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Employee Benefits Security Administration

EBSA Final Rule

Fiduciary Responsibility Under the Employee Retirement Income Security Act of 1974 Automatic Rollover Safe Harbor; Final Rule [09/28/2004]

[PDF Version]


[[Page 58017]]

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Part III





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; Final Rule


[[Page 58018]]


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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: Final rule.

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SUMMARY: This document contains a final regulation that establishes 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 final 
regulation will affect employee pension benefit plans, plan sponsors, 
administrators and fiduciaries, service providers, and plan 
participants and beneficiaries.

DATES: Effective Date: This final regulation is effective March 28, 
2005.
    Applicability Date: This final regulation shall apply to the 
rollover of mandatory distributions made on or after March 28, 2005.

FOR FURTHER INFORMATION CONTACT: Kristen L. Zarenko, Office of 
Regulations and Interpretations, Employee Benefits Security 
Administration, Room N-5669, U.S. Department of Labor, 200 Constitution 
Avenue, NW., Washington, DC 20210, (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 staff of Treasury and 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 contained herein 
applies only to employee benefit pension plans covered under title I 
of ERISA. See infra note 20.
    \8\ Conforming amendments to Code sections 401(a)(31) and 
401(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 issues safe harbor regulations.
    On March 2, 2004, the Department published a notice in the Federal 
Register (69 FR 9900) containing a proposed safe harbor regulation for 
the automatic rollover of certain mandatory distributions, designated 
as proposed Sec.  2550.404a-2 of Title 29 (proposal). The standards 
contained in the proposal, as explained in the preamble, were based in 
part on comments the Department received in response to a Request for 
Information (RFI) published on January 7, 2003 in the Federal Register 
(68 FR 991). The Department also published a proposed class exemption 
in the March 2, 2004 edition of the Federal Register (69 FR 9846) to 
address certain prohibited transactions that may result in connection 
with automatic rollovers.\9\ The Department received 45 comment letters 
in response to the proposed safe harbor regulation and related class 
exemption. Copies of

[[Page 58019]]

these comments are posted on the Department's Website.\10\
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    \9\ 69 FR 9846, as corrected at 69 FR 11043. http://www.dol.gov/ebsa/regs/fedreg/notices/2004004552.htm
.

    \10\ http://www.dol.gov/ebsa/regs/cmt_autorollover.html (for the proposed safe harbor regulation); http://www.dol.gov/ebsa/regs/cmt_autorolloverexe.html
 (for the proposed class exemption).

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    After careful consideration of the issues raised by the written 
comments on the proposal, the Department has modified the scope of the 
regulation and revised some of the conditions requisite to achieving 
relief under the safe harbor. The Department now is publishing in this 
notice, in final form, regulation Sec.  2550.404a-2 of Title 29 
(regulation), establishing a safe harbor pursuant to which a fiduciary 
will be deemed to have satisfied his or her fiduciary responsibilities 
in connection with rollovers of certain mandatory distributions to 
individual retirement plans. In modifying the regulation, the 
Department has attempted to strike a balance between preserving 
retirement assets for participants on whose behalf a rollover is made 
to an individual retirement plan and the costs attendant to 
establishing and maintaining such plans on behalf of the participants.
    Set forth below is an overview of the regulation, with a discussion 
of the comments received in response to the proposal and changes made 
in response to those comments.

B. Overview of Final Safe Harbor Regulation

1. Scope

    Like the proposal, paragraph (a)(1) of the regulation provides that 
the safe harbor applies to the automatic rollover of a mandatory 
distribution described in section 401(a)(31)(B) of the Code, which 
limits such distributions 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 may 
include prior rollover contributions, the regulation provides safe 
harbor coverage for the automatic rollover of mandatory distributions 
containing such prior rollover contributions.
    Several commenters recommended that the safe harbor be expanded to 
include mandatory distribution amounts of $1,000 or less, which tax-
qualified retirement plans are permitted to distribute 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.\11\ A 
number of commenters also suggested that the safe harbor extend to 
distributions of amounts greater than $5,000 (amounts beyond those 
otherwise permitted under section 411(a)(11) of the Code).
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    \11\ See supra note 1.
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    Taking into account the purpose and provisions of the safe harbor 
regulation, the Department is persuaded that application of the safe 
harbor to rollovers of mandatory distributions of $1,000 or less is 
appropriate. In this regard, the Department believes that the 
availability of the safe harbor for such distributions may increase the 
likelihood that such amounts will be rolled over to individual 
retirement plans and thereby may promote the preservation of retirement 
assets, without compromising the interests of the participants on whose 
behalf such rollovers are made. Therefore, paragraph (a)(1) of the 
regulation has been modified to provide that the safe harbor in Sec.  
2550.404a-2 extends to certain other mandatory distributions not 
described in section 401(a)(31)(B) of the Code. A new paragraph (d) has 
been added to the regulation to address mandatory distributions of 
$1,000 or less. With regard to distributions greater than $5,000, the 
Department is not prepared to conclude that the framework for safe 
harbor relief, specifically the prescribed investment products, is 
appropriate for distributions in excess of the amounts otherwise 
subject to the automatic rollover requirements of section 401(a)(31)(B) 
of the Code. Accordingly, no modifications have been made to the 
regulation concerning such amounts.
    Paragraph (b) of the regulation, like the proposal, provides that, 
if the conditions of the safe harbor are met, 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 regulation continues to make 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 invited public comment on whether, given the conditions of 
the proposal, further relief was necessary in this regard. While the 
Department did not receive comments specifically addressing the 
necessity of further relief regarding the use of low-cost individual 
retirement plans, a substantial number of comments concerned the fee 
and expense limitations, which relate directly to the cost of 
establishing and maintaining automatic rollover individual retirement 
plans. As discussed below, the regulation has been modified to reflect 
comments made concerning fees and expenses assessed in connection with 
distribution and maintenance of rolled-over funds into an individual 
retirement plan.

2. Conditions

    The proposal provided that safe harbor relief is dependent on a 
fiduciary satisfying six conditions. These conditions related to the 
amount of distributions, the qualifications of retirement plan 
providers, permissible investment products, limits on fees and 
expenses, disclosure of information to participants and prohibited 
transactions. Except as discussed below, this regulation, while 
structured somewhat differently, generally retains the conditions of 
the proposal. Each of the conditions is discussed below.
Amount of Mandatory Distributions
    The first condition, described in paragraph (c)(1) of the 
regulation,

[[Page 58020]]

requires 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. Although this 
condition is generally the same as the proposal, paragraph (d) has been 
added to provide safe harbor relief for mandatory distributions of 
$1,000 or less that are directly rolled over.
    One commenter requested clarification as to whether the amount of a 
participant loan would constitute a portion of the present value of the 
nonforfeitable accrued benefit for purposes of the safe harbor. This 
question involves an interpretation of sections 401(a)(31)(B) and 
411(a)(11) of the Code and, therefore, is beyond the jurisdiction of 
the Department. Accordingly, this question has been referred to the 
Department of the Treasury (Treasury) and the Internal Revenue Service 
(IRS) for consideration.
Rollover Distribution to an Individual Retirement Plan
    The second condition of the regulation, described in paragraph 
(c)(2), requires 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.\12\
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    \12\ 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 IRS, 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 Department is adopting this condition without modification. No 
commenters objected to this condition or identified any problems in the 
existing Code or regulatory standards for individual retirement plans. 
However, a number of commenters did raise questions concerning the 
application of this provision. These questions included whether 
fiduciaries can select multiple individual retirement plan providers at 
the same time or only use one, and whether multiple plans of the same 
employer may designate the same provider as the recipient for all 
automatic rollovers. The safe harbor regulation establishes neither 
minimums nor maximums in terms of the number of individual retirement 
plan providers to a plan or multiple plans of an employer. The 
regulation merely requires, without regard to whether there are one or 
more individual retirement plan providers, that mandatory distributions 
be directed to an individual retirement plan within the meaning of 
section 7701(a)(37) of the Code. One commenter requested clarification 
regarding the status of brokerage firms that qualify as non-bank 
trustee individual retirement plan providers under section 408 of the 
Code. In the Department's view, any individual retirement plan provider 
offering individual retirement plans as defined in section 7701(a)(37) 
of the Code is a qualified provider for purposes of the safe harbor.
Agreements With Individual Retirement Plan Providers
    Several commenters urged the Department to clarify the obligations 
of plan fiduciaries in terms of reliance on representations of 
individual retirement plan providers concerning satisfaction of the 
conditions of the safe harbor regulation and monitoring compliance with 
the conditions of the regulation following the initial selection and 
distribution of funds to the individual retirement plan provider. In 
response to these and other issues, the Department restructured 
paragraph (c) to establish an explicit requirement for a written 
agreement on which the plan fiduciary may rely in making rollover 
distributions under the safe harbor regulation. As modified, paragraph 
(c)(3) now provides, as a condition for relief under the regulation, 
that a fiduciary enter into a written agreement with an individual 
retirement plan provider that specifically addresses, among other 
things, the investment of rolled-over funds and the fees and expenses 
attendant to the individual retirement plan. The Department anticipates 
that such information would be addressed in documents currently 
utilized by individual retirement plan providers in the normal course 
of their business and that special documents would not have to be 
prepared for purposes of the safe harbor.
    To the extent that the terms and conditions of the agreement 
comport with the conditions of the safe harbor regulation with respect 
to rollover distributions, the fiduciary will be able to evidence 
compliance with the regulation. In this regard, the fiduciary can rely 
on commitments of the individual retirement plan provider as reflected 
in the agreement(s) and is not required to monitor the provider's 
compliance with the terms of the agreement beyond the point in time 
funds are rolled over in accordance with the terms of the agreement. In 
other words, the plan fiduciary's responsibility with respect to 
mandatory rollovers ends at such time as the funds are placed with the 
individual retirement plan provider pursuant to an agreement that 
satisfies the conditions of the safe harbor. This position is 
consistent with the Department's view expressed in a footnote to 
Revenue Ruling 2000-36 relating to mandatory distributions.\13\
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    \13\ Rev. Rul. 2000-36, 2000-2 C.B. 140.
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    Inasmuch as the agreement is being entered into on behalf of a plan 
participant, the regulation further provides, at subparagraph 
(c)(3)(v), that the terms of the agreement are enforceable by the 
participant on whose behalf the fiduciary makes an automatic rollover 
to an individual retirement plan. Such a provision is consistent with 
the view that the obligations of the plan fiduciary end, and the rights 
of the former participant as the account holder begin, with the 
distribution of funds to the individual retirement plan provider.
Investment Products
    Paragraph (c)(3)(i), (ii) and (iii) address the types of 
investments that are permitted under the safe harbor. While, as 
discussed below, a number of commenters suggested expanding the types 
of investments that would be permitted under the regulation, the 
Department has concluded that the limited approach of the proposal is 
more appropriate for safe harbor relief. This regulation, therefore, 
provides that the agreement entered into by the plan fiduciary must 
provide, with respect to investment of individual retirement plan 
funds, that (i) the rolled-over funds shall be 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; (ii) for purposes of (i), the investment 
product selected for the rolled-over funds 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; and 
(iii) the investment product selected for the rolled-over funds shall

[[Page 58021]]

be offered by a State or federally regulated financial institution, 
which 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 guaranty associations; or 
an investment company registered under the Investment Company Act of 
1940.
    As with the proposal, the standards in subparagraphs (c)(3)(i)-
(iii) reflect the Department's view that, given the nature and amount 
of 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,\14\ 
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 stable value 
products provide a liquidity guarantee of principal by a financially 
responsible third party 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 on the account holder's access to the assets 
of the individual retirement plan.
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    \14\ 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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    Several commenters endorsed the Department's view that safe harbor 
investment products should favor the retention of income and principal 
over growth. However, some commenters suggested expanding the types of 
permissible investment products. They suggested that 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 commenters recommended that the default 
investment options selected by fiduciaries for account balances under 
the plan for which participants fail to provide investment direction 
should be included as permissible safe harbor investments. Other 
commenters urged the inclusion of balanced or diversified funds, 
because the necessarily low returns on the approved safe harbor 
investments, would not help retirement savings grow over time.
    The Department continues to believe that an investment strategy 
adopted by a participant while in a defined contribution plan or a 
default investment chosen by a plan fiduciary at a particular point in 
time would not necessarily continue to be appropriate for the 
separating participant in the context of an automatic rollover, 
particularly given the relatively small account balances typically 
covered by the safe harbor. Further, the Department believes that, 
consistent with Congress' intent to preserve retirement assets for 
participants, the investment products in which mandatory distributions 
can be invested under the safe harbor should be limited to investment 
products that are consistent with this goal of preservation. In the 
Department's view, this would be limited to the class of investment 
products designed to preserve principal and provide a reasonable rate 
of return, whether or not such return is guaranteed, consistent with 
liquidity. For these reasons, the Department retained the proposal's 
standards without modification in subparagraphs (c)(3)(i) and (ii) of 
the regulation.
    One commenter requested clarification that the investment of 
rolled-over funds in safe harbor investment products offered by Puerto 
Rican financial institutions would satisfy the safe harbor's 
requirement. The Department believes that as long as the Puerto Rican 
financial institution offering the investment product meets the 
regulation's definition of ``regulated financial institution'', the 
investment of rolled-over funds in investment products offered by such 
Puerto Rican financial institution would not be precluded.
    Several commenters appeared to confuse the terms ``regulated 
financial institutions'' and ``individual retirement plan providers''. 
These terms are defined for separate and distinct purposes by the 
regulation. An individual retirement plan provider is an entity that 
offers individual retirement plans to which a mandatory distribution 
must be transferred, while a regulated financial institution is an 
entity that offers the types of investment products in which a 
mandatory distribution must be invested. While it is conceivable that 
one entity may meet both definitions, it is equally plausible that two 
entities will be involved. For example, a plan fiduciary may select a 
bank that qualifies as an individual retirement plan provider to 
receive a mandatory distribution and may also select certificates of 
deposit as a safe harbor investment that are offered by this same 
entity as a regulated financial institution. On the other hand, a plan 
fiduciary may select a financial institution that qualifies as an 
individual retirement plan provider to receive a mandatory distribution 
and may then select a safe harbor investment made available by this 
institution to its customers, such as a money market mutual fund, which 
is actually offered by a different entity, an investment company 
registered under the Investment Company Act of 1940, which qualifies as 
a regulated financial institution.
Fees and Expenses
    Subparagraph (c)(3)(iv) of the regulation addresses the extent to 
which fees and expenses can be assessed against an individual 
retirement plan, including investments of such plan (e.g., 
establishment charges, maintenance fees, investment expenses, 
termination costs and surrender charges). Under the proposal, fees and 
expenses could not exceed amounts charged by the individual retirement 
plan provider for comparable individual retirement plans established 
for rollover distributions other than automatic rollovers. The proposal 
further provided that fees and expenses, other than those attributable 
to establishment of the individual retirement plan, could be charged 
only against the income earned by the individual retirement plan.
    Most commenters objected to the provision limiting fees and 
expenses to income earned by the individual retirement plan. They 
argued, among other things, that the income to be generated by the 
investments permitted by the safe harbor against which expenses may be 
assessed would be very limited, while the costs attendant to 
maintaining such individual retirement plans would tend to be higher 
than individual retirement plans with respect to which the account 
holder contributes and maintains contact with the institution. Such 
constraints, it was argued, would limit the number of individual 
retirement plan providers available for rollover distributions in 
accordance with the safe harbor regulation. These commenters further 
argued that the comparability standard of the proposal provides 
adequate protection to

[[Page 58022]]

individual retirement plan account holders in both the setting of fees 
and expenses and services provided, given the competitive nature of the 
individual retirement plan marketplace generally.\15\
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    \15\ The Department notes that individual retirement plan 
providers are subject to section 4975 of the Code including the 
requirement that the fees and expenses may not exceed reasonable 
compensation within the meaning of section 4975(d)(2) of the Code.
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    After careful consideration, the Department is persuaded that a 
comparability standard, without further limit, is sufficient to protect 
individual retirement plans from being assessed unreasonable fees, 
while avoiding the imposition of financial disincentives for individual 
retirement plan providers to offer plans for mandatory rollover 
distributions under the safe harbor. The Department has modified the 
regulation accordingly in subparagraph (c)(3)(iv).
Notice to Participants
    The fourth condition for safe harbor relief, described in paragraph 
(c)(4) of the regulation, requires, like the proposal, that, prior to 
an automatic rollover, participants must be furnished a summary plan 
description (SPD) or summary of material modifications (SMM) that 
includes an explanation of the nature of the investment product in 
which the mandatory distribution will be invested, and an explanation 
of how 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. For purposes of this condition, the 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.
    Several commenters supported the disclosure provision as proposed, 
and others requested clarification on issues such as the timing of SPD 
or SMM revisions and the provision of electronic notice. Some 
commenters requested that the Department broaden the proposed 
disclosure condition to require that separating participants be 
notified of automatic rollover procedures at the time a distribution is 
made in order to provide more timely information. One commenter 
recommended this approach as a permitted alternative to SPD or SMM 
disclosure, while another advocated for this approach in lieu of the 
SPD or SMM disclosure. Another commenter asserted that, in addition to 
SPD or SMM disclosure, a plan sponsor should be required to provide an 
individualized notice to separating participants before any rollover 
distribution is made, including all of the information required to be 
contained in the SPD or SMM, the participant's benefit amount, and 
generic tax information on direct transfers, rollovers, and 
distributions.
    The Department continues to believe that information concerning 
automatic rollover procedures must be included in a plan's SPD or 
SMM.\16\ The Department also believes that the SPD or SMM that is 
provided to participants before mandatory distributions are made, in 
conjunction with the notice required under Code section 402(f) that is 
provided on an individual basis within a specified period before a 
mandatory distribution is made, as well as the notice expressly added 
by EGTRRA under the Code,\17\ ensure that participants and 
beneficiaries will be provided, and have access to, sufficient 
information about automatic rollovers. The Department is not persuaded 
that the benefits to participants that might be obtained by additional 
disclosures will, given the existing required disclosures, outweigh the 
costs and burdens attendant to such disclosure.
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    \16\ This condition is consistent with the Department's 
statement in a footnote to Revenue Ruling 2000-36, 2000-2 C.B. 140 
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.
    \17\ Section 657(a) of EGTRRA added a notice requirement to 
section 401(a)(31)(B)(i) of the Code requiring the plan 
administrator to notify a participant in writing, either separately 
or as part of the required Code section 402(f) notice, that the 
participant may transfer the distribution to another individual 
retirement plan. See supra note 8.
---------------------------------------------------------------------------

Prohibited Transactions
    The fifth condition, described in paragraph (c)(5) of the 
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 products, unless 
such actions are covered by a statutory or administrative exemption 
issued under section 408(a) of ERISA; for example, a plan fiduciary 
that received consideration from a financial institution in exchange 
for selecting that financial institution as the individual plan 
provider would have engaged in a prohibited transaction under ERISA 
section 406 that is not covered by either the statutory service 
provider exemption under ERISA section 408(b)(2) or an administrative 
exemption. This condition remains unchanged from the proposal, in part, 
because commenters did not request any changes.
    As noted in ``Background'' above, the Department also published a 
proposed class exemption in the Federal Register that was 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 initial investment held 
by such plan in connection with mandatory distributions from the 
provider's own pension plan. The Department received four comment 
letters that specifically addressed the proposed class exemption's 
conditions; these comments are discussed in the final class exemption, 
referenced below.
    Simultaneously with publication of the regulation, the Department 
is publishing a final class exemption in today's Federal Register. 
Specifically, the exemption permits a bank or other financial 
institution to (1) select itself or an affiliate as the individual 
retirement plan provider to receive automatic rollovers from its own 
plan, (2) select its own funds or investment products for automatic 
rollovers from its own plan and (3) receive fees therefor. 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 proposal, a number of commenters 
identified possible impediments that fiduciaries, banks and other 
financial institutions might encounter in connection with automatic 
rollovers. These commenters requested clarification on a number of 
issues, including perceived conflicts with state laws on signature 
requirements and escheat, Code and regulatory requirements, 
requirements under the USA PATRIOT Act,\18\ section 404(c)(3) of ERISA, 
missing participant issues, and beneficiary designations under the 
distributing employee benefit plan. Issues raised by commenters 
concerning the possible application of state laws

[[Page 58023]]

including signature and escheat requirements are beyond the scope of 
the regulation.
---------------------------------------------------------------------------

    \18\ Pub. L. 107-56, October 26, 2001, 115 Stat. 272.
---------------------------------------------------------------------------

Code Requirements

    In response to the RFI and the proposal, some commenters raised 
concerns with regard to Code requirements that may conflict with the 
establishment of individual retirement plans for purposes of automatic 
rollovers of mandatory distributions under section 401(a)(31)(B) of the 
Code. For example, one commenter raised issues concerning the 
application of the safe harbor to employer-sponsored plans in Puerto 
Rico, not all of which are governed by the Code. These Code issues are 
beyond the Department's jurisdiction and have been referred to Treasury 
and IRS for consideration. The Department has been informed that the 
staffs of Treasury and IRS are reviewing the current rules and 
regulations affecting distributions covered by the regulation and that 
guidance addressing the application of these rules to the automatic 
rollover of mandatory distributions is anticipated prior to the 
effective date of this regulation.

USA PATRIOT Act

    A few commenters continued to express concern over the application 
of the customer identification and verification (CIP) procedures of the 
USA PATRIOT Act (the Act). These commenters' concerns mirrored those 
previously expressed in response to the Department's RFI. Generally, 
the perceived difficulties concern situations where a fiduciary is 
required to make an automatic rollover to an individual retirement 
plan, but the participant cannot be located or is otherwise not 
communicating with the plan concerning the distribution of plan 
benefits. If the CIP provisions of the Act were construed to require 
active participant involvement at the time an individual retirement 
plan is established on his or her behalf, fiduciaries would be unable 
to comply with the automatic rollover requirements of the Code and 
utilize this safe harbor.
    In response to these concerns, the Department reiterates that it 
has been advised by Treasury staff, along with staff of other Federal 
functional regulators,\19\ that they interpret the 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.\20\ In January 2004, Treasury staff, along with staff of the 
other Federal functional regulators, issued guidance on this matter in 
the form of a question and answer, published in a set of ``FAQs: Final 
CIP Rule,'' on the regulators'' Web sites.\21\
---------------------------------------------------------------------------

    \19\ The term ``other Federal functional regulators'' refers to 
the other agencies responsible for administration and regulations 
under the Act.
    \20\ 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.
    \21\ See FAQs: Final CIP Rule at: http://www.occ.treas.gov/10.pdf; http://www.fincen.gov/finalciprule.pdf; http://www.fdic.gov/

news/news/financial/2004/FIL0404a.html.
---------------------------------------------------------------------------

ERISA Section 404(c)(3)

    Several commenters requested that the Department clarify the 
relationship between ERISA section 404(c)(3), as added by EGTRRA 
section 657(c) and the safe harbor relief provided in the regulation 
under ERISA section 404(a). ERISA section 404(c)(3) provides that, in 
the case of a pension plan that makes a transfer to an individual 
retirement account or annuity under Code section 401(a)(31)(B), the 
participant will be treated as exercising control over the assets of 
the individual retirement account or annuity upon (A) the earlier of 
(i) a rollover of all or a portion of the account or annuity to another 
account or annuity or (ii) one year after the transfer is made; or (B) 
a transfer that is made in a manner consistent with guidance provided 
by the Secretary.
    The Department confirms that this regulation is the guidance 
referred to in ERISA section 404(c)(3)(B). Consequently, a fiduciary's 
rollover of a mandatory distribution to an individual retirement plan 
under this regulation will be treated as ``a transfer that is made in a 
manner consistent with guidance provided by the Secretary'' under ERISA 
section 404(c)(3)(B). Immediately following such rollover, the 
Department will view the participant as exercising control over the 
assets of the individual retirement plan for purposes of ERISA section 
404(c)(3).

Missing Participants

    Some commenters requested that the Department provide additional 
guidance in the regulation to plan fiduciaries of terminated defined 
contribution plans concerning missing participants. For example, one 
commenter suggested expanding the safe harbor beyond the automatic 
rollover context to handle missing participant issues. Although the 
Department is aware of the problems faced by plan fiduciaries in 
handling missing participants' accounts, the Department believes that 
these issues are beyond the scope of this safe harbor initiative on 
mandatory rollover distributions.

Beneficiary Designations

    One commenter questioned whether an existing beneficiary 
designation under the distributing plan, whether made by a participant 
or a default designation under the terms of the plan, would transfer to 
the individual retirement plan into which the participant's benefit is 
rolled over. As stated above, in the Department's view, the rollover 
distribution of the entire pension plan benefit to which a participant 
is entitled into an individual retirement plan ends his or her status 
as a plan participant, and the distributed assets cease to be plan 
assets under Title I of ERISA. As a corollary to this view, a 
beneficiary designation under the distributing plan would cease to 
control the distribution of the rolled-over funds upon the death of the 
individual retirement plan account holder. Further, nothing in the 
regulation precludes an individual retirement plan provider from 
applying its own default beneficiary provisions under the terms of the 
individual retirement plan until an individual retirement plan account 
holder makes an affirmative designation under the terms of the 
individual retirement plan.

D. Effective Date

    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 prescribes a final regulation. 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 as well as Treasury and IRS 
believe that the effective date of the Code's rollover requirement must 
be determined by reference to the effective date of this regulation, 
which is the

[[Page 58024]]

point in time when plan fiduciaries may first avail themselves of the 
relief provided by the safe harbor. In this regard, the Department 
proposed to make the regulation effective 6 months after the date of 
its 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.
    A few commenters suggested that the effective date of the 
regulation should be delayed for one year following its publication to 
provide sufficient time for fiduciaries to comply with the conditions 
of the safe harbor and individual retirement plan providers to develop 
individual retirement plans for the automatic rollover market. Other 
commenters requested a one year delay based on the many outstanding 
issues that require clarification from Treasury and IRS.
    After careful consideration of the comments, the Department, in 
consultation with the staffs of Treasury and IRS, has concluded that 
delaying the effective date for 6 months following publication in the 
Federal Register will provide most plans adequate time to implement 
processes necessary to take advantage of the safe harbor relief 
provided by the regulation. In particular, the Department notes that 
the regulation will not require the comprehensive systems changes 
required under the proposal's earnings limitation on fees and expenses. 
Accordingly, paragraph (e) of the regulation provides that the 
regulation shall be effective and shall apply to any rollover of a 
mandatory distribution made on or after the date 6 months following 
publication in the Federal Register.
    The Department notes that fiduciaries may rely in good faith on the 
regulation for purposes of satisfying their fiduciary responsibilities 
under section 404(a) of ERISA with regard to the selection of an 
institution to receive a rollover of a mandatory distribution and the 
initial investment choice for the rolled-over funds made before the 
effective date of this regulation.\22\
---------------------------------------------------------------------------

    \22\ The Department notes, however, that the related final class 
exemption published today in the Federal Register cannot be relied 
upon for prohibited transaction relief prior to the effective date 
of the regulation.
---------------------------------------------------------------------------

E. Regulatory Impact Analysis

Summary

    This regulation establishes 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 of between $1,001 and $5,000, as described in amended Code 
section 401(a)(31)(B), and certain other distributions described in 
section 411(a)(11) of the Code and not described in section 
401(a)(31)(B). The savings arising from this safe harbor will 
substantially outweigh its costs. Benefits will accrue to fiduciaries 
through greater certainty and reduced exposure to risk, and to former 
plan participants through regulatory standards concerning individual 
retirement plan providers, investment products, preservation of 
principal, rates of return, liquidity, fees and expenses, and 
disclosure. The safe harbor will help preserve the principal amounts of 
automatic rollovers of mandatory distributions by ensuring that the 
various fees and expenses applicable to the individual retirement plans 
established for mandatory distributions are not larger than those 
charged by the provider to individual retirement plans established for 
reasons other than the receipt of a rollover distribution subject to 
Code section 401(a)(31)(B). It is assumed, for purposes of cost 
estimates presented here, that all fees, to the extent that they meet 
the condition related to comparability, will be charged to the 
individual retirement plan.
    Individual retirement plan establishment and maintenance fees for 
participants are estimated, at the upper bound at $21.6 million, $7.2 
million of which are costs associated with changes to the regulation. 
Automatic rollovers of mandatory distributions may give rise to other 
costs as well, such as investment expenses, termination charges, and 
surrender charges. 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 EGTRRA amendment will generate one-time administrative 
compliance costs to plans of an estimated $139 million. Cost to plans 
associated with modifying a summary plan description or summary of 
material modifications to satisfy the safe harbor conditions are 
estimated at $13 million.
    Annually, on aggregate, the EGTRRA amendment and the regulation are 
expected to affect 361,000 former participants, preserving retirement 
savings of an estimated $270 million and creating tax savings of 
approximately $77 million. The guidance provided by the regulation will 
result in a 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. Finally, a small number of 
defined benefit plans will benefit annually from reduced premiums to 
the Pension Benefit Guaranty Corporation (PBGC) of approximately 
$202,200.
    Further discussion of costs and benefits of the EGTRRA amendment 
and the regulation, 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 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. 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 regulation. OMB has reviewed 
this regulatory action.
1. Costs of the EGTRRA Amendment and the Regulation
    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

[[Page 58025]]

plan, an IRA, or an individual retirement annuity'' (``rolled over''). 
The number of lump sum distributions that are less than $5,000 and 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 and the 
regulation 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 
mandatory lump sum distributions of $1,001 to $5,000, approximately 
143,000 distributions, 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).
    The cost of automatic rollovers has been adjusted to account for 
additional costs associated with rollovers of mandatory distributions 
of $1,000 or less by eligible plans. Specifically, new section 
2550.404a-2(d) of the regulation permits plans with a mandatory 
distribution provision that includes individual retirement accounts 
valued at $1,000 or less, as described in section 411(a)(11) of the 
Code, to roll over the accounts into an individual retirement plan. 
Unlike the mandatory rollover provisions of EGTRRA, the decision to 
roll over smaller accounts under new paragraph (d) of the regulation is 
a voluntary one. The Department has conservatively assumed, for 
purposes of this analysis, that all eligible plans will take advantage 
of the option to roll over smaller accounts and has analyzed the costs 
and benefits of the regulation separately from those of the amendment. 
Using data from SIPP, Wave 7 Pension Benefits Module, the Department 
estimates that approximately 85,000 participants might fail to make an 
affirmative election for a mandatory distribution of $1,000 or less. 
The total number of participants that might fail to make an affirmative 
election to roll over a mandatory distribution is 228,000 participants.
    Finally, during 1997, the account balances with present values of 
accrued benefits (``accounts'') of between $1 and $5,000 of an 
additional 133,000 participants were left in plans 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.
    In the aggregate, the amount of automatic rollovers of mandatory 
distributions to individual retirement plans for 361,000 participants 
is approximately $722 million per year, or an average of $2,000 per 
participant. Only $456 million of this total represents retirement 
savings that would not otherwise have been preserved, given that the 
$266 million was already maintained in retirement plans for the 133,000 
former participants that were unavailable or unresponsive.
    Costs and fees will be incurred by pension plans in connection with 
automatic rollovers and the investments for individual retirement 
plans.
    After the effective date of the amendment, plans that currently 
mandate immediate distributions for amounts not to exceed $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 $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.
    Finally, plans will incur costs in connection with the final safe 
harbor to modify summary plan descriptions (SPD) or provide a summary 
of material modifications (SMM). This cost is estimated to be about $13 
million. Two commenters suggested that the cost of disclosing 
information about a plan's automatic rollover provisions in an SPD or 
SMM was higher than the Department had estimated. The Department's 
estimate includes the costs of a one-time modification to the SPD or 
preparation of an SMM, and mailing and materials. The estimate also 
takes into consideration the fact that plan administrators report 
making routine distributions of revised SPDs or SMMs on a regular 
basis. The Department believes that many plans will make the required 
disclosure along with disclosures made for other reasons. This is 
expected to have the effect of reducing distribution costs that would 
otherwise be associated with the disclosure requirement for the safe 
harbor. As such, the Department continues to believe that its original 
estimate of $13 million is appropriate.
    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).
    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 affirmatively direct, upon leaving employment, the disposition of 
their accounts. Compared with other participants, those with prior 
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.

[[Page 58026]]

    The Department did not attempt to estimate the number or dollar 
amount of mandatory distributions eligible for relief under the final 
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.
    The establishment and maintenance of individual retirement plans 
for automatic rollovers of mandatory distributions will generate costs 
to participants whose accounts have been rolled over. At the time of 
the proposal, it was assumed that, in the absence of guidance, most 
fees would be charged against individual retirement plans. Based on a 
range of typical establishment fees for comparable individual 
retirement plans, $0 to $10 per account, the annual establishment fees 
for rollovers arising from the regulation each year are estimated to 
range from a negligible amount to $3.6 million, with a mid point of 
$1.8 million per year. Annual maintenance fees, which typically range 
from $7 to $50, are estimated to range from $2.5 million to $18 
million, with a mid-point estimate of $10.3 million for individual 
retirement plans established in the first year. A comparison of the 
upper bounds for maintenance fees yields an additional $6 million 
increase in fees for participants, also attributable to the additional 
120,000 rollovers newly included in the regulation. Assuming that 
individual retirement plans would continue to be established at a 
constant rate of 361,000 plans per year and that no account holders 
assume control of their plans, at the midpoint, maintenance fees would 
continue to grow at a rate of $10.3 million annually.
    Although establishment and maintenance fees are relatively 
predictable based on comparable individual retirement plans 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. However, with this 
interpretive guidance, fiduciaries and the regulated financial 
institutions will have increased certainty regarding costs, fees, and 
charges for individual retirement plans.
    The total one-time cost to plans for the amendment to the Code is 
$139 million. The upper bounds of ranges for establishment and 
maintenance costs under the regulation are estimated at $21.6 million.
2. Benefits of the EGTRRA and the Regulation
    The 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. Certain regulated 
financial institutions will receive additional deposits having earnings 
potential.
    Plans will benefit from administrative cost savings for those 
133,000 accounts that previously remained in pension plans because 
participants were passive or non-responsive but are assumed to be 
rolled over under the amendment to the Code and the regulation. 
Ordinary administrative costs that typically range from $45 to $150 per 
participant will be saved when accounts are rolled over, reducing plan 
expenses under the amendment to the Code and the regulation by about $6 
million to $20 million, or at a mid point, $13 million per year, $3.5 
million of which is attributable to the regulation only. 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.
    The benefits of greater certainty for fiduciaries and protection of 
participants cannot be specifically quantified. By providing a safe 
harbor for plan fiduciaries that choose to roll over accounts, the 
Department has increased certainty concerning compliance with ERISA 
section 404(a) for fiduciaries that designate institutions and 
investment funds for rolled over accounts and expanded the opportunity 
for retirement savings for plan participants.
    The regulation is, however, expected to reduce one-time startup 
administrative compliance costs to plans 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.
    At the time of the proposal, the Department estimated that the 
EGTRRA amendment would provide 143,000 former participants with 
preserved retirement savings of about $415 million and immediate tax 
savings of about $112 million on an annual basis. (The additional 
98,000 former participants who did not receive mandatory distributions 
because they were passive or non-responsive were not counted for 
purposes of estimates of preserved retirement savings and tax savings 
because their accounts were not distributed.) These estimates were 
considerably higher than those included in the Joint Committee on 
Taxation's (JCT) May 26, 2001 estimates of the budget effects for this 
provision of EGTRRA, which projected a revenue loss of about $30 
million per year. This revenue loss implied an aggregate preservation 
of retirement savings of about $83 million per year. Because the 
reasons for this difference were unknown, the Department interpreted 
the JCT estimates and its own estimates as the endpoints of ranges, and 
presented the midpoints as estimates of ordinary income tax and penalty 
savings, and preserved retirement savings. These midpoints amounted to 
$71 million and $249 million, respectively.
    The Department estimates that paragraph (d) of the regulation will 
provide an additional 85,000 former plan participants with tax savings 
and preserved retirement savings, such that the aggregate estimate of 
tax savings of the amendment and the regulation is $123 million, and 
the aggregate estimate of preserved retirement savings is $456 million. 
Because the regulation includes the provision for mandatory 
distributions of $1,000 or less, the JCT estimates and Department's 
estimates for these values are no longer exactly comparable. However, 
in spite of the substantial differences in the two sets of estimates, 
the Department has continued to present midpoints between the two to 
illustrate the potential benefits of tax savings and preserved 
retirement savings. The benefits, expressed as midpoints, amount to $77 
million in tax savings, and $270 million in preserved retirement 
savings. These savings for former participants and distributions of 
amounts previously retained in plans also represent increased deposits 
to regulated financial institutions.
    For the estimated 8 percent of these accounts that were in defined 
benefit plans, a savings of approximately

[[Page 58027]]

$202,000 would be realized from reduced funding risk and corresponding 
premium payments to the PBGC. This includes an additional $53,200 that 
arises from the change to the regulation with respect to mandatory 
distributions of $1,000 or less.

Paperwork Reduction Act

    This Notice of Final 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 final 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 
final rulemaking.
    The Department has clarified section (c)(3) of the regulation by 
inserting that the agreement between a fiduciary and an individual 
retirement plan provider that provides for the distribution of rolled 
over funds must be in writing. The agreement, as previously stated in 
the proposal, must include a description of the rollover investment 
product, fees, and participants' rights. The Department understands 
that it is customary business practice for agreements related to the 
establishment of individual retirement plans to be set forth in writing 
and that no new burden is created by this requirement. As a result, the 
Department has not made a submission for OMB approval in connection 
with the regulation.

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 final rule is not 
likely to have a significant economic impact on a substantial number of 
small entities, section 604 of the RFA requires that the agency present 
a final regulatory flexibility analysis at the time of the publication 
of the notice of final rulemaking describing the impact of the rule on 
small entities. 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 that 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 requested comments on the appropriateness of the 
size standard used in evaluating the impact of the proposal on small 
entities, but received none.
    EBSA has 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 final 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 a 
proposed regulation, the Department requested comments on the potential 
design of the safe harbor.
    The conditions set forth in this 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 fiduciaries, individual 
retirement plan providers, and the investment goal of preserving 
principal.
    The regulation will impact small plans that include provisions for 
the mandatory distribution of accounts with a value not greater than 
$5,000. It has been assumed for the purposes of this analysis that all 
plans include such provisions, although some may not. On this basis, it 
is expected that the proposal will affect 611,800 small plans. The 
proportion of the total of 361,000 participants estimated to be 
affected annually by the amendment to Code section 401(a)(31)(B) and 
paragraph (d) of the regulation that are 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 will choose to comply 
with new Sec.  2550.404a-2(d).
    As described above, the costs and benefits of the Code amendment 
and safe harbor proposal are distinguishable, and have been estimated 
separately. As also noted, the 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

[[Page 58028]]

the final 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 to small plans 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 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. The Department received no specific 
comments on the impact of the proposal on small plans.
    To the Department's knowledge, there are no Federal regulations 
that might duplicate, overlap, or conflict with the regulation for safe 
harbors under section 404(a) of ERISA.

Congressional Review Act

    The notice of final 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 has been 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 final 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 are not pertinent here, 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 final 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, Employee Retirement Income Security Act, 
Employee stock ownership plans, Exemptions, Fiduciaries, Investments, 
Investments foreign, Party in interest, Pensions, Pension and Welfare 
Benefit Programs Office, Prohibited transactions, Real estate, 
Securities, Surety bonds, Trusts and Trustees.

0
For the reasons set forth in the preamble, the Department amends 
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

0
1. The authority citation for part 2550 is revised to read as follows:

    Authority: 29 U.S.C. 1135; 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, 3 CFR, 
1978 Comp. p. 332, effective Dec. 31, 1978, E.O. 12108, 44 FR 1065, 
3 CFR, 1978 Comp. p. 275. 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. 2550.404a-2 also 
issued under 26 U.S.C. 401 note (sec. 657, Pub. L. 107-16, 115 Stat. 
38). Sec. 2550.408b-1 also issued under 29 U.S.C. 1108(b)(1) and 
sec. 102, Reorganization Plan No. 4 of 1978, 43 FR 47713, 3 CFR, 
1978 Comp. p. 332, effective Dec. 31, 1978, E.O. 12108, 44 FR 1065, 
3 CFR, 1978 Comp. p. 275. Sec. 2550.412-1 also issued under 29 
U.S.C. 1112.


0
2. The following new section is added to part 2550 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 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). This section also provides a safe harbor for certain other 
mandatory distributions not described in section 401(a)(31)(B) of 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 rollovers of mandatory distributions 
described in paragraphs (c) and (d) of this section.
    (b) Safe harbor. A fiduciary that meets the conditions of paragraph 
(c) or paragraph (d) of this section is deemed to have satisfied his or 
her duties under section 404(a) of the Act with respect to

[[Page 58029]]

both the selection of an individual retirement plan provider and the 
investment of funds in connection with the rollover of mandatory 
distributions described in those paragraphs 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) In connection with the distribution of rolled-over funds to an 
individual retirement plan, the fiduciary enters into a written 
agreement with an individual retirement plan provider that provides:
    (i) The rolled-over funds shall be 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;
    (ii) For purposes of paragraph (c)(3)(i) of this section, the 
investment product selected for the rolled-over funds 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;
    (iii) The investment product selected for the rolled-over funds 
shall be offered by a state or federally regulated financial 
institution, which 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 
guaranty associations; or an investment company registered under the 
Investment Company Act of 1940;
    (iv) All 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) shall not exceed the fees and expenses charged by the 
individual retirement plan provider for comparable individual 
retirement plans established for reasons other than the receipt of a 
rollover distribution subject to the provisions of section 
401(a)(31)(B) of the Code; and
    (v) The participant on whose behalf the fiduciary makes an 
automatic rollover shall have the right to enforce the terms of the 
contractual agreement establishing the individual retirement plan, with 
regard to his or her rolled-over funds, against the individual 
retirement plan provider.
    (4) 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 (i.e., the extent to 
which expenses will be borne by the account holder alone or shared with 
the distributing plan or plan sponsor), 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
    (5) 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.
    (d) Mandatory distributions of $1,000 or less. A fiduciary shall 
qualify for the protection afforded by the safe harbor described in 
paragraph (b) of this section with respect to a mandatory distribution 
of one thousand dollars ($1,000) or less described in section 
411(a)(11) of the Code, provided there is no affirmative distribution 
election by the participant and the fiduciary makes a rollover 
distribution of such amount into an individual retirement plan on 
behalf of such participant in accordance with the conditions described 
in paragraph (c) of this section, without regard to the fact that such 
rollover is not described in section 401(a)(31)(B) of the Code.
    (e) Effective date. This section shall be effective and shall apply 
to any rollover of a mandatory distribution made on or after March 28, 
2005.

    Signed at Washington, DC, this 20th day of September, 2004.
Ann L. Combs,
Assistant Secretary, Employee Benefits Security Administration.
[FR Doc. 04-21591 Filed 9-27-04; 8:45 am]

BILLING CODE 4150-29-P