Fiduciary Responsibility Under the Employee Retirement Income
Security Act of 1974 Automatic Rollover Safe Harbor [03/02/2004]
Volume 69, Number 41, Page 9899-9909
[[Page 9899]]
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Part II
Department of Labor
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Employee Benefits Security Administration
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29 CFR Part 2550
Fiduciary Responsibility Under the Employee Retirement Income Security
Act of 1974 Automatic Rollover Safe Harbor; Proposed Rule
[[Page 9900]]
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DEPARTMENT OF LABOR
Employee Benefits Security Administration
29 CFR Part 2550
RIN 1210-AA92
Fiduciary Responsibility Under the Employee Retirement Income
Security Act of 1974 Automatic Rollover Safe Harbor
AGENCY: Employee Benefits Security Administration, Labor.
ACTION: Proposed regulation.
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SUMMARY: This document contains a proposed regulation that, upon
adoption, would establish a safe harbor pursuant to which a fiduciary
of a pension plan subject to Title I of the Employee Retirement Income
Security Act of 1974, as amended (ERISA), will be deemed to have
satisfied his or her fiduciary responsibilities in connection with
automatic rollovers of certain mandatory distributions to individual
retirement plans. This proposed regulation, if finalized, would affect
employee pension benefit plans, plan sponsors, administrators and
fiduciaries, and plan participants and beneficiaries.
DATES: Written comments on the proposed regulation should be received
by the Department of Labor on or before April 1, 2004.
ADDRESSES: Comments (preferably at least three copies) should be
addressed to the Office of Regulations and Interpretations, Employee
Benefits Security Administration, Room N-5669, U.S. Department of
Labor, 200 Constitution Avenue NW., Washington, DC 20210. Attn:
Automatic Rollover Regulation. Comments also may be submitted
electronically to e-ori@dol.gov. All comments received will be
available for public inspection at the Public Disclosure Room, N-1513,
Employee Benefits Security Administration, 200 Constitution Avenue NW.,
Washington, DC 20210.
FOR FURTHER INFORMATION CONTACT: Lisa M. Alexander or Kristen L.
Zarenko, Office of Regulations and Interpretations, Employee Benefits
Security Administration, (202) 693-8510. This is not a toll-free
number.
SUPPLEMENTARY INFORMATION:
A. Background
Under the Internal Revenue Code of 1986, as amended (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.\1\ 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,\2\ into an eligible retirement plan,\3\ or they
may retain the cash-out as a taxable distribution. Within a reasonable
period of time prior to making a mandatory distribution, plan
administrators are required 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.\4\
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\1\ 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 into the plan.
\2\ See Code section 402(f)(2)(A).
\3\ See Code section 402(f)(2)(B).
\4\ Code section 402(f)(1).
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As part of the Economic Growth and Tax Relief Reconciliation Act of
2001 (EGTRRA),\5\ 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 \6\ 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,\7\ 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.\8\
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\5\ Pub. L. 107-16, June 7, 2001, 115 Stat. 38.
\6\ 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).
\7\ 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)(11) 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. The
Department notes that the safe harbor proposed herein applies only
to employee benefit pension plans covered under title I of ERISA.
See infra fn. 15.
\8\ 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 of Labor
(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.
Section 657(c)(2)(A) of EGTRRA further provides that the Code
provisions requiring automatic rollovers of certain mandatory
distributions to individual retirement plans will not become effective
until the Department of Labor issues safe harbor regulations.
On January 7, 2003, the Department published a notice in the
Federal Register requesting information on a variety of issues relating
to the development of a safe harbor pursuant to section 657(c)(2)(A)
and (B) of EGTRRA.\9\ In response to this request for information
(RFI), the Department received 17 comment letters. Copies of these
[[Page 9901]]
http://www.dol.gov/ebsa/regs/cmt_rolloverRFI.html.
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\9\ 68 FR 991. http://www.dol.gov/ebsa/regs/fedreg/proposed/2003000281.htm
.
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Set forth below is an overview of the proposed safe harbor
regulation and a review of the comments received in response to the
RFI.
B. Overview of Proposal
1. Scope
Consistent with the directive in section 657(c)(2)(A) of EGTRRA,
paragraph (a)(1) of Sec. 2550.404a-2 provides that the proposed safe
harbor 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 (generally referred to as vested benefits), the present value
of which is in excess of $1,000, but 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 proposal provides safe harbor
coverage for the automatic rollover of mandatory distributions
containing such prior rollover contributions. One commenter on the RFI
suggested that the safe harbor should extend to amounts of $1,000 or
less. While the Department agrees with the commenter that similar
considerations may be relevant to such rollovers, the Department did
not adopt this suggestion in light of Congress's direction to provide a
safe harbor for automatic rollovers of mandatory distributions
described in section 401(a)(31)(B) of the Code.
Paragraph (b) of the proposed regulation provides that, if the
conditions of the safe harbor are satisfied, fiduciaries will be deemed
to have satisfied their fiduciary duties under section 404(a) of ERISA
with respect to both the selection of an individual retirement plan
provider and the investment of funds in connection with an automatic
rollover of a mandatory distribution described in section 401(a)(31)(B)
of the Code to an individual retirement plan, within the meaning of
section 7701(a)(37) of the Code.
The proposal makes clear that the standards set forth in the
proposed regulation apply solely for purposes of determining compliance
with the safe harbor and that such standards are not intended to
represent the exclusive means by which a fiduciary might satisfy his or
her duties under ERISA with respect to automatic rollovers of mandatory
distributions described in section 401(a)(31)(B) of the Code.
As noted above, section 657(c)(2)(B) of EGTRRA provides that the
Secretary of the Treasury and the Secretary of Labor shall consider and
may provide special relief with respect to the use of low-cost
individual retirement plans. The Department considered the provision of
such special relief and believes that the framework of the safe harbor
encourages the use of low-cost individual retirement plans for purposes
of rollovers under section 401(a)(31)(B) of the Code. The Department
specifically invites public comment on whether, given the conditions of
the proposal, further relief is necessary in this regard. If so,
commenters are encouraged to specifically address what relief is
necessary and why, as well as identify approaches to providing such
relief.
2. Conditions
Safe harbor relief under the proposed regulation is dependent on a
fiduciary satisfying six conditions. In general, the conditions
address: (1) The amount of mandatory distributions; (2) qualifications
for an individual retirement plan; (3) permissible investment products;
(4) permissible fees and expenses; (5) required disclosures to
participants and beneficiaries; and 6) prohibited transactions. Each of
the conditions is discussed below.
The first condition, described in paragraph (c)(1) of the proposed
regulation, provides that, for the automatic rollover of mandatory
distributions, the present value of the nonforfeitable accrued benefit,
as determined under section 411(a)(11) of the Code, does not exceed the
maximum amount permitted under section 401(a)(31)(B) of the Code. This
condition was discussed in ``Scope'', above.
The second condition, described in paragraph (c)(2) of the proposed
regulation, provides that the mandatory distribution be directed to an
individual retirement plan within the meaning of section 7701(a)(37) of
the Code. Section 7701(a)(37) defines the term individual retirement
plan to mean 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. Accordingly, a bank, insurance company,
financial institution or other provider of an individual retirement
plan under the safe harbor is required to satisfy the requirements of
the Code and regulations issued thereunder.\10\ This approach is
consistent with the majority of comments received in response to the
RFI. These commenters argued that additional criteria are unnecessary
and, if imposed, may only serve to limit the number of providers
available or willing to establish and maintain the small rollover
accounts covered by the safe harbor. Other commenters suggested that
the fiduciaries should be required to consider an individual retirement
plan provider's financial stability, taking into account such matters
as credit ratings or insurance coverage. The Department is unaware of
any problems attributable to weaknesses in the existing Code and
regulatory standards for individual retirement plan providers. The
Department, therefore, believes that, given the limited scope of the
proposed safe harbor, existing Code and regulatory standards are
sufficiently protective of separating participants and their
beneficiaries who would become individual retirement plan account
holders, without imposing unnecessary burdens on either plans or
individual retirement plan providers.
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\10\ For example, with respect to individual retirement
accounts, 26 CFR 1.408-2(b)(2)(i) provides that the trustee of an
individual retirement account must be a bank (as defined in section
408(n) of the Code and regulations thereunder) or another person who
demonstrates, in the manner described in paragraph (e) of the
regulation, to the satisfaction of the Internal Revenue Service,
that the manner in which the trust will be administered will be
consistent with section 408 of the Code and regulations thereunder.
With respect to individual retirement annuities, 26 CFR 1.408-3
describes, among other things, requirements that must be met in
order to maintain the tax-qualified status of such annuity
arrangements.
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The third condition, described in paragraph (c)(3) of the proposed
regulation, defines the type of investment products in which a
mandatory distribution can be invested under the safe harbor.
Specifically, the proposal provides for the investment of mandatory
distributions in investment products designed to preserve principal and
provide a reasonable rate of return, whether or not such return is
guaranteed, consistent with liquidity, and taking into account the
extent to which charges can be assessed against an individual
retirement plan. For this purpose, the product must be offered by
[[Page 9902]]
a state or federally 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.
For purposes of this condition, a ``regulated financial
institution'' is defined in the proposal as 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.
This condition reflects the Department's view that, given the
nature and amount of the automatic rollovers, investments under the
safe harbor should be designed to minimize risk, preserve assets for
retirement and maintain liquidity. Such safe harbor investment products
would typically include money market funds maintained by registered
investment companies,\11\ and interest-bearing savings accounts and
certificates of deposit of a bank or a similar financial institution.
In addition, safe harbor investment products would include ``stable
value products'' issued by a regulated financial institution that are
fully benefit-responsive to the individual retirement plan account
holder. Such products must 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.
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\11\ Regarding money market mutual funds, prospectuses for such
funds generally state that ``an investment in the [money market
mutual] Fund is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency. Although the
Fund seeks to preserve the value of your [the investor's] investment
at $1.00 per share, it is possible to lose money by investing in the
Fund.''
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The majority of the commenters on the RFI supported inclusion in
the safe harbor of an investment product that favored retention of
principal and income over growth. A number of commenters suggested
that, in addition to such products, the safe harbor should include
investment products identical or similar to those in which the
participant had directed his or her investments prior to the mandatory
distribution. Some argued that retaining such investments outside the
plan might, in fact, result in some cost savings (e.g., lower
administrative expenses, avoiding termination charges, etc.). Some
commenters also argued for inclusion of participant investments in
qualifying employer securities as a safe harbor investment option. The
Department does not believe that an investment strategy adopted by a
participant while in a defined contribution plan or chosen by a plan
fiduciary at a particular point in time would necessarily continue to
be appropriate for the participant in the context of an automatic
rollover, particularly given the relatively small account balances
covered by the safe harbor. For this reason, the Department did not
adopt these suggestions.
The fourth condition addresses the extent to which fees and
expenses can be assessed against an individual retirement plan,
including the investments of such plan. Most of the commenters on the
RFI argued that the safe harbor should permit fees and expenses
attendant to the establishment and maintenance of an individual
retirement plan to be charged against the assets in the individual
retirement plan and the safe harbor should not impose limits on such
fees and expenses, noting that competition in the marketplace will
serve to control costs. These commenters also noted that the costs
attendant to maintaining individual retirement plans to handle
mandatory distributions will be higher than for other types of
accounts, because the amounts contributed are small, future
contributions are unlikely, and the account holders generally will be
passive or not in contact with the individual retirement plan
providers.
There is nothing in the safe harbor that would preclude
establishment, maintenance and other fees and expenses from being
charged against the individual retirement plan of an account holder. On
the other hand, the safe harbor does establish limits on the amount of
such fees and expenses that can be charged against an individual
retirement plan. While the Department agrees that competition in the
marketplace may serve to keep administrative and investment management
costs down, the Department nonetheless believes that, given the
importance of cost considerations in connection with the selection of
service providers by plan fiduciaries generally and the importance of
protecting principal in connection with automatic rollover
distributions, the safe harbor should contain some limits on the fees
and expenses that may be assessed against an individual retirement plan
established for mandatory distributions. In this regard, the Department
attempted to strike a balance in the proposal between the application
of a marketplace principle and the investment goal of preserving
principal.
Under paragraph (c)(4) of the proposed regulation, fees and
expenses attendant to an individual retirement plan, including
investments of such plan, (e.g., establishment charges, maintenance
fees, investment expenses, termination costs and surrender charges) may
not exceed certain limits. The first limit, provided in paragraph
(c)(4)(i), is intended to ensure that fees and expenses charged to
individual retirement plans established in connection with a mandatory
distribution are not inconsistent with the marketplace. This limit
provides that the fees and expenses charged to such plans may not
exceed the fees and expenses charged by the provider for comparable
individual retirement plans established for rollover distributions that
are not subject to the automatic rollover provisions of section
401(a)(31)(B) of the Code.
The second limit, provided in paragraph (c)(4)(ii), is intended to
protect the investment principal by providing that fees and expenses
attendant to the individual retirement plan may be charged only against
the income earned by the plan, with the exception of charges assessed
for the establishment of the plan. The Department understands that in
some instances providers will charge a one-time, typically small, fee
to set up an individual retirement plan. While providers are not
required to limit establishment charges to the income earned by
individual retirement plans, these charges, nonetheless, may not exceed
establishment charges assessed against comparable individual retirement
plans established for rollover distributions that are not subject to
the automatic rollover provisions of section 401(a)(31)(B) of the Code.
If a provider, therefore, imposes no establishment or set-up charge on
its comparable individual retirement plan customers, it may not impose
a charge on plans established for rollover distributions under section
401(a)(31)(B) of the Code.
The fifth condition is intended to ensure that participants and
beneficiaries are informed of the plan's procedures governing automatic
rollovers, including an explanation about the nature of the investment
product in which the mandatory distribution will be invested, and how
[[Page 9903]]
fees and expenses attendant to the individual retirement plan will be
allocated (i.e., the extent to which expenses will be borne by the
account holder alone or shared with the distributing plan or plan
sponsor). In addition, the disclosure must identify a plan contact for
further information concerning the plan's procedures, individual
retirement plan providers, and the fees and expenses attendant to the
individual retirement plan. In this regard, paragraph (c)(5) of the
proposed regulation conditions safe harbor relief on the furnishing of
this information to the plan's participants and beneficiaries in a
summary plan description (SPD) or a summary of material modifications
(SMM) in advance of an automatic rollover. For purposes of this
condition, a plan contact can be identified by reference to a person,
position or office, along with an address and phone number of the
contact. It is anticipated that the contact, in response to requests
from separated participants on whose behalf distributions have been
made to an individual retirement plan, would be able to identify the
individual retirement plan provider to whom a distribution was made for
the particular participant.
One commenter on the RFI argued against the establishment of any
new disclosure requirements under the safe harbor, given the
requirements that already exist under the Code. Another commenter
argued that the safe harbor should require individual notices to each
separated participant on whose behalf an individual retirement plan is
established informing him or her of the provider's name, address and
phone number, and any other information needed by the account holder to
take action with regard to the distributed funds.
This condition is consistent with the Department's statement in a
footnote to Revenue Ruling 2000-36 requiring that plan provisions
governing the default direct rollover of distributions, including the
participant's ability to affirmatively opt out of the arrangement, must
be described in the plan's SPD furnished to participants.\12\ We
believe this approach to disclosure similarly serves to ensure that
participants and beneficiaries are provided, and have access to,
sufficient information about automatic rollovers, while avoiding the
imposition of unnecessary costs and burdens on pension plans and
individual retirement plan providers.
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\12\ Revenue Ruling 2000-36, 2000-2 C.B. 140.
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Paragraph (c)(6) of the proposed regulation conditions safe harbor
relief on the plan fiduciary not engaging in prohibited transactions in
connection with the selection of an individual retirement plan provider
or investment product, unless such actions are covered by a statutory
or administrative exemption issued under section 408(a) of ERISA. In
this regard, the Department is publishing a proposed class exemption in
today's Federal Register that is intended to deal with prohibited
transactions resulting from an individual retirement plan provider's
selection of itself as the provider of an individual retirement plan
and/or issuer of an investment held by such plan in connection with
mandatory distributions from the provider's own pension plan.
Specifically, the proposed exemption is intended to permit a bank or
other regulated financial institution as defined therein to (1) select
itself or an affiliate as the individual retirement plan trustee,
custodian or issuer to receive automatic rollovers from its own plan
and (2) select its own funds or investment products for automatic
rollovers from its own plan. In the absence of this exemption, a bank
or other financial institution would be required to direct automatic
rollovers from its own plan for its own employees to a competitor as
the individual retirement plan provider.
C. Miscellaneous Issues
In response to the Department's RFI, a number of commenters
identified possible legal impediments that fiduciaries, banks and other
financial institutions might encounter in connection with automatic
rollovers. These impediments included perceived conflicts with state
laws on signature requirements and escheat, Code requirements, and
requirements under the USA PATRIOT Act.\13\
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\13\ Pub. L. No. 107-56, October 26, 2001, 115 Stat. 272.
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With regard to Code requirements that may possibly conflict with or
impede the establishment of individual retirement plans for purposes of
automatic rollovers of mandatory distributions under section
401(a)(31)(B) of the Code, the Department has been informed that staff
of the Department of the Treasury and the Internal Revenue Service are
reviewing the current rules and regulations affecting such
distributions and that guidance addressing the application of these
rules to the automatic rollover of mandatory distributions is
anticipated in advance of or simultaneously with the Department's
issuance of a final safe harbor regulation.
With regard to the provisions of the USA PATRIOT Act (Act), a
number of commenters pointed out that the customer identification and
verification provisions of the Act may preclude banks and other
financial institutions from establishing individual retirement plans
without the participation of the participant or beneficiary on whose
behalf the fiduciary is required to make an automatic rollover. In most
of the situations where a fiduciary is required to make an automatic
rollover to an individual retirement plan, the participant or
beneficiary is unable to be located or is otherwise not communicating
with the plan concerning the distribution of plan benefits.
Accordingly, if the customer identification and verification provisions
of the Act were construed to require participant or beneficiary
participation when an individual retirement plan is established on his
or her behalf, fiduciaries will be unable to comply with the automatic
rollover requirements of the Code and utilize this safe harbor.
Commenters also noted that such an interpretation of the Act would
limit the ability of fiduciaries to make distributions from terminating
defined contribution plans on behalf of missing plan participants and
beneficiaries.
In response to these issues, Treasury staff, along with staff of
the other Federal functional regulators,\14\ have advised the
Department that they interpret the customer identification and
verification (CIP) requirements of section 326 of the Act and
implementing regulations to require that banks and other financial
institutions implement their CIP compliance program with respect to an
account, including an individual retirement plan, established by an
employee benefit plan in the name of a former participant (or
beneficiary) of such plan, only at the time the former participant or
beneficiary first contacts such institution to assert ownership or
exercise control over the account. CIP compliance will not be required
at the time an employee benefit plan establishes an account and
transfers the funds to a bank or other financial institution for
purposes of a distribution of benefits from the plan to a separated
employee.\15\ In January 2004, Treasury staff, along with staff of the
other Federal functional regulators, issued guidance on this matter in
the form of
[[Page 9904]]
a question and answer, published in a set of ``FAQs: Final CIP Rule,''
on the regulators'' Web sites.\16\
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\14\ The term ``other Federal functional regulators'' refers to
the other agencies responsible for administration and regulations
under the Act.
\15\ It is the Department's understanding that this
interpretation applies to a broad spectrum of employee benefit plans
including those covered by title I of ERISA and those established
under Code provisions.
\16\ See FAQs: Final CIP Rule at: http://www.occ.treas.gov/10.pdf http://www.fincen.gov/finalciprule.pdf http://
www.ots.treas.gov/docs/25188.pdf http://www.fdic.gov/news/news/financial/2004/FIL0404a.html_____________________________________-
Issues raised by commenters concerning the possible application of
state laws are beyond the scope of this regulation.
D. Effective Date
As discussed above, section 657(c)(2)(A) of EGTRRA provides that
the requirements of section 401(a)(31)(B) of the Code requiring
automatic rollovers of mandatory distributions to individual retirement
plans do not become effective until the Department issues final safe
harbor regulations. Inasmuch as it appears clear that Congress did not
intend fiduciaries to be subject to the automatic rollover requirements
under the Code in the absence of a safe harbor, the Department believes
the effective date of the rollover requirement must be determined by
reference to the effective date of the final safe harbor regulation,
that is the date on which plan fiduciaries may avail themselves of the
relief provided by the safe harbor. In this regard, the Department is
proposing to make the final safe harbor regulation effective 6 months
after the date of publication in the Federal Register in order to
afford plan fiduciaries adequate time to amend their plans, distribute
required disclosures and identify institutions and products that would
afford relief under the final safe harbor regulation.
E. Request for Comments
The Department invites comments from interested persons on all
aspects of the proposed safe harbor provided herein, including the
proposed effective date. Comments (preferably at least three copies)
should be addressed to the Office of Regulations and Interpretations,
Employee Benefits Security Administration, Room N-5669, U.S. Department
of Labor, 200 Constitution Avenue NW., Washington, DC 20210. Attn:
Automatic Rollover Regulation. Comments also may be submitted
electronically to e-ori@dol.gov. All comments received will be
available for public inspection at the Public Disclosure Room, N-1513,
Employee Benefits Security Administration, 200 Constitution Avenue NW.,
Washington, DC 20210.
The Department has limited the comment period to 30 days in order
to issue a final regulation on the earliest possible date, taking into
account Congress's expectation that regulations would be issued in June
2004. The Department believes that, in light of the earlier published
request for information and the limited number of issues presented for
consideration by the proposal, the provided 30-day comment period
affords interested persons an adequate amount of time to analyze the
proposal and submit comments thereon.
F. Regulatory Impact Analysis
Summary
The purpose of this proposed regulation is to establish conditions
under which a fiduciary will be deemed to satisfy the fiduciary
obligations under section 404(a) of ERISA in connection with the
automatic rollover of a mandatory distribution as described in amended
Code section 401(a)(31)(B). The EGTRRA amendment is estimated to have
significant costs and benefits in that it annually will provide 241,000
former participants with preserved retirement savings of about $249
million and immediate tax savings of about $71 million. Included in
those 241,000 participants are 98,000 who are assumed to be passive or
non-responsive. Establishing individual retirement plans for these
participants for automatic rollovers of mandatory distributions will
reduce ordinary plan administrative expenses attributable to those
participants by an estimated $9.5 million in the first year.
The amendment will generate one-time administrative compliance
costs of an estimated $139 million, and individual retirement plan
establishment and maintenance fees totaling $14.4 million in the first
year. Automatic rollovers of mandatory distributions may give rise to
other costs as well, such as investment expenses, termination charges,
and surrender charges, but the magnitude of some of those expenses will
relate to the actual investment products selected. The range of
possible costs that relate to investment products is considered too
broad to support meaningful estimates.
The savings that will arise from this safe harbor are expected to
substantially outweigh its costs and transfers. The guidance provided
by this proposed regulation is expected to result in an aggregate
savings of administrative compliance costs for plans of about $92
million by lessening the time required to select an individual
retirement plan provider, investment product, and fee structure that
are consistent with the provisions of Code section 401(a)(31)(B) and
ERISA section 404(a) with respect to automatic rollovers of mandatory
distributions. Other benefits not quantified here are expected to
accrue to fiduciaries through greater certainty and reduced exposure to
risk, and to former plan participants through the proposed regulatory
standards concerning individual retirement plan providers, investment
products, preservation of principal, rates of return, liquidity, and
fees and expenses.
One-time costs associated with modifying a summary plan description
or summary of material modifications to satisfy the safe harbor
conditions are expected to amount to about $13 million.
The proposed safe harbor will preserve the principal amounts of
automatic rollovers of mandatory distributions by ensuring that the
various fees and expenses that apply to the individual retirement plans
established for mandatory distributions are not more costly than those
charged by the provider to individual retirement plans for comparable
rollover distributions that are not subject to the automatic rollover
provisions of Code section 401(a)(31)(B). If adopted as proposed, this
guidance may also result in a transfer of individual retirement plan
costs to other individual retirement plans or to plan sponsors to the
extent that earnings and available profit are less than the fees that
the individual retirement plan provider would ordinarily charge for
comparable individual retirement plans.
Further discussion of costs and benefits and the data and
assumptions underlying these estimates will be found below.
Executive Order 12866 Statement
Under Executive Order 12866, the Department must determine whether
a 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) of the Executive
Order, a ``significant regulatory action'' is an action that is likely
to result in a rule (1) having an annual effect of 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
[[Page 9905]]
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. OMB has determined that this action is
significant under section 3(f)(4) because it raises novel legal or
policy issues arising from the President's priorities. Accordingly, the
Department has undertaken an analysis of the costs and benefits of the
proposed regulation. OMB has reviewed this regulatory action.
1. Costs and Benefits of the EGTRRA Amendment
The impact of the amendment to Code section 401(a)(31) is
distinguishable from the impact of the proposed regulation, and is
expected to affect, in the aggregate, fiduciaries, plan participants,
and certain regulated financial institutions. Fiduciaries will incur
initial administrative expenses to select providers and investment
products. Plan participants who may otherwise receive a cash
distribution and pay ordinary income tax and penalties on the amount
distributed will not pay those taxes because the amounts would have
been retained in the pension system to earn additional tax-deferred
income for retirement. As a result of the amendment, certain costs and
fees will also be incurred by pension plans in connection with
automatic rollovers and the investments for individual retirement
plans. Finally, certain regulated financial institutions will receive
additional deposits and earnings potential, and incur costs and charge
fees for account maintenance.
After the effective date of the amendment, plans that currently
mandate immediate distributions for amounts of greater than $1,000 but
not exceeding $5,000 will, absent an affirmative election of a
different alternative, make direct transfers of these distributions to
an individual retirement plan. To implement this change, fiduciaries
and their professional service providers will need to review the new
requirements and select individual retirement plan providers and
investment products. The amount of time required for this activity will
vary, but based on 680,000 retirement plans and an assumed hourly rate
of $68, the aggregate cost of each hour is over $46 million. An effort
involving an average of 3 hours would result in an aggregate one-time
cost of about $139 million. For this estimate we have conservatively
assumed that all plans provide for such mandatory distributions and
will need to take action to implement procedures for automatic
rollovers to individual retirement plans. The proportion of pension
plans that provide for such mandatory distributions is not known, but
is believed based on anecdotal evidence to be very high. This total
cost may be lessened to the extent that fewer plans will need to
address the automatic rollover requirement, or that the assistance of
service providers to multiple plans results in greater efficiency.
The Census Bureau's 1996 Survey of Program Participation (SIPP),
Wave 7 Pension Benefits Module collected information as to the number,
uses, and values of lump sum distributions from private pension plans
in 1997. The survey responses show whether a distribution was mandatory
or voluntary, and whether the amount involved was ``Rolled over into
another plan, an IRA, or an individual retirement annuity'' (``rolled
over''). The number of lump sum distributions between $1,001 and $5,000
that were characterized as mandatory and put to other specific uses
enumerated in the survey instrument (``lump sums'') has been used for
the purpose of this analysis to approximate the number of participants
in plans with mandatory distribution provisions that might fail to make
an affirmative election. The number of automatic rollovers of mandatory
distributions that will occur because of the Code amendment may be
smaller than the number of lump sums because some of these participants
may have made an affirmative election. It seems reasonable to assume
that distributions rolled over would have involved an affirmative
election, and that the number of participants making affirmative
elections will be largely unchanged. The number of lump sums is assumed
to represent an upper bound of the number of participants potentially
affected by the automatic rollover provisions of Code section
401(a)(31)(B).
SIPP data show that in 1997 about 143,000 mandatory lump sum
distributions of $1,001 to $5,000 were made. Using the midpoint of the
reported groupings of distribution amounts (e.g., $1,500 for $1,001 to
$1,999) the total amount of retirement savings distributed was about
$415 million, or an average of $2,900 per former participant. The
account balances and present values of accrued benefits (``accounts'')
of an additional 98,000 participants were left in plans during the same
year for reasons that are not known. Although there is some uncertainty
with respect to this assumption, this number has been used here as a
proxy for a number of participants that did not receive mandatory
distributions because they were passive or non-responsive. Assuming
that the accounts of these participants were comparable in size and
would also be automatically rolled over after the amendment is
effective, the aggregate amount of automatic rollovers of mandatory
distributions to individual retirement plans for 241,000 participants
would be about $699 million per year ($415 million plus $284 million).
Only $415 million of this total represents retirement savings that
would not otherwise have been preserved, given that the $284 million
was already maintained in retirement plans.
The amount of some mandatory distributions subject to the automatic
rollover requirements of section 401(a)(31)(B) of the Code may be more
than $5,000. This can occur where the present value of the
nonforfeitable accrued benefits immediately distributable includes
additional funds attributable to prior rollover contributions (and the
earnings thereon).
The Department did not attempt to estimate the number or dollar
amount of mandatory distributions eligible for relief under the
proposed safe harbor regulation that may exceed $5,000. Adequate data
to support such estimates are not currently available.
The Department believes it is probable that the number of mandatory
distributions containing prior rollover contributions that will be
subject to the automatic rollover requirement of section 401(a)(31)(B)
of the Code will be small but the number of plans affected and the
dollar amount of some of these mandatory distributions might be large.
A large majority of 401(k) plan participants are in plans that
accept rollover contributions, according to the Bureau of Labor
Statistics. There is some evidence, however, that rollovers into
qualified plans are infrequent, which suggests that the number of
participants whose accounts include amounts attributable to prior
rollover contributions may be small. The number of such participants
that will eventually become the owners of an automatic rollover
individual retirement plan will be further limited by a number of
factors, on which no data are available. Some plans will not mandate
distribution of accounts that include prior rollover contributions and
therefore exceed $5,000. Some accounts of participants with prior
rollover contributions will accumulate more than $5,000 of additional
contributions, thereby becoming ineligible for mandatory distributions.
Some participants whose accounts do not accumulate more than $5,000
will
[[Page 9906]]
affirmatively direct, upon leaving employment, the disposition of their
accounts. Compared with other participants, those with prior rollover
contributions, especially those with large rollover contributions, may
be more likely to accumulate more than $5,000 from new contributions
and more likely to affirmatively direct the disposition of their
accounts.
The Department invites comments on the potential economic impact of
the safe harbor established by this proposed regulation in connection
with the mandatory distributions of accounts valued at more than
$5,000.
The Joint Committee on Taxation's May 26, 2001 estimates of budget
effects for this provision of EGTRRA indicated revenue losses on the
order of about $30 million per year, which suggests a substantially
lower estimate of the aggregate preservation of retirement savings,
amounting to about $83 million for private plan participants. The
reason for this difference is unknown. Interpreting these differing
estimates as ends of a range, ordinary income tax and penalty savings
are expected to amount to between $30 million and $112 million per
year, while aggregate retirement savings are expected to increase by
between $83 million and $415 million per year. For purposes of
discussion, midpoint values of $71 million and $249 million are used
here. These savings for former participants and distributions of
amounts previously retained in plans also represent increased deposits
to regulated financial institutions.
The establishment and maintenance of individual retirement plans
for automatic rollovers of mandatory distributions will generate costs
to individual retirement plans that may be defrayed by administrative
fees to the extent that the individual retirement plan providers charge
them. Certain investments may also generate fees. Some individual
retirement plan providers may have termination fees, and some
investments may have surrender charges associated with them that would
be incurred at a later time when a former participant chose to exercise
control over the account. With interpretive guidance, fiduciaries and
the regulated financial institutions will have increased certainty
regarding the limitations on costs, fees, and charges for individual
retirement plans. In the absence of the proposed safe harbor and the
fiduciary's desire to make use of the safe harbor, such costs and fees
could be paid by plan sponsors or charged to individual retirement
plans. However, it has been assumed here that in the absence of
guidance, most fees would be charged against individual retirement
plans. Aggregate annual establishment fees for rollovers arising from
the amendment each year are estimated to range from a negligible amount
to $2.4 million at the upper end of a range based on typical
establishment fees for comparable individual retirement plan rollovers
that range from no charge to $10 per account. Annual maintenance fees,
which typically range from $7 to $50, with a mid-point of $29, are
estimated to range from $1.7 million to $12 million, implying a mid-
point estimate of $6.9 million, for individual retirement plans
established in the first year. Assuming that individual retirement
plans continue to be established at a constant rate of 241,000 plans
per year and that, at an upper bound, no account holders assume control
of their plans, maintenance fees would continue to grow at an average
rate of $6.9 million annually.
As noted earlier, although establishment and maintenance fees are
relatively predictable based on comparable individual retirement plans
for rollover distributions available in the marketplace, the types of
investment products available and the actual choices that may be made
by fiduciaries are considered to be too variable to support a
meaningful estimate of investment fees, termination charges, and
surrender fees.
Plans will benefit from administrative cost savings under the Code
amendment for those 98,000 accounts that previously remained in pension
plans but are assumed to be subject to mandatory rollover provisions
under EGTRRA. Ordinary administrative costs that typically range from
$45 to $150 per participant will be saved when accounts are rolled
over, reducing plan expenses by about $4.4 million to $14.7 million, or
an average of $9.5 million in the first year. Assuming an annual
rollover of 98,000 accounts that would have remained in pensions plans,
cost savings to plans would continue to increase at an average of $9.5
million per year. The cost savings realized in each year will continue
to accumulate through the future years that the accounts would
otherwise have remained in the pension plan.
For the estimated 8 percent of these accounts that were in defined
benefit plans, a small savings of approximately $144,000 would be
realized from reduced funding risk and corresponding premium payments
to the Pension Benefit Guaranty Corporation (PBGC).
2. Benefits and Costs of the Proposed Regulation
The proposed regulation will benefit fiduciaries by affording them
greater assurance of compliance and reduced exposure to risk.
Specificity as to the types of entities that may receive the rollovers,
the investment choices, and the limitations on fees will lessen the
time required to comply with the EGTRRA amendment. The substantive
conditions of the safe harbor will benefit former participants by
directing their retirement savings to individual retirement plans,
providers, regulated financial institutions, and investment products
that minimize risk and offer preservation of principal and liquidity.
The limitation of fees and expenses will also benefit individual
retirement plan account holders. Fees and expenses for the individual
retirement plans will be limited under the safe harbor to those that
would be charged by the provider to comparable individual retirement
plans established for rollover distributions that are not subject to
automatic rollover provisions of the Code, thereby preserving
principal. The limitation of maintenance fees to the extent of income
earned will also serve to maintain principal.
The benefits of greater certainty for fiduciaries and protection of
participants cannot be specifically quantified. The proposed regulation
is, however, expected to reduce one-time startup administrative
compliance costs by as much as $92 million by narrowing the range of
individual retirement plan providers and investment products
fiduciaries might otherwise consider, assuming a savings of 2 of the 3
hours that compliance would otherwise require.
No estimate is made for the impact of the limitation on fees
charged to the subject individual retirement plans compared to those
charged by individual retirement plan providers for comparable
individual account plans established for rollover distributions that
are not subject to section 401(a)(31)(B) of the Code because the
Department is not aware of a basis for judging whether and in what
magnitude providers would charge different fees absent the safe harbor.
The proposal may affect the manner in which fees and expenses would
otherwise have been allocated among plan sponsors and individual
retirement plans. Under section 2550.404a-2(c)(4)(ii) of the proposed
regulation, fees and expenses may be charged only against the income
earned by the individual retirement plan. In some instances,
particularly in the case of
[[Page 9907]]
smaller individual retirement plans and when interest rates are low,
the credited interest, together with any profit the individual
retirement plan provider might otherwise derive from holding the plan,
may not cover the cost incurred by the provider to maintain the plan.
The Department believes that in these circumstances individual
retirement plan providers will offset or subsidize any such uncovered
costs either through increased maintenance fees on larger automatic
rollovers, through increased administrative charges to plan sponsors,
or possibly both. Because such uncovered costs (if any) derive from a
provision of this proposed regulation, any associated offsets or
subsidies would be attributable to it as well. The Department would
welcome comments on the probable incidence and magnitude of any such
uncovered costs and associated offsets or subsidies.
Plans will incur costs in connection with the proposed safe harbor
to modify summary plan descriptions or provide a summary of material
modifications. This cost is estimated to be about $13 million.
3. Alternatives
In preparation for drafting the proposed regulation, the Department
published an RFI (68 FR 991) requesting comment on issues relating to
the development of safe harbors for automatic rollovers and assistance
in drafting regulations. The Department received 17 comments from the
general public, service providers, and professional associations
involved with pension planning, investing, and retirement accounts.
Commenters opined on potential costs, issues of fiduciary liability and
prohibited transaction relief, technical considerations involving state
and federal laws, disclosures to participants, and draft language for
the proposed regulation. Responses to the RFI informed the drafting
process by permitting the Department to consider alternatives for
achieving the regulatory objective at the initial stages. A more
detailed discussion of the comments and the considerations given the
alternatives by the Department is provided earlier in the preamble.
Paperwork Reduction Act
This Notice of Proposed Rulemaking is not subject to the
requirements of the Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et
seq.) because it does not contain a ``collection of information'' as
defined in 44 U.S.C. 3502(3). It is expected that this proposed rule
will result in a modification of retirement plan Summary Plan
Descriptions, an information collection request approved separately
under OMB control number 1210-0039. However, this modification is not
considered to be substantive or material in the context of that
information collection request as a whole. In addition, the methodology
for calculating burden under the Paperwork Reduction Act for the
Summary Plan Description takes into account a steady rate of change in
Summary Plan Descriptions that is estimated to accommodate the change
that would be made by this proposed rulemaking. As a result, the
Department has not made a submission for OMB approval in connection
with this rulemaking.
Regulatory Flexibility Act
The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) (RFA) imposes
certain requirements with respect to Federal rules that are subject to
the notice and comment requirements of section 553(b) of the
Administrative Procedure Act (5 U.S.C. 551 et seq.) and which are
likely to have a significant economic impact on a substantial number of
small entities. Unless an agency determines that a proposed rule is not
likely to have a significant economic impact on a substantial number of
small entities, section 603 of the RFA requires that the agency present
an initial regulatory flexibility analysis at the time of the
publication of the notice of proposed rulemaking describing the impact
of the rule on small entities and seeking public comment on such
impact. Small entities include small businesses, organizations and
governmental jurisdictions.
For purposes of analysis under the RFA, the Employee Benefits
Security Administration (EBSA) proposes to continue to consider a small
entity to be an employee benefit plan with fewer than 100 participants.
The basis of this definition is found in section 104(a)(2) of ERISA,
which permits the Secretary of Labor to prescribe simplified annual
reports for pension plans which cover fewer than 100 participants.
Under section 104(a)(3), the Secretary may also provide for exemptions
or simplified annual reporting and disclosure for welfare benefit
plans. Pursuant to the authority of section 104(a)(3), the Department
has previously issued at 29 CFR 2520.104-20, 2520.104-21, 2520.104-41,
2520.104-46 and 2520.104b-10 certain simplified reporting provisions
and limited exemptions from reporting and disclosure requirements for
small plans, including unfunded or insured welfare plans covering fewer
than 100 participants and which satisfy certain other requirements.
Further, while some large employers may have small plans, in
general small employers maintain most small plans. Thus, EBSA believes
that assessing the impact of this proposed rule on small plans is an
appropriate substitute for evaluating the effect on small entities. The
definition of small entity considered appropriate for this purpose
differs, however, from a definition of small business which is based on
size standards promulgated by the Small Business Administration (SBA)
(13 CFR 121.201) pursuant to the Small Business Act (15 U.S.C. 631 et
seq.). EBSA therefore requests comments on the appropriateness of the
size standard used in evaluating the impact of this proposed rule on
small entities. The Department does not expect that the financial
institutions potentially impacted by this proposal will be small
entities.
EBSA has preliminarily determined that this rule will not have a
significant economic impact on a substantial number of small entities.
In support of this determination, and in an effort to provide a sound
basis for this conclusion, EBSA has prepared the following initial
regulatory flexibility analysis.
Section 657(c)(2)(A) of EGTRRA directed the Department to issue
regulations providing safe harbors under which a plan administrator's
designation of an institution to receive automatic rollovers of
mandatory distributions pursuant to section 401(a)(31)(B) of the Code
and the initial investment choice for the rolled-over funds would be
deemed to satisfy the fiduciary responsibility provisions of section
404(a) of ERISA. This EGTRRA provision further provided that the Code
provisions requiring automatic rollovers of certain mandatory
distributions to individual retirement plans would not become effective
until the Department issued safe harbor regulations. Before issuing
this proposal, the Department requested comments on the potential
design of the safe harbor.
The conditions set forth in this proposed regulation are intended
to satisfy the EGTRRA requirement that the Department prescribe
regulations providing for safe harbors, while meeting the objectives of
offering greater certainty to fiduciaries concerning their compliance
with the requirements of ERISA section 404(a), and of preserving assets
of former plan participants for retirement income purposes. In
describing the financial institutions, investment products, and fee
arrangements that fall within the safe harbor, the Department has
attempted to strike a balance between the interests of
[[Page 9908]]
fiduciaries, individual retirement plan providers, and the investment
goal of preserving principal.
The proposed rule would impact small plans that include provisions
for the mandatory distribution of accounts with a value exceeding
$1,000 and not greater than $5,000. It has been assumed for the
purposes of this analysis that all plans include such provisions,
although the number may actually be somewhat lower. On this basis, it
is expected that the proposal will affect 611,800 small plans. The
proportion of the total of 241,000 participants estimated to be
affected annually by the amendment to Code section 401(a)(31)(B) that
were in small plans is not known. Similarly, there are no available
data on the number of participants that will separate from employment
with account balances of more than $5,000 (because of prior rollover
contributions) that may be, depending on the provisions of the
distributing plans, automatically rolled over under EGTRRA. It is
assumed that all 611,800 small plans will need to address compliance
with the Code amendment and section 404(a) of ERISA.
As described above, the costs and benefits of the Code amendment
and safe harbor proposal are distinguishable, and estimated separately.
As also noted, the proposed regulation is expected to substantially
reduce the cost of compliance with the Code amendment. The initial cost
of the Code amendment for small plans is expected to be about $124
million. The one-time savings from the proposed regulation is estimated
at about $83 million for small plans compared with $9 million for large
plans, due to the significantly larger number of small plans. The
condition of the safe harbor requiring disclosure of specific
information in a summary plan description or summary of material
modification is expected to result in costs of about $11 million.
Preparation of this information is in most cases accomplished by
professionals that provide services to employee benefit plans. Where
fiduciaries prepare these materials themselves, it is assumed that
persons at the professional level of budget analysts or financial
managers will complete the necessary work.
The benefits of greater certainty afforded fiduciaries by the safe
harbor are substantial but cannot be specifically quantified.
Prior to publication of this proposed regulation, the Department
published an RFI requesting comments and suggestions from the general
public on developing guidelines to assist fiduciaries in selecting
institutions and investment products for individual retirement plans.
The Department specifically requested in the RFI that commenters,
``address the anticipated annual impact of any proposals on small
businesses and small plans (plans with fewer than 100 participants).''
The Department received three comments that pertained specifically to
small plans, the first of which cautioned that plan sponsors would be
deterred from sponsoring plans with a mandatory distribution provision
by placement of any additional burdens on them. Another comment
indicated that, because of technological improvements, the burden on
small plans would be manageable. Finally, a third commenter noted that
annual costs would not be any higher for small plans.
To the Department's knowledge, there are no federal regulations
that might duplicate, overlap, or conflict with the proposed regulation
for safe harbors under section 404(a) of ERISA.
Congressional Review Act
The notice of proposed rulemaking being issued here is subject to
the provisions of the Congressional Review Act provisions of the Small
Business Regulatory Enforcement Fairness Act of 1996 (5 U.S.C. 801 et
seq.) and, if finalized, will be transmitted to the Congress and the
Comptroller General for review.
Unfunded Mandates Reform Act
Pursuant to provisions of the Unfunded Mandates Reform Act of 1995
(Pub. L. 104-4), this rule does not include any Federal mandate that
may result in expenditures by State, local, or tribal governments, or
the private sector, which may impose an annual burden of $100 or more.
Federalism Statement
Executive Order 13132 (August 4, 1999) outlines fundamental
principles of federalism and requires the adherence to specific
criteria by federal agencies in the process of their formulation and
implementation of policies that have substantial direct effects on the
States, the relationship between the national government and the
States, or on the distribution of power and responsibilities among the
various levels of government. This proposed rule would not have
federalism implications because it has no substantial direct effect on
the States, on the relationship between the national government and the
States, or on the distribution of power and responsibilities among the
various levels of government. Section 514 of ERISA provides, with
certain exceptions specifically enumerated, that the provisions of
Titles I and IV of ERISA supersede any and all laws of the States as
they relate to any employee benefit plan covered under ERISA. The
requirements implemented in this proposed rule do not alter the
fundamental provisions of the statute with respect to employee benefit
plans, and as such would have no implications for the States or the
relationship or distribution of power between the national government
and the States.
List of Subjects in 29 CFR Part 2550
Employee benefit plans, Exemptions, Fiduciaries, Investments,
Pensions, Prohibited transactions, Real estate, Securities, Surety
bonds, Trusts and trustees.
For the reasons set forth in the preamble, the Department proposes
to amend Subchapter F, Part 2550 of Title 29 of the Code of Federal
Regulations as follows:
SUBCHAPTER F--FIDUCIARY RESPONSIBILITY UNDER THE EMPLOYEE RETIREMENT
INCOME SECURITY ACT OF 1974
PART 2550--RULES AND REGULATIONS FOR FIDUCIARY RESPONSIBILITY
1. The authority citation for part 2550 is revised to read as
follows:
Authority: 29 U.S.C. 1135; sec. 657, Pub. L. 107-16, 115 Stat.
38; and Secretary of Labor's Order No. 1-2003, 68 FR 5374 (Feb. 3,
2003). Sec. 2550.401b-1 also issued under sec. 102, Reorganization
Plan No. 4 of 1978, 43 FR 47713 (Oct. 17, 1978), 3 CFR, 1978 Comp.
332, effective Dec. 31, 1978, 44 FR 1065 (Jan. 3, 1978), 3 CFR, 1978
Comp. 332. Sec. 2550.401c-1 also issued under 29 U.S.C. 1101. Sec.
2550.404c-1 also issued under 29 U.S.C. 1104. Sec. 2550.407c-3 also
issued under 29 U.S.C. 1107. Sec. 2550.408b-1 also issued under 29
U.S.C. 1108(b)(1) and sec. 102, Reorganization Plan No. 4 of 1978, 3
CFR, 1978 Comp. p. 332, effective Dec. 31, 1978, 44 FR 1065 (Jan. 3,
1978), and 3 CFR, 1978 Comp. 332. Sec. 2550.412-1 also issued under
29 U.S.C. 1112.
2. Add Sec. 2550.404a-2 to read as follows:
Sec. 2550.404a-2 Safe harbor for automatic rollovers to individual
retirement plans.
(a) In general. (1) Pursuant to section 657(c) of the Economic
Growth and Tax Relief Reconciliation Act of 2001, Public Law 107-16,
June 7, 2001, 115 Stat. 38, this section provides a safe harbor under
which a fiduciary of an employee pension benefit plan subject to Title
I of the Employee Retirement Income Security Act of 1974, as amended
(the Act), 29 U.S.C. 1001 et seq., will be deemed to have satisfied his
or her fiduciary duties under section 404(a) of
[[Page 9909]]
the Act in connection with an automatic rollover of a mandatory
distribution described in section 401(a)(31)(B) of the Internal Revenue
Code of 1986, as amended (the Code).
(2) The standards set forth in this section apply solely for
purposes of determining whether a fiduciary meets the requirements of
this safe harbor. Such standards are not intended to be the exclusive
means by which a fiduciary might satisfy his or her responsibilities
under the Act with respect to automatic rollovers of mandatory
distributions described in section 401(a)(31)(B) of the Code.
(b) Safe harbor. A fiduciary that meets the conditions of paragraph
(c) of this section is deemed to have satisfied his or her duties under
section 404(a) of the Act with respect to both the selection of an
individual retirement plan provider and the investment of funds in
connection with an automatic rollover of a mandatory distribution
described in section 401(a)(31)(B) of the Code to an individual
retirement plan, within the meaning of section 7701(a)(37) of the Code.
(c) Conditions. With respect to an automatic rollover of a
mandatory distribution described in section 401(a)(31)(B) of the Code,
a fiduciary shall qualify for the safe harbor described in paragraph
(b) of this section if:
(1) 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;
(2) The mandatory distribution is to an individual retirement plan
within the meaning of section 7701(a)(37) of the Code;
(3)(i) The mandatory distribution is invested in an investment
product designed to preserve principal and provide a reasonable rate of
return, whether or not such return is guaranteed, consistent with
liquidity, and taking into account paragraph (c)(4) of this section.
For this purpose, the product must be offered by a state or federally
regulated financial institution, as defined in paragraph (c)(3)(ii) of
this section, and must seek to maintain a stable dollar value equal to
the amount invested in the product by the individual retirement plan,
and
(ii) For purposes of this section, a regulated financial
institution shall be: 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;
(4)(i) Fees and expenses attendant to the individual retirement
plan, including investments 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 rollover distributions that are not
subject to the automatic rollover provisions of section 401(a)(31)(B)
of the Code, and
(ii) Fees and expenses attendant to the individual retirement plan
may be charged only against the income earned by the individual
retirement plan, with the exception of charges assessed for the
establishment of the individual retirement plan;
(5) Participants have been furnished a summary plan description, or
a summary of material modifications, that describes the plan's
automatic rollover provisions effectuating the requirements of section
401(a)(31)(B) of the Code, including an explanation that the mandatory
distribution will be invested in an investment product designed to
preserve principal and provide a reasonable rate of return and
liquidity, a statement indicating how fees and expenses attendant to
the individual retirement plan will be allocated, and the name, address
and phone number of a plan contact (to the extent not otherwise
provided in the summary plan description or summary of material
modifications) for further information concerning the plan's automatic
rollover provisions, the individual retirement plan provider and the
fees and expenses attendant to the individual retirement plan; and
(6) Both the fiduciary's selection of an individual retirement plan
and the investment of funds would not result in a prohibited
transaction under section 406 of the Act, unless such actions are
exempted from the prohibited transaction provisions by a prohibited
transaction exemption issued pursuant to section 408(a) of the Act.
Signed at Washington, DC, this 24th day of February, 2004.
Ann L. Combs,
Assistant Secretary, Employee Benefits Security Administration,
Department of Labor.
[FR Doc. 04-4551 Filed 3-1-04; 8:45 am]
BILLING CODE 4150-29-P
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