) of the code.
(f) The mandatory distribution is invested in an Eligible
Investment Product(s), as defined in section IV(e).
(g) The rate of return or the investment performance of the
individual retirement plan investment(s) is no less favorable than the
rate of return or investment performance of an identical investment(s)
that could have been made at the same time by comparable individual
retirement plans for distributions not described in section
401(a)(31)(B) of the code.
(h) The individual retirement plan does not pay a sales commission
in connection with the acquisition of an eligible Investment Product.
(i) The individual retirement plan account holder may, within a
reasonable period of time after his or her request and without penalty
to the principal amount of the investment, transfer his individual
retirement plan balance to a different investment offered by the
Individual Retirement Plan Provider, or transfer his individual
retirement plan balance to an individual retirement plan sponsored at a
different financial institution.
(j) (1) Fees and expenses attendant to the individual retirement
plan, including the investment of the assets of such plan, (e.g.,
establishment charges, maintenance fees, investment expenses,
termination costs, and surrender charges) shall not exceed the fees and
expenses charged by the Individual Retirement Plan Provider for
comparable individual retirement plans established for eligible
rollover distributions that are not subject to the automatic rollover
provisions of section 401(a)(31)(B) of the Code;
(2) Fees and expenses attendant to the individual retirement plan,
with the exception of establishment charges, may be charged only
against the income earned by the individual retirement plan; and
(3) Fees and expenses are not in excess of reasonable compensation
within the meaning of section 4975(d)(2) of the Code.
(k) The present value of the nonforfeitable accrued benefit, as
determined under section 411(a)(11) of the Code, does not exceed the
maximum amount under section 401(a)(31)(B) of the Code.
III. Recordkeeping
(a) The Individual Retirement Plan Provider maintains or causes to
be maintained for a period of six (6) years from the date of each
automatic rollover the records necessary to enable the persons
described in paragraph (b) of this section to determine whether the
applicable conditions of this exemption have been met. Such records
must be readily available to assure accessibility by the persons
identified in paragraph (b) of this section.
(b) Notwithstanding any provisions of section 504(a)(2) and (b) of
the Act, the records referred to in paragraph (a) of this section are
unconditionally available at their customary location for examination
during normal business hours by--
(1) Any duly authorized employee or representative of the
Department of Labor or the Internal Revenue Service; and
(2) Any account holder of an individual retirement plan established
pursuant to this exemption, or any duly authorized representative of
such account holder.
(c) A prohibited transaction will not be considered to have
occurred if, due to circumstances beyond the control of the Individual
Retirement Plan Provider, the records are lost or destroyed prior to
the end of the six-year period, and no party in interest other than the
Individual Retirement Plan Provider shall be subject to the civil
penalty that may be assessed under section 502(i) of ERISA or to the
taxes imposed by sections 4975(a) and (b) of the Code if the records
are not maintained or are not available for examination as required by
paragraph (b).
IV. Definitions
(a) The term ``individual retirement plan'' means an individual
retirement plan described in section 7701(a)(37) of the Code. For
purposes of this exemption, the term individual retirement plan shall
not include an individual retirement plan which is an employee benefit
plan covered by Title I of ERISA.
(b) The term ``Employee Pension Benefit Plan'' refers to an
employee pension benefit plan defined in ERISA section 3(2)(A).
(c) The term ``Automatic Rollover Regulation'' refers to the
regulation promulgated by the Department at 29 CFR 2550.404a-2.
(d) The term ``Individual Retirement Plan Provider'' means an
entity that is eligible to serve as an individual retirement account
trustee under section 408(a)(2) of the Code, or for purposes of an
individual retirement annuity described in section 408(b) of the Code,
an insurance company which is qualified to do business under the law of
the jurisdiction in which the annuity contract, or endowment contract
(described in 26 CFR 1.408-3 (e)), is sold.
(e) The term ``Eligible Investment Product'' means an investment
product designed to preserve principal and provide a reasonable rate of
return, whether or not such return is guaranteed, consistent with
liquidity. For this purpose, the product must be offered by a Regulated
Financial Institution and must seek to maintain a stable dollar value
equal to the amount invested in the product by the individual
retirement plan. Such term includes money market funds maintained by
registered investment companies, and interest-bearing savings accounts
and certificates of deposit of a bank or similar financial institution.
In addition, the term includes ``stable value products'' issued by a
financial institution that are fully benefit-responsive to the
individual retirement plan account holder, i.e., that provide a
liquality guarantee by a financially responsible third party of
principal and previously accrued interest for liquidations or transfers
initiated by the individual retirement plan account holder exercising
his or her right to withdraw or transfer funds under the terms of an
arrangement that does not include substantial restrictions to the
account holder's access to the individual retirement plan's assets.
(f) The term ``Regulated Financial Institution'' means an entity
that: (i) Is
[[Page 9852]]
subject to state or federal regulation, and (ii) is a bank or savings
association, the deposits of which are insured by the Federal Deposit
Insurance Corporation; a credit union, the member accounts of which are
insured within the meaning of section 101(7) of the Federal Credit
Union Act; an insurance company, the products of which are protected by
state guarantee associations; or an investment company registered under
the Investment Company Act of 1940.
(g) An ``affiliate'' of a person includes: (1) Any person directly
or indirectly controlling, controlled by, or under common control with,
the person; or (2) Any officer, director, partner or employee of the
person;
(h) The term ``control'' means the power to exercise a controlling
influence over the management or policies of a person other than an
individual.
Signed at Washington, DC, this 5th day of February.
Ivan L. Strasfeld,
Director, Office of Exemption Determinations, Employee Benefits
Security Administration, Department of Labor.
[FR Doc. 04-4552 Filed 3-1-04; 8:45 am]
BILLING CODE 4510-29-M
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