Class Exemption for Services Provided in Connection With the
Termination of Abandoned Individual Account Plans
[04/21/2006]
Volume 71, Number 77, Page 20855-20862
[[Page 20855]]
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Part V
Department of Labor
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Employee Benefits Security Administration
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Class Exemption for Services Provided in Connection With the
Termination of Abandoned Individual Account Plans; Notice
[[Page 20856]]
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DEPARTMENT OF LABOR
Employee Benefits Security Administration
[ZRIN 1210-ZA05; Prohibited Transaction Exemption 2006-06; Application
No. D-11201]
Class Exemption for Services Provided in Connection With the
Termination of Abandoned Individual Account Plans
AGENCY: Employee Benefits Security Administration, Department of Labor.
ACTION: Grant of class exemption.
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SUMMARY: This document contains a final exemption from certain
prohibited transaction restrictions of the Employee Retirement Income
Security Act of 1974 (ERISA or the Act) and from certain taxes imposed
by the Internal Revenue Code of 1986, as amended (the Code). The
exemption permits a ``qualified termination administrator'' (QTA) of an
individual account plan that has been abandoned by its sponsoring
employer to select itself or an affiliate to provide services to the
plan in connection with the termination of the plan, to pay itself or
an affiliate fees for those services, and to pay itself for services
provided prior to the plan's deemed termination. The exemption also
permits a qualified termination administrator of an abandoned plan to:
(1) Designate itself or an affiliate as the provider of an individual
retirement plan or other account for the distribution of a participant
or beneficiary who fails to make an election regarding the disposition
of such benefits; (2) select a proprietary investment product as the
initial investment for such plan or account; (3) provide a federally
insured bank or savings association account for small distributions;
and (4) pay itself or its affiliate fees in connection therewith. This
exemption is being granted in connection with the Department's final
regulation at 29 CFR 2578.1, relating to the Termination of Abandoned
Individual Account Plans, the Department's final regulation at 29 CFR
2550.404a-3, relating to the Safe Harbor for Distributions From
Terminated Individual Account Plans, and the Department's final
regulation at 29 CFR 2520.103-13, relating to the Terminal Report for
Abandoned Individual Account Plans, which are being published
simultaneously in this issue of the Federal Register. The exemption
will affect individual account plans, the participants and
beneficiaries of such plans, certain plan service providers, and the
fiduciaries of such plans.
DATES: Effective Date: The class exemption is effective May 22, 2006.
FOR FURTHER INFORMATION CONTACT: Brian Buyniski, Office of Exemption
Determinations, Employee Benefits Security Administration, U.S.
Department of Labor, Washington, DC 20210, (202) 693-8545. This is not
a toll free number.
SUPPLEMENTARY INFORMATION: On March 10, 2005, the Department published
a notice in the Federal Register (70 FR 12074) of the pendency of a
proposed class exemption from the restrictions of sections 406(a)(1)(A)
through (D), 406(b)(1) and (b)(2) of the Act 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 proposed the
class exemption on its own motion pursuant to section 408(a) of the Act
and section 4975(c)(2) of the Code, and in accordance with the
procedures set forth in 29 CFR part 2570, subpart B (55 FR 32836,
August 10, 1990).\1\
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\1\ Section 102 of Reorganization Plan No. 4 of 1978, 5 U.S.C.
App. 1 (1996) 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.
For purposes of this exemption, references to specific
provisions of Title I of the Act, unless otherwise specified, refer
also to the corresponding provisions of the Code.
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The notice of pendency gave interested persons an opportunity to
comment or request a public hearing on the proposal. Five (5) public
comments were received by the Department. No requests for a public
hearing were received. Upon consideration of the comments received, the
Department has determined to grant the proposed class exemption subject
to certain modifications. These modifications and the comments are
discussed below.
Executive Order 12866
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 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. It has been determined
that this exemption is significant for ``raising novel policy issues''
under section 3(f)(4) of the Executive Order. Accordingly, the
exemption has been reviewed by OMB.
This exemption is being published simultaneously with a group of
three regulatory actions (the Abandoned Plan Regulations) that are also
being issued in final form. In the Department's view, the conditional
relief provided by the exemption is necessary in order to effectuate
the purposes underlying the Abandoned Plan Regulations. Accordingly,
the Department's basic statement regarding the economic benefits and
costs of encouraging efficient, effective termination of abandoned
plans, which is described in detail in the preamble to the Abandoned
Plan Regulations, published elsewhere in this issue of the Federal
Register, applies equally to this exemption. The following provides
more specific analysis of the exemption and its specific economic costs
and benefits.
The purpose of the Abandoned Plan Regulations is to facilitate the
orderly, efficient termination of abandoned individual account plans in
order to give participants and beneficiaries of those plans access to
the amounts held in their individual accounts, which are frequently
unavailable to them because of the abandonment. The relief provided by
the exemption facilitates this goal by permitting a QTA, under the
conditions of the exemption, to select itself or an affiliate to
provide services to the plan, to pay itself or an affiliate fees for
those services, and to pay itself fees for services provided prior to
the plan's deemed termination, in connection with terminating the
abandoned plan. Without the availability of the exemptive relief, QTAs
and their affiliates would be unable to use plan assets as a source of
compensation for their services; since those plan assets are usually
the only available source of payment, QTAs would be highly unlikely to
undertake abandoned plan terminations.
The exemption also permits a QTA to designate itself or an
affiliate as the provider of an individual retirement plan or other
account for distributions of benefits for which the participant or
beneficiary has failed to make an election; select a proprietary
investment product as the initial investment for the distributed
benefits of a participant or
[[Page 20857]]
beneficiary of a terminated plan who fails to make an election
regarding the disposition of such benefits; provide federally insured
bank or savings association accounts for small distributions of such
benefits; and pay itself or its affiliate in connection with such
distributions. By removing the barrier to use of proprietary or
affiliated investment vehicles for distributions for which the
participant or beneficiary has failed to make investment decisions, the
exemption facilitates the winding-up of abandoned plan terminations.
Because some proportion of the participants or beneficiaries in
virtually every termination of an abandoned plan will fail to make
decisions regarding the disposition of their benefits, QTAs will need
to make distribution decisions for those benefits. Allowing QTAs to use
their own or affiliated investment products to receive the
distributions will accelerate and simplify the orderly termination and
winding-up of a plan's affairs.
The exemption imposes certain conditions on use of proprietary or
affiliated investments, including (1) the condition that fees other
than establishment fees and expenses attendant to an individual
retirement plan or account may be charged only against the income
earned by the individual retirement plan or account and (2) the
condition that no sales commissions may be imposed in connection with
acquiring an Eligible Investment Product. The exemption also conditions
relief for payment for services provided prior to a plan's deemed
termination on the services' being provided in good faith pursuant to a
written agreement and the QTA's providing the Department with a copy of
the written agreement and a statement under penalty of perjury that
such services were actually performed.
In response to comments on the proposed regulations concerning the
limitations on fees, the Department has revised one of the Abandoned
Plan Regulations (the QTA Regulation, discussed below under
``Discussion of Comments Received'') to permit QTAs to transfer certain
small accounts to bank or savings association accounts or the unclaimed
property fund of the relevant state, but has determined not to make
further changes in the conditions imposed on transactions under the
exemption. The Department believes that these conditions, which shape
the transactions for which relief will be available, are justified by
the protection they provide to participants and beneficiaries.
The conditions appropriately limit the extent to which a QTA may
pay itself or its affiliate. Although the conditions restrict the fees
that QTAs and their affiliates may receive for their services, they
protect against potential self-dealing and depletion of account
balances. In these circumstances, the fee limitations substitute for an
independent fiduciary's assessment of the value of using products or
services of the QTA or its affiliate. Further, QTAs are not required to
make use of proprietary or affiliated individual retirement plans or
accounts, but are merely permitted by the exemption to choose
voluntarily whether to do so. The Department believes that the fee
limitations will encourage a QTA to make decisions regarding whether to
use its own or an affiliate's individual retirement plans or accounts
and investment products based not on the availability of a pool of
assets for payment of fees, but on whether it will be in the best
interests of the participants and beneficiaries to do so.
Paperwork Reduction Act
As part of its continuing effort to reduce paperwork and respondent
burden, the Department of Labor conducts a preclearance consultation
program to provide the general public and Federal agencies with an
opportunity to comment on proposed and continuing collections of
information in accordance with the Paperwork Reduction Act of 1995 (PRA
95) (44 U.S.C. 3506(c)(2)(A)). This helps to ensure that respondents
will be able to provide the requested data in the desired format; that
the public understands the Department's collection instruments; that
the Department minimizes the reporting burden it imposes, both in time
and financial resources; and that the Department properly assesses the
impact of its collection requirements on respondents.
Because QTAs that rely on the exemption are required, as a
condition for the relief, to comply with the requirements of the
Abandoned Plan Regulations, published elsewhere in this issue of the
Federal Register, the Department has combined the paperwork burden
arising from the exemption with the paperwork burden attributable to
the Abandoned Plan Regulations, including specifically the QTA
Regulation, the Safe Harbor for Distributions From Terminated
Individual Account Plans, and the Terminal Report for Abandoned
Individual Account Plans, under one Information Collection Request
(ICR). By combining these collections of information, the Department
believes that the general public will gain a better understanding of
the burden impact as it relates to terminating plans. The specific
burden for the exemption includes a recordkeeping requirement for a QTA
that terminates an abandoned plan and chooses to distribute the account
balances of missing or nonresponsive participants into proprietary or
affiliated individual retirement plans or accounts and a reporting
requirement for a QTA that intends to pay itself for services provided
to a plan prior to its deemed termination. The reporting requirement
includes submitting to the Department a copy of the written agreement
under which the services were provided, together with a representation,
under penalty of perjury, that the services for which reimbursement is
sought were in fact rendered. The hour and cost burdens for the ICR are
described more fully in the preamble to the Abandoned Plan Regulations
under the section on the Paperwork Reduction Act.
Discussion of Comments Received
The Department received five comment letters regarding the proposed
class exemption.\2\ Additionally, the Department received a number of
comments in connection with the regulation relating to the Termination
of Abandoned Individual Account Plans (the QTA Regulation) and the
regulation relating to the Safe Harbor for Distributions from
Terminated Individual Account Plans (the Safe Harbor Regulation).
Interested persons should refer to these regulations, published
elsewhere in this issue of the Federal Register, for a discussion of
those comments.
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\2\ The Department received one request for a public hearing
which was subsequently withdrawn by the commenter after the
Department informed the commenter that the issues raised in the
comment letter would be addressed in the final exemption.
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The Department received several comments regarding the fees
associated with the establishment of an account for participants and
beneficiaries who fail to provide direction as to the disposition of
their account balances. Two commenters requested that the Department
eliminate the requirement in section III(i)(2) of the proposed
exemption that fees and expenses attendant to the individual retirement
plan or other account, with the exception of establishment charges, may
be charged only against the income earned by the individual retirement
plan or other account.
The Department recognizes that the fee limitations in the class
exemption may serve as a disincentive to a QTA providing an individual
retirement plan for distributions from abandoned
[[Page 20858]]
individual account plans, particularly with respect to accounts with
small balances.\3\ In such cases, the QTA Regulation permits the
distribution to be made to an interest-bearing federally insured bank
account in the name of the participant or beneficiary, to the unclaimed
property fund of the state in which the participant's or beneficiary's
last known address is located, or to an individual retirement plan
provided by an unrelated financial institution. In light of this
modification to the QTA Regulation, the Department does not believe
that further relief is warranted. However, the Department has
determined to modify the final exemption to provide relief for a QTA
(or its affiliate) that is a provider of an interest-bearing, federally
insured bank or savings association account, to designate itself or its
affiliate as provider of such an account for the distribution of the
account balances of participants or beneficiaries who do not provide
direction as to the disposition of such balances, and to receive fees
in connection with the establishment and maintenance of such accounts
for distributions $1,000 or less.
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\3\ See the Safe Harbor Regulation at 2550.404a-3 at d(1)(iii).
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A commenter also requested that the Department clarify that a one-
time closing fee would be treated the same as an establishment fee
which, under the exemption, is not limited to the amount of income
earned by the account. The Department continues to believe that only
establishment fees may be charged against the principal balance of the
account. All other fees, including termination costs, can only be
charged against the income earned.
The commenter further requested that the Department clarify whether
an IRA owner's ability to transfer his or her account to a different
institution must be made without penalty to principal. Section III(h)
of the proposed exemption provided that the IRA owner may, within a
reasonable period of time after his or her request and without penalty
to the principal amount of the investment, transfer his or her account
balance to a different investment offered by the QTA or its affiliate.
The commenter asked for clarification of how this rule would apply if
the transfer was made to a different financial institution. In response
to this comment, the Department does not believe that a participant who
determines to transfer his or her account balance to a different
financial institution should be faced with a penalty deducted from the
principal amount of the investment. Thus, the final exemption has been
clarified to provide that the IRA owner must be able to transfer his or
her account balance to a different financial institution without
penalty to the principal.
Several comments addressed the definitions contained in section V
of the proposed exemption. One commenter recommended that the
definition of ``Eligible Investment Product'' be expanded to permit
investments in lifestyle, retirement date and other balanced fund
options. The commenter stated that these options are designed for long-
term investors who choose not to actively manage their accounts. The
Department notes that, given the nature of the accounts governed by
this exemption, investments should be designed to minimize risk,
preserve assets for retirement and maintain liquidity until the IRA
owner becomes available to take control of his or her account.
Accordingly, the Department has determined not to expand the definition
of ``Eligible Investment Product'' as requested.
Several commenters requested expansion of the definition of QTA in
the Regulation, as well as certain related changes to the class
exemption. For reasons more fully set forth in the QTA Regulation, the
Department has determined not to expand the definition of QTA. In light
of the determination not to modify this final definition under the QTA
Regulation, no changes have been made to the class exemption.
As proposed, the class exemption permitted a QTA to select itself
to furnish services to the plan in its capacity as a QTA, and to pay
itself for those services. It was suggested to the Department that the
final exemption also should permit a QTA to pay itself for services
rendered prior to becoming a QTA. Such services may have been rendered
in connection with a determination of plan abandonment under the QTA
Regulation or pursuant to an existing written contract previously
entered into with the plan sponsor or other independent fiduciary prior
to the time the service provider became the plan's QTA.
After considering the issues, the Department has expanded the class
exemption to permit a QTA to pay itself for services rendered before
becoming a QTA. In this regard, the exemption applies to two scenarios
involving the payment of fees. First, the exemption permits the payment
for services provided pursuant to the terms of a written contract
previously entered into with the plan sponsor, or other independent
fiduciary. This modification recognizes that a service provider might
be viewed as exercising authority or control with respect to the
disposition of a plan's assets, and therefore acting as a fiduciary,
when paying itself fees from plan assets for services under
circumstances where the service provider knows that there is no plan
fiduciary monitoring plan services or otherwise responsible for the
management of the plan, as would be the case in a plan that is
determined to have been abandoned by the plan sponsor. Second, the
exemption also permits payment for services that were not provided
pursuant to a written contract, but were rendered in connection with a
determination of plan abandonment under the QTA Regulation. Such
services will generally take place prior to the service provider
becoming a QTA.
One commenter on the QTA Regulation requested clarification on how
a QTA would be able to effect a distribution on behalf of a missing or
non-responsive participant in circumstances when the benefit payable is
subject to the Code's survivor annuity requirements. The Department has
modified the final QTA Regulation by adding a provision that provides
that if a QTA determines that the survivor annuity requirements in
section 401(a)(11) and 417 of the Code prevent a distribution in
accordance with the Safe Harbor Regulation, the QTA shall distribute
benefits in any manner reasonably determined to achieve compliance with
the survivor annuity requirements of the Code.
Although the commenter did not request exemptive relief for the
purchase of annuity contracts from the QTA or an affiliate, it does not
foreclose future consideration of additional exemptive relief if the
requisite findings under section 408(a) of the Act can be made.
Specifically, the Department is interested in information with regard
to the types of products that are currently available in the
marketplace to annuitize benefits, and the standards and safeguards
that the Department would include in an exemption for the purchase of
such annuities.
Description of the Exemption
The class exemption has five sections. Section I describes the
transactions that are covered by the exemption. Section II contains
conditions for the provision of termination services and the receipt of
fees. Section III contains the conditions for distributions. Section IV
contains the general recordkeeping provisions imposed on the QTA, and
section V contains definitions.
Under section I(a), relief is provided from the restrictions of
sections 406(a)(1)(A) through (D), 406(b)(1) and
[[Page 20859]]
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, for a ``qualified termination administrator'' (QTA) within the
meaning of section V(a) of the exemption to use its authority in
connection with the termination of an abandoned individual account plan
to select itself or an affiliate to provide services to the plan, to
receive fees for services provided as a QTA, and to pay itself fees for
services provided to the plan prior to the deemed termination of the
plan.
Section I(b) of the exemption provides relief from 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, for a QTA to
use its authority in connection with the termination of an abandoned
individual account plan to designate itself or an affiliate as provider
of an individual retirement plan or other account to receive the
account balance of a participant that does not provide direction as to
the disposition of such assets. The other accounts authorized by the
exemption include an account, other than an individual retirement
account, as described in section (d)(1)(ii) of the Safe Harbor
Regulation, for a distribution made to a distributee other than a
participant or spouse, and an interest-bearing, federally insured bank
or savings association account for distributions of less than $1,000,
as described in section (d)(1)(iii) of the Safe Harbor Regulation.
Section I(b) of the class exemption further permits the QTA to make
the initial investment of the distributed proceeds in a proprietary
investment product, receive fees in connection with the establishment
or maintenance of the individual retirement plan or other account, and
receive investment fees as a result of the investment of the individual
retirement plan or other account's assets in a proprietary investment
product in which the QTA or an affiliate has an interest.
Section II of the exemption describes the conditions that apply to
a transaction described in section I(a) of the exemption. The QTA must
comply with the requirements of the QTA Regulation, which is published
elsewhere in this issue of the Federal Register. Additionally, the QTA
is required to provide, in a timely manner, any other reasonably
available information requested by the Department regarding the
proposed termination.
Under the exemption, fees and expenses paid to the QTA and its
affiliate must be consistent with industry rates for such or similar
services, based on the experience of the QTA, and must not be in excess
of rates charged by the QTA (or its affiliate) for the same or similar
services provided to customers that are not individual account plans
terminated pursuant to the QTA Regulation, if the QTA (or its
affiliate) provides the same or similar services to such other
customers. The reference to ``industry rates'' and ``based on the
experience of the QTA'' are intended to enable a QTA who possesses
knowledge about the services needed for a plan termination and industry
rates for such or similar services, to engage or retain itself, an
affiliate, and other service providers without going through a
potentially timely and costly bidding process.
With respect to payment to the QTA for services provided to the
plan prior to its deemed termination, the exemption provides relief in
two situations. First, the exemption covers payment for services
performed by a service provider pursuant to the QTA Regulation prior to
the deemed termination of the plan and the service provider becoming a
QTA. Such services will generally have been performed by the service
provider in determining that a plan has been abandoned and in preparing
the notice of plan abandonment as required by section (c)(3) of the QTA
Regulation.
Second, the exemption covers payment for services provided in good
faith pursuant to the terms of a written agreement prior to the service
provider becoming a QTA. This includes services provided under a valid,
unexpired contract, as well as the continuation of such services after
the contract had expired. With respect to such services, the QTA must
demonstrate to the Department, in its initial notification of plan
abandonment (as required in section (c)(3) of the QTA Regulation), by a
representation under penalty of perjury, that such services were
actually performed. The QTA also must provide a copy of the executed
contract between the QTA and the plan fiduciary or plan sponsor that
authorized such services.
Section III contains conditions for transactions described in
section I(b) of the exemption. In this regard, the conditions of the
QTA Regulation must be met. In addition, the QTA must inform the
participant or beneficiary in the notice required by section (d)(2)(vi)
of the QTA Regulation that: (1) Absent his or her election within the
30-day period from receipt of the notice, the QTA will directly
distribute the account balance of the participant or beneficiary to an
individual retirement plan or other account offered by the QTA or its
affiliate; and (2) the account balance may be invested in the QTA's own
proprietary investment product, which is designed to preserve principal
and provide a reasonable rate of return and liquidity.
The exemption also requires that the individual retirement plan or
other account must be established and maintained for the exclusive
benefit of the individual retirement plan or other account holder, his
or her spouse or their beneficiaries.
The terms of the individual retirement plan or other account,
including the fees and expenses for establishing and maintaining the
individual retirement plan or other account, must be no less favorable
than those available to comparable individual retirement plans or other
accounts established for reasons other than the receipt of a
distribution described in the QTA Regulation.
In addition, the exemption requires that, other than in the case of
a bank or savings account described in section I(b)(1)(iii) of the
exemption for distributions of less than $1,000, the distribution must
be invested in an Eligible Investment Product, as defined in section
V(c) of the exemption. The rate of return or the investment performance
received by the individual retirement plan or other account from an
investment product must be no less than that received by comparable
individual retirement plans or other accounts that are not established
pursuant to the QTA Regulation but are invested in the same product.
For example, the rate of return received by the individual retirement
plan for an investment in a one-year certificate of deposit which is an
Eligible Investment Product cannot be less than the rate of return
received by an individual retirement plan or other account established
for reasons other than the receipt of a distribution that is invested
in an identical one-year certificate of deposit.
The exemption does not permit the individual retirement plan or
other account to pay a sales commission in connection with the
acquisition of an Eligible Investment Product.
Under the exemption, the individual retirement plan or other
account holder must be able, within a reasonable period of time after
his or her request and without penalty to the principal amount of the
investment, to transfer his or her individual retirement plan or other
account balance to a different
[[Page 20860]]
investment offered by the QTA or its affiliate. Also, the individual
retirement plan holder or other account holder must be able, within a
reasonable period of time after his or her request and without penalty
to the principal amount of the investment, to transfer his or her
individual retirement plan or other account balance to a different
financial institution not related to the QTA or its affiliate.
Under the exemption, fees and expenses attendant to the individual
retirement plan or other account, including the investment of the
assets of such plan or account, (e.g., establishment charges,
maintenance fees, investment expenses, termination costs, and surrender
charges) must not exceed the fees and expenses charged by the QTA for
comparable individual retirement plans or other accounts established
for reasons other than the receipt of a distribution made pursuant to
the QTA regulation. Additionally, fees and expenses attendant to the
individual retirement plan or other account, other than establishment
charges, may be charged only against the income earned by the
individual retirement plan or other account. Finally, fees and expenses
shall not exceed reasonable compensation within the meaning of section
4975(d)(2) of the Code.
Section IV of the exemption contains a recordkeeping requirement.
The QTA must maintain records to enable certain persons to determine
whether the applicable conditions of the class exemption have been met.
The records must be made available for examination by the IRS, the
Department, and any account holder or duly authorized representative of
such account holder of an individual retirement plan or other account,
for at least six years from the date the QTA provides notice to the
Department of its determination of plan abandonment and its election to
serve as the QTA.
Lastly, section V of the exemption contains certain definitions.
The term ``qualified termination administrator'' is defined in section
V(a) as an entity that is eligible to serve as a trustee or issuer of
an individual retirement plan within the meaning of section 7701(a)(37)
of the Code and that holds the assets of the abandoned plan.
The term ``Eligible Investment Product'' is defined in section V(c)
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. In this regard, the product must
be offered by a Regulated Financial Institution as defined in section
V(d) and must seek to maintain, over the term of the investment, a
dollar value that is equal to the amount invested in the product by the
individual retirement plan or other account. 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 or other account
holder. For purposes of this class exemption, the term ``benefit
responsive'' means a stable value product that provides 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 or other 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 or other
account assets.
The term ``Regulated Financial Institution'' is defined in section
V(d) to mean 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 guaranty
associations; or an investment company registered under the Investment
Company Act of 1940.
General Information
The attention of interested persons is directed to the following:
(1) The fact that a transaction is the subject of an exemption
under section 408(a) of the Act and section 4975(c)(2) of the Code does
not relieve a fiduciary or other party in interest or disqualified
person from certain other provisions of the Act and the Code, including
any prohibited transaction provisions to which the exemption does not
apply and the general fiduciary responsibility provisions of section
404 of the Act, which require, among other things, that a fiduciary
discharge his duties with respect to the plan solely in the interests
of the participants and beneficiaries of the plan and in a prudent
fashion in accordance with section 404(a)(1)(B) of the Act;
(2) In accordance with section 408(a) of the Act and section
4975(c)(2) of the Code, the Department finds that the exemption is
administratively feasible, in the interests of plans and their
participants and beneficiaries and protective of the rights of
participants and beneficiaries of such plans;
(3) The exemption is applicable to a transaction only if the
conditions specified in the exemption are met; and
(4) The exemption is supplemental to and not in derogation of any
other provisions of the Act 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.
Exemption
Accordingly, the following exemption is granted under the authority
of section 408(a) of the Act 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, 32847, August 10, 1990).
I. Covered Transactions
(a) 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 a QTA, (as defined in section V(a)
of this class exemption), using its authority in connection with the
termination of an abandoned individual account plan pursuant to the
Department's regulation at 2550.404a-3, relating to the Termination of
Abandoned Individual Account Plans (the QTA Regulation) to:
(1) Select itself or an affiliate to provide services to the plan;
(2) Receive fees for the services performed as a QTA; and
(3) Pay itself fees for services provided to the plan prior to the
deemed termination of the plan, provided that the conditions set forth
in sections II and IV of this exemption are satisfied.
(b) 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 a QTA, using its authority in
connection with the termination of an abandoned individual account plan
pursuant to the QTA Regulation to:
(1) Designate itself or an affiliate as: (i) Provider of an
individual retirement plan; (ii) provider of an account (other
[[Page 20861]]
than an individual retirement plan) under the limited circumstances
described in section (d)(1)(ii) of the Safe Harbor Regulation for
Terminated Plans (2550.404a-3) (Safe Harbor Regulation); or (iii)
provider of an interest-bearing, federally insured bank or savings
association account maintained in the name of the participant or
beneficiary, in the case of a distribution described in section
(d)(1)(iii) of the Safe Harbor Regulation, for the distribution of the
account balance of the participant or beneficiary of the abandoned
individual account plan who does not provide direction as to the
disposition of such assets;
(2) Make the initial investment of the account balance of the
participant or beneficiary in the QTA's or its affiliate's proprietary
investment product;
(3) Receive fees in connection with the establishment or
maintenance of the individual retirement plan or other account; and
(4) Pay itself or an affiliate investment fees as a result of the
investment of the individual retirement plan or other account assets in
the QTA's or its affiliate's proprietary investment product, provided
that the conditions set forth in sections III and IV of this exemption
are satisfied.
II. Conditions for Provision of Termination Services and Receipt of
Fees in Connection Therewith
(a) The requirements of the QTA Regulation are met. The QTA
provides, in a timely manner, any other reasonably available
information requested by the Department regarding the proposed
termination.
(b) Fees and expenses paid to the QTA, and its affiliate, in
connection with the termination of the plan and the distribution of
benefits:
(1) Are consistent with industry rates for such or similar
services, based on the experience of the QTA, and
(2) Are not in excess of rates ordinarily charged by the QTA (or
affiliate) for the same or similar services provided to customers that
are not plans terminated pursuant to the QTA regulation, if the QTA (or
affiliate) provides the same or similar services to such other
customers.
(c) In the case of a transaction described in section I(a)(3):
(1) Such services: (i) Were performed in good faith pursuant to the
terms of a written agreement executed prior to the service provider
becoming a QTA, or (ii) were performed pursuant to the QTA Regulation;
and
(2) The QTA, in the initial notification of plan abandonment
described in section (c)(3) of the QTA Regulation: (i) Represents under
penalty of perjury that such services were actually performed and (ii)
in the case of section II(c)(1)(i) above, provides the Department with
a copy of the executed contract between the QTA and a plan fiduciary or
the plan sponsor that authorized such services.
III. Conditions for Distributions
(a) The conditions of the QTA Regulation are met.
(b) In connection with the notice to participants and beneficiaries
described in the QTA Regulation, a statement is provided explaining
that:
(1) If the participant or beneficiary fails to make an election
within the 30-day period referenced in the QTA Regulation, the QTA will
directly distribute the account balance to an individual retirement
plan or other account offered by the QTA or its affiliate;
(2) The proceeds of the distribution may be invested in the QTA's
(or affiliate's) own proprietary investment product, which is designed
to preserve principal and provide a reasonable rate of return and
liquidity.
(c) The individual retirement plan or other account is established
and maintained for the exclusive benefit of the individual retirement
plan account holder or other account holder, his or her spouse, or
their beneficiaries.
(d) The terms of the individual retirement plan or other account,
including the fees and expenses for establishing and maintaining the
individual retirement plan or other account, are no less favorable than
those available to comparable individual retirement plans or other
accounts established for reasons other than the receipt of a
distribution described in the QTA Regulation.
(e) Except in the case of a QTA providing a bank or savings account
pursuant to section I(b)(1)(iii) of the exemption, the distribution
proceeds are invested in an Eligible Investment Product(s), as defined
in section V(c) of this class exemption.
(f) The rate of return or the investment performance of the
individual retirement plan or other account 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 or other accounts established for reasons
other than the receipt of a distribution described in the QTA
Regulation.
(g) The individual retirement plan or other account does not pay a
sales commission in connection with the acquisition of an Eligible
Investment Product.
(h) The individual retirement plan account holder or other account
holder must be able, within a reasonable period of time after his or
her request and without penalty to the principal amount of the
investment, to transfer his or her account balance to a different
investment offered by the QTA or its affiliate, or to a different
financial institution not related to the QTA or its affiliate.
(i)(1) Fees and expenses attendant to the individual retirement
plan or other account, including the investment of the assets of such
plan or account, (e.g., establishment charges, maintenance fees,
investment expenses, termination costs, and surrender charges) shall
not exceed the fees and expenses charged by the QTA for comparable
individual retirement plans or other accounts established for reasons
other than the receipt of a distribution made pursuant to the QTA
Regulation;
(2) Fees and expenses attendant to the individual retirement plan
or other account, with the exception of establishment charges, may be
charged only against the income earned by the individual retirement
plan or other account; and
(3) Fees and expenses attendant to the individual retirement plan
or other account are not in excess of reasonable compensation within
the meaning of section 4975(d)(2) of the Code.
IV. Recordkeeping
(a) The QTA maintains or causes to be maintained, for a period of
six (6) years from the date the QTA provides notice to the Department
of its determination of plan abandonment and its election to serve as
the QTA described in the QTA Regulation, 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 or other
account established pursuant to this
[[Page 20862]]
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 QTA, the
records necessary to enable the persons described in paragraph (b) to
determine whether the conditions of the exemption have been met are
lost or destroyed, and no party in interest other than the QTA shall be
subject to the civil penalty that may be assessed under section 502(i)
of the Act 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).
(3) None of the persons described in paragraph (b)(2) of this
section shall be authorized to examine the trade secrets of the QTA or
its affiliates or commercial or financial information that is
privileged or confidential.
V. Definitions
(a) A termination administrator is ``qualified'' for purposes of
the QTA Regulation and this exemption if:
(1) The QTA is eligible to serve as a trustee or issuer of an
individual retirement plan or other account, within the meaning of
section 7701(a)(37) of the Code, and
(2) The QTA holds plan assets of the plan that is considered
abandoned.
(b) 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.
(c) 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 as defined in paragraph (d) of this section and
shall seek to maintain, over the term of the investment, the dollar
value that is equal to the amount invested in the product by the
individual retirement plan or other account. 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 or other 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 or other 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 access to the individual retirement plan or other
account's assets.
(d) The term ``Regulated Financial Institution'' means 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 guaranty associations; or an investment
company registered under the Investment Company Act of 1940.
(e) 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.
(f) The term ``control'' means the power to exercise a controlling
influence over the management or policies of a person other than an
individual.
(g) The term ``individual account plan'' means an individual
account plan as that term is defined in section 3(34) of the Act.
Signed at Washington, DC, this 17th day of April, 2006.
Ivan L. Strasfeld,
Director of Exemption Determinations, Employee Benefits Security
Administration, U.S. Department of Labor.
[FR Doc. 06-3815 Filed 4-20-06; 8:45 am]
BILLING CODE 4150-29-P
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