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Employee Benefits Security Administration

EBSA Federal Register Notice

Class Exemption for the Establishment, Investment and Maintenance of Certain Individual Retirement Plans Pursuant to a Mandatory Distribution [09/28/2004]

[PDF Version]

Volume 69, Number 187, Page 57964-57970

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DEPARTMENT OF LABOR

Employee Benefits Security Administration

[Prohibited Transaction Exemption 2004-16; Application No. D-11203]

 
Class Exemption for the Establishment, Investment and Maintenance 
of Certain Individual Retirement Plans Pursuant to a Mandatory 
Distribution

AGENCY: Employee Benefits Security Administration, Department of Labor.

ACTION: Grant of class exemption.

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[[Page 57965]]

SUMMARY: This document contains a final class exemption from certain 
prohibited transaction restrictions of the Employee Retirement Income 
Security Act of 1974 (ERISA) and from certain taxes imposed by the 
Internal Revenue Code of 1986 (the Code). The exemption permits a 
fiduciary of a plan who is also the employer maintaining the plan to 
establish, on behalf of its separated employees, an individual 
retirement plan at a financial institution which is the employer or an 
affiliate, in connection with a Mandatory Distribution, as defined 
herein. Relief also is provided for a plan fiduciary to select a 
proprietary product as the initial investment for such individual 
retirement plan. Finally, relief is provided for the receipt of certain 
fees by the Individual Retirement Plan Provider in connection with the 
establishment or maintenance of the individual retirement plan and the 
initial investment of the Mandatory Distribution. The class exemption 
affects plan sponsors, plan fiduciaries, Individual Retirement Plan 
Providers and individual retirement plan account holders.

EFFECTIVE DATE: The exemption is effective for Mandatory Distributions 
made on or after March 28, 2005.

FOR FURTHER INFORMATION CONTACT: Allison Padams Lavigne or Karen Lloyd, 
Office of Exemption Determinations, Employee Benefits Security 
Administration, U.S. Department of Labor, Washington, DC 20210, at 
(202) 693-8540 (this is not a toll-free number).

SUPPLEMENTARY INFORMATION: On March 2, 2004, the Department published a 
notice in the Federal Register (69 FR 9846\1\) of the pendency before 
the Department of a proposed class exemption from the restrictions of 
sections 406(a), 406(b)(1) and 406(b)(2) of ERISA and from the taxes 
imposed by section 4975(a) and (b) of the Code, by reason of section 
4975(c)(1)(A) through (E) of the Code. The proposed exemption was 
published concurrently with the proposed Fiduciary Responsibility under 
the Employee Retirement Income Security Act of 1974 Automatic Rollover 
Safe Harbor to be promulgated at 29 CFR 2550.404a-2 (defined herein as 
``Automatic Rollover Regulation''), which also was published on March 
2, 2004 (69 FR 9899).
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    \1\ As corrected at 69 FR 11043 (March 9, 2004).
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    The Department proposed this class exemption on its own motion 
pursuant to section 408(a) of ERISA and section 4975(c)(2) of the Code, 
and in accordance with the procedures set forth in 29 CFR 2570, Subpart 
B (55 FR 32836, August 10, 1990).\2\ The notice gave interested persons 
an opportunity to comment or request a public hearing on the proposed 
exemption. Four comments were received by the Department regarding the 
proposed class exemption. No requests for a public hearing were 
received. Upon consideration of the comments received, the Department 
has determined to grant the proposed exemption subject to certain 
modifications. These modifications and the comments are discussed 
below.
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    \2\ Section 102 of Reorganization Plan No. 4 of 1978 generally 
transferred the authority of the Secretary of the Treasury to issue 
exemptions under section 4975(c)(2) of the Code to the Secretary of 
Labor.
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Executive Order 12866

    Under Executive Order 12866, the Department must determine whether 
the regulatory action is ``significant'' and therefore subject to the 
requirements of the Executive Order and subject to review by the Office 
of Management and Budget (OMB). Under section 3(f), the order defines a 
``significant regulatory action'' as an action that is likely to result 
in a rule (1) having an annual effect on the economy of $100 million or 
more, or adversely and materially affecting a sector of the economy, 
productivity, competition, jobs, the environment, public health or 
safety, or State, local or tribal governments or communities (also 
referred to as ``economically significant''); (2) creating serious 
inconsistency or otherwise interfering with an action taken or planned 
by another agency; (3) materially altering the budgetary impacts of 
entitlement grants, user fees, or loan programs or the rights and 
obligations of recipients thereof; or (4) raising novel legal or policy 
issues arising out of legal mandates, the President's priorities, or 
the principles set forth in the Executive Order. Pursuant to the terms 
of the Executive Order, it has been determined that this action is 
``significant'' and therefore subject to review by the Office of 
Management and Budget (OMB). Accordingly, this action has been reviewed 
by OMB.
    This final prohibited transaction class exemption is being 
published concurrently with a final regulation titled ``Fiduciary 
Responsibility under the Employee Retirement Income Security Act of 
1974 Automatic Rollover Safe Harbor.'' The exemption permits plan 
fiduciaries that are also employers maintaining a pension plan to 
establish, for separated employees, individual retirement plans at 
financial institutions that are the employer or an affiliate, in 
connection with a Mandatory Distribution as that term is defined in 
this exemption. The exemption also permits plan fiduciaries to select a 
proprietary product as the initial investment for an individual 
retirement plan. Finally, the exemption provides relief from what would 
otherwise be a prohibited transaction for the receipt of certain fees 
by Individual Retirement Plan Providers in connection with the 
establishment or maintenance of the individual retirement plan and the 
initial investment of a Mandatory Distribution.
    The modifications made to the exemption following the Department's 
consideration of comments received on both the proposed exemption and 
the proposed Automatic Rollover Regulation are described in detail in 
the discussion that follows this summary of costs and benefits. An 
overview of the economic impacts of those modifications is presented in 
this section.
    In general, the costs and benefits that may accrue to fiduciaries 
have been described and quantified in connection with the economic 
impact of the final regulation describing the safe harbor for automatic 
rollovers of mandatory distributions also published in today's issue of 
the Federal Register. Although they are not separately identified, the 
fiduciaries of pension plans who are also employers maintaining the 
plan who would establish these individual retirement plans at a 
financial institution which is the employer or affiliate pursuant to 
this exemption are included within the estimates of affected plans and 
separated employees presented in the final regulation.
    The estimates presented in the final regulation have been revised 
from the proposal to reflect the provision of the final rule with 
respect to the applicability of the safe harbor to mandatory 
distributions of $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 into an 
individual retirement plan in accordance with the other conditions of 
the regulation, without regard to the fact that such a rollover is not 
described in section 401(a)(31) of the Code.
    When the Department originally estimated the costs and benefits of 
the proposed regulation, which included the potential impact on the 
plans of financial institutions and affiliates that might make use of 
this exemption, the conditions of both the proposed regulation and the 
proposed exemption

[[Page 57966]]

provided that fees and expenses attendant to the individual retirement 
plan, other than establishment fees, could be charged only against the 
income earned by the individual retirement plan. This condition has not 
been modified in the final exemption. Although the condition has been 
revised in the final regulation, the change has no impact on the total 
estimated fees and expenses attendant to these individual retirement 
plans, regardless of whether they are established in accordance with 
the conditions of the regulation or exemption. This difference between 
the regulation and exemption with respect to this condition is expected 
to result in a difference in only the way in which fees and expenses 
are allocated between the individual retirement plan and the Individual 
Retirement Plan Provider. It is likely that the fees and expenses 
attendant to the individual retirement plan offered by the plan 
fiduciary or an affiliate will be allocated at least in part to the 
Individual Retirement Plan Provider due to the limitation on the amount 
that can be charged to the individual retirement plan. The likelihood 
of the provider incurring such a limit on the recovery of its cost is 
greater when rates of return are low.
    Certain other costs may be allocated in connection with the 
conditions of the exemption to plan fiduciaries that select the 
proprietary products of an employer or an affiliate for investment of 
individual retirement plans, that would not be allocated to plan 
fiduciaries absent the prohibited transaction that would otherwise 
occur. Specifically, in connection with the acquisition of an Eligible 
Investment Product, section I(h) of the exemption provides that plan 
fiduciaries are not permitted to charge a sales commission to the 
individual retirement plans of their separated employees. Foregone 
sales commissions may result in costs in the form of a reduction in 
profit margin or an operating loss to some Individual Retirement Plan 
Providers.
    The Department has no basis for estimating a wide array of factors 
that would affect costs, such as the amount of fees or expenses that 
might not be fully charged to the individual retirement plans, the 
extent to which plan fiduciaries will use one or more proprietary 
products, the number of accounts that could be rolled over into such 
products, or the lost income, if any, that may result from unpaid sales 
commissions. Therefore, the Department has not estimated a cost for 
these provisions of the exemption. However, fiduciaries are in no event 
required to make use of individual retirement plans offered by the plan 
fiduciary or an affiliate. In addition, many of the proprietary 
products permitted under the exemption generally do not charge a sales 
commission in connection with an initial purchase. In any case, it is 
likely that a plan fiduciary will use the individual retirement plans 
of itself or an affiliate, or a proprietary product for these 
individual retirement plans only if it is financially beneficial to do 
so, for example, as a way to retain deposits and increase earnings.

Paperwork Reduction Act

    The final exemption permits a fiduciary of a pension plan that is 
also the employer maintaining the plan to establish, on behalf of its 
separated employees, an individual retirement plan at a financial 
institution that is the employer or an affiliate, in connection with a 
Mandatory Distribution. Relief is also being provided for a plan 
fiduciary to select a proprietary product as the initial investment for 
such an individual retirement plan. Finally, relief is provided for the 
receipt of certain fees by the Individual Retirement Plan Provider.
    The exemption includes notice and recordkeeping requirements that 
are meant to inform separated employees and allow for verification by 
interested persons that the terms of the exemption have been met. 
Specifically, prior to an automatic rollover of a Mandatory 
Distribution, a plan fiduciary is required to notify a participant that 
the distribution may be rolled over into a proprietary investment 
selected by the plan fiduciary. Notification that a proprietary 
investment may be selected is to be provided in connection with a 
written explanation required under section 402(f) of the Code or in the 
plan's summary plan description or summary of material modifications 
thereto.
    In the Department's view, neither alternative will result in a 
measurable burden. The additional information required to be included 
to meet this condition, though important, would require only a minor 
alteration to an existing disclosure. The fiduciary would also retain 
flexibility under the exemption as to the most efficient method of 
conveying the required information. As such, no burden for plan 
fiduciaries is expected to arise from the notice requirement in the 
exemption.
    Similarly, because the records required to be maintained to enable 
verification of adherence to the conditions of the exemption would 
customarily be maintained as a part of usual business practices, this 
condition is not expected to impose a burden on Individual Retirement 
Plan Providers.
    Accordingly, the Department has made no submission to OMB for 
approval of an information collection request in connection with the 
proposed or final exemption. Although the Department requested comments 
on any potential impact within the terms of the Paperwork Reduction Act 
of the notice and recordkeeping requirements of the exemption, no 
comments were received.

Discussion of Comments Received

    The Department received four comments in response to the notice of 
proposed exemption. Additionally, the Department received a number of 
comments in connection with the proposed Automatic Rollover Regulation. 
Interested persons should refer to the final Automatic Rollover 
Regulation, published in this issue of the Federal Register, for 
discussion of these comments.
    With respect to the proposed exemption, one commenter stated that 
the definition of Eligible Investment Product should not be limited to 
money market funds because such investments might not keep pace with 
inflation. The commenter asserted that a better safe harbor investment 
would be any diversified fund that invests in a substantial number of 
stocks and/or bonds. Another commenter asked that the definition of 
Eligible Investment Product be revised to include alternative default 
portfolio allocations for the assets, similar to what is permitted by 
the Internal Revenue Service (IRS) for automatic enrollments (i.e., 
balanced funds). The same commenter suggested that the individual 
retirement plans should replicate the asset allocation that workers 
selected while in active employment. Upon consideration of the 
comments, the Department believes that given the nature and the amount 
of the automatic rollover, investments should be designed to minimize 
risk, preserve assets for retirement and maintain liquidity. Further, 
the Department does not believe that an investment strategy adopted by 
a participant while in a defined contribution plan would necessarily 
continue to be the appropriate strategy for the participant in the 
context of an automatic rollover, particularly given the small account 
balances covered under this exemption. Accordingly, the Department has 
determined not to modify the definition of ``Eligible Investment 
Product.''
    One commenter on the proposed exemption requested that the dollar 
limit on accounts affected by the exemption be raised from $5,000 to 
$10,000, and that the $1,000 floor be

[[Page 57967]]

eliminated. The Department has determined to eliminate the $1,000 floor 
but retain the $5,000 limit.\3\ In this regard, the Department has 
added a new section IV(i) to the exemption to define the term, 
``Mandatory Distribution,'' which includes both an automatic rollover 
of a mandatory distribution described in section 401(a)(31)(B) of the 
Code and a mandatory distribution of one thousand dollars ($1,000) or 
less described in section 411(a)(11) of the Code.
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    \3\ For a further discussion of this issue, refer to the 
preamble to the final Automatic Rollover Regulation, published in 
this issue of the Federal Register.
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    Finally, a commenter asked that the Department address ``whether a 
credit union, or other `Regulated Financial Institution' * * * can 
establish [individual retirement plans] at its own institution in order 
to satisfy the automatic rollover requirement with respect to 
distributions from qualified plans which it maintains for its own 
employees.'' The commenter also asked whether such credit union or 
``Regulated Financial Institution'' could charge fees in connection 
with the establishment and maintenance of such individual retirement 
plans. The Department notes that the exemption currently permits a 
fiduciary of a plan to designate itself or an affiliate to provide an 
individual retirement plan and to receive fees in connection with the 
establishment and maintenance of the individual retirement plan, if the 
conditions of the exemption are met. Accordingly, a credit union or 
other ``Regulated Financial Institution'' may establish individual 
retirement plans for distributions from qualified plans it sponsors for 
its own employees, provided the credit union or ``Regulated Financial 
Institution'' meets the definition of Individual Retirement Plan 
Provider.\4\
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    \4\ The Department notes that the term ``Regulated Financial 
Institution'' is defined in section IV(f) of the exemption and 
refers to the entity that can provide the initial investment product 
for the Mandatory Distribution. This term is separate from the term 
``Individual Retirement Plan Provider,'' defined at section IV(d), 
which refers to the entity that may provide the individual 
retirement plan for the Mandatory Distribution.
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    The Department did not receive any comments on the proposed 
exemption regarding the amount of fees and expenses attendant to the 
individual retirement plan, including the investment of the assets 
thereof. However, the Department notes that such comments were received 
in connection with the parallel provisions of the proposed Automatic 
Rollover Regulation, and that the fee provisions of the final Automatic 
Rollover Regulation were revised in response to the commenters. Unlike 
the Automatic Rollover Regulation, the Department has determined to 
retain the condition of the exemption (section II(j)(2)) that limits 
fees and expenses other than establishment charges to the income earned 
by the individual retirement plan. The Department believes that the 
removal or modification of this requirement would increase the 
potential for self dealing. This situation presents potential 
violations of section 406(b) of the Act for which the Department is not 
prepared to provide additional relief. However, in accordance with the 
modifications made to the Automatic Rollover Regulation, the Department 
has revised the language of section II(j)(1). In the proposal, this 
condition stated that the fees and expenses attendant to the individual 
retirement plan could not exceed fees and expenses charged by the 
Individual Retirement Plan Provider for comparable individual 
retirement plans established for eligible rollover distributions that 
are not subject to the automatic rollover provisions of section 
401(a)(31)(B) of the Code. As revised, the condition requires an 
Individual Retirement Plan Provider to charge fees and expenses that do 
not exceed the fees and expenses it charges to comparable individual 
retirement plans established for reasons other than the receipt of a 
Mandatory Distribution made pursuant to section 401(a)(31)(B) of the 
Code. The Department has made the same revision to similar language in 
conditions II(e) and II(g).

Description of the Exemption

    Section I of the exemption describes the transactions that are 
covered by the exemption. The plan fiduciary who provides the notice in 
section II(a) and meets the additional requirements described below 
would be able to be the Individual Retirement Plan Provider for its 
separated employees and to make an initial decision to invest the 
Mandatory Distribution in an investment product in which such plan 
fiduciary or its affiliate has an interest. Additionally, relief is 
provided for the receipt of fees by the Individual Retirement Plan 
Provider in connection with the establishment or maintenance of the 
individual retirement plan, and as a result of the investment of the 
Mandatory Distribution in an investment product in which the plan 
fiduciary or its affiliate has an interest.
    Under the exemption, a plan fiduciary must, in connection with the 
written explanation provided pursuant to section 402(f) of the Code or 
in the plan's summary plan description or summary of material 
modifications thereto, notify the participant prior to the Mandatory 
Distribution that, absent his or her election, the Mandatory 
Distribution will be rolled over to an individual retirement plan 
provided by the plan fiduciary or an affiliate, and that the plan 
fiduciary may select its own proprietary investment as the initial 
investment of the Mandatory Distribution. In any case, the plan's 
summary plan description or summary of material modifications thereto 
will describe the plan's rollover provisions effectuating the 
requirements of sections 401(a)(31)(B) and 411(a)(11) of the Code.
    The plan fiduciary must comply with the requirements of the 
Automatic Rollover Regulation. The term ``Automatic Rollover 
Regulation'' refers to the regulation promulgated by the Department at 
29 CFR 2550.404a-2, which is published elsewhere in this issue of the 
Federal Register.
    The plan fiduciary must be the employer, any of whose employees are 
covered by the plan from which the Mandatory Distribution is made, or 
an affiliate.
    Under the exemption, the individual retirement plan must be 
established and maintained for the exclusive benefit of the account 
holder of the individual retirement plan, his or her spouse or their 
beneficiaries. Under section IV(a) of the exemption, the term 
individual retirement plan is defined in section 7701(a)(37) of the 
Code. Section 7701(a)(37) defines individual retirement plan as an 
individual retirement account described in section 408(a) of the Code 
and an individual retirement annuity described in section 408(b) of the 
Code. For purposes of this exemption, the term individual retirement 
plan shall not include an individual retirement plan which is an 
employee benefit plan covered by Title I of ERISA. See 29 CFR 2510.3-
2(d).
    The exemption requires that the terms of the individual retirement 
plan, including the fees and expenses for establishing and maintaining 
the individual retirement plan, be no less favorable than those 
available to comparable individual retirement plans established for 
reasons other than the receipt of a Mandatory Distribution made 
pursuant to section 401(a)(31)(B) of the Code. The exemption further 
requires that all fees and expenses not be in excess of reasonable 
compensation within the meaning of section 4975(d)(2) of the Code. 
Corresponding service provider regulations under the Code provide 
guidance on the meaning of reasonable compensation under section 
4975(d)(2). See 26 CFR 54.4975-6.

[[Page 57968]]

    Under the exemption, the individual retirement plan must be 
invested in an ``Eligible Investment Product.'' Section IV(e) defines 
the term ``Eligible Investment Product'' to mean an investment product 
designed to preserve principal and provide a reasonable rate of return, 
whether or not such return is guaranteed, consistent with liquidity. 
For this purpose, the product must be offered by a Regulated Financial 
Institution and 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. Such term includes money 
market funds maintained by registered investment companies, and 
interest-bearing savings accounts and certificates of deposit of a bank 
or a similar financial institution. In addition, the term includes 
``stable value products'' issued by a financial institution that are 
fully benefit-responsive to the individual retirement plan account 
holder, i.e., that provide a liquidity guarantee by a financially 
responsible third party of principal and previously accrued interest 
for liquidations or transfers initiated by the individual retirement 
plan account holder exercising his or her right to withdraw or transfer 
funds under the terms of an arrangement that does not include 
substantial restrictions to the account holder's access to the assets 
of the individual retirement plan.
    The exemption would not apply to the initial investment transaction 
entered into by an individual retirement plan unless the Eligible 
Investment Product is offered by a Regulated Financial Institution. A 
Regulated Financial Institution is defined under the exemption as an 
entity that: (i) Is subject to state or federal regulation, and (ii) is 
a bank or savings association, the deposits of which are insured by the 
Federal Deposit Insurance Corporation; a credit union, the member 
accounts of which are insured within the meaning of section 101(7) of 
the Federal Credit Union Act; an insurance company, the products of 
which are protected by state guaranty associations; or an investment 
company registered under the Investment Company Act of 1940.
    In addition, the exemption requires that the rate of return or the 
investment performance of the individual retirement plan investment(s) 
be no less favorable than the rate of return or investment performance 
of an identical investment that could have been made at the same time 
by a comparable individual retirement plan established for reasons 
other than the receipt of a Mandatory Distribution made pursuant to 
section 401(a)(31)(B) of the Code.
    The exemption does not permit the individual retirement plan to pay 
a sales commission in connection with the acquisition of an Eligible 
Investment Product.
    Under the exemption, the individual retirement plan account holder 
must be able to, within a reasonable time after request and without 
penalty to the principal amount of the investment, transfer his 
individual retirement plan balance to a different investment offered by 
the Individual Retirement Plan Provider, or transfer his or her 
individual retirement plan balance to another individual retirement 
plan sponsored at a different financial institution. The Department 
wants to ensure that, once the account holder discovers that an 
individual retirement plan has been established on his or her behalf, 
he or she is able to make appropriate investment decisions with respect 
to the assets of the individual retirement plan or to change Individual 
Retirement Plan Providers without penalty.
    Section II(j) of the exemption limits the fees that may be paid by 
the individual retirement plan, as follows: (1) The fees and expenses 
attendant to the individual retirement plan, including the investment 
of the assets of such plan, (e.g., establishment charges, maintenance 
fees, investment expenses, termination costs, and surrender charges) 
shall not exceed the fees and expenses charged by the Individual 
Retirement Plan Provider for comparable individual retirement plans 
established for reasons other than the receipt of a Mandatory 
Distribution made pursuant to section 401(a)(31)(B) of the Code; (2) 
the fees and expenses, other than establishment charges, attendant to 
the individual retirement plan, may be charged only against the income 
earned by the individual retirement plan; and (3) the fees and expenses 
shall not exceed reasonable compensation within the meaning of section 
4975(d)(2) of the Code. In this regard, an Individual Retirement Plan 
Provider who has not previously offered comparable individual 
retirement plans will not be able to satisfy condition II(j)(1) of the 
exemption.
    Lastly, the exemption contains a recordkeeping requirement. The 
Individual Retirement Plan Provider must maintain records to enable 
certain persons to determine whether the applicable conditions of the 
exemption have been met. The records must be available for examination 
by the IRS, the Department, and account holders and their beneficiaries 
for at least six years from the date of each automatic rollover.

General Information

    The attention of interested persons is directed to the following:
    (1) In accordance with section 408(a) of ERISA and section 
4975(c)(2) of the Code, the Department finds that the exemption is 
administratively feasible, in the interests of the plan and of its 
participants and beneficiaries and protective of the rights of 
participants and beneficiaries of such plan;
    (2) The exemption is supplemental to, and not in derogation of, any 
other provisions of ERISA and the Code including statutory or 
administrative exemptions and transitional rules. Furthermore, the fact 
that a transaction is subject to an administrative or statutory 
exemption is not dispositive of whether the transaction is in fact a 
prohibited transaction;
    (3) The exemption does not extend to transactions prohibited under 
section 406(b)(3) of ERISA and section 4975(c)(1)(F) of the Code; and
    (4) The class exemption is applicable to a particular transaction 
only if the transaction satisfies the conditions specified in the 
exemption.

Exemption

    Accordingly, the following exemption is granted under the authority 
of section 408(a) of ERISA and section 4975(c)(2) of the Code, and in 
accordance with the procedures set forth in 29 CFR part 2570, subpart B 
(55 FR 32836, 32847, August 10, 1990).

I. Transactions

    The restrictions of sections 406(a)(1)(A) through (D), 406(b)(1) 
and 406(b)(2) of the Act, and the taxes imposed by section 4975(a) and 
(b) of the Code, by reason of section 4975(c)(1)(A) through (E) of the 
Code, shall not apply to (i) the fiduciary of an Employee Pension 
Benefit Plan (plan) using its authority to designate itself or an 
affiliate as Individual Retirement Plan Provider to receive a Mandatory 
Distribution, (ii) the initial investment of the Mandatory Distribution 
by the plan fiduciary in an investment product in which the plan 
fiduciary or its affiliate has an interest, (iii) the receipt of fees 
by the Individual Retirement Plan Provider in connection with the 
establishment or maintenance of the individual retirement plan, and 
(iv) the receipt of investment fees by the Individual Retirement Plan 
Provider or an affiliate as a result of the initial investment of the 
Mandatory Distribution in an investment product in which the plan 
fiduciary or an affiliate

[[Page 57969]]

has an interest, provided that the conditions set forth in sections II 
and III are satisfied.

II. Conditions

    (a) In connection with the written explanation provided to the 
separating participant pursuant to section 402(f) of the Code, or in 
the plan's summary plan description or summary of material 
modifications thereto, the plan fiduciary notifies the participant 
that, absent his or her election, the Mandatory Distribution will be 
rolled over to an individual retirement plan offered by the plan 
fiduciary or an affiliate, and that the plan fiduciary may select its 
own proprietary investment for the initial investment of the Mandatory 
Distribution.
    (b) The requirements of the Automatic Rollover Regulation are met.
    (c) The plan fiduciary is the employer any of whose employees are 
covered by the plan from which the Mandatory Distribution is made, or 
an affiliate.
    (d) The individual retirement plan is established and maintained 
for the exclusive benefit of the individual retirement plan account 
holder, his or her spouse or their beneficiaries.
    (e) The terms of the individual retirement plan, including the fees 
and expenses for establishing and maintaining the individual retirement 
plan, are no less favorable than those available to comparable 
individual retirement plans established for reasons other than the 
receipt of a Mandatory Distribution made pursuant to section 
401(a)(31)(B) of the Code.
    (f) The Mandatory Distribution is invested in an Eligible 
Investment Product(s), as defined in section IV(e).
    (g) The rate of return or the investment performance of the 
individual retirement plan investment(s) is no less favorable than the 
rate of return or investment performance of an identical investment(s) 
that could have been made at the same time by comparable individual 
retirement plans established for reasons other than the receipt of a 
Mandatory Distribution made pursuant to section 401(a)(31)(B) of the 
Code.
    (h) The individual retirement plan does not pay a sales commission 
in connection with the acquisition of an Eligible Investment Product.
    (i) The individual retirement plan account holder may, within a 
reasonable period of time after his or her request and without penalty 
to the principal amount of the investment, transfer his individual 
retirement plan balance to a different investment offered by the 
Individual Retirement Plan Provider, or transfer his individual 
retirement plan balance to an individual retirement plan sponsored at a 
different financial institution.
    (j)(1) Fees and expenses attendant to the individual retirement 
plan, including the investment of the assets of such plan, (e.g., 
establishment charges, maintenance fees, investment expenses, 
termination costs, and surrender charges) shall not exceed the fees and 
expenses charged by the Individual Retirement Plan Provider for 
comparable individual retirement plans established for reasons other 
than the receipt of a Mandatory Distribution made pursuant to section 
401(a)(31)(B) of the Code;
    (2) Fees and expenses attendant to the individual retirement plan, 
with the exception of establishment charges, may be charged only 
against the income earned by the individual retirement plan; and
    (3) Fees and expenses are not in excess of reasonable compensation 
within the meaning of section 4975(d)(2) of the Code.
    (k) The present value of the nonforfeitable accrued benefit, as 
determined under section 411(a)(11) of the Code, does not exceed the 
maximum amount required to be rolled over under section 401(a)(31)(B) 
of the Code.

III. Recordkeeping

    (a) The Individual Retirement Plan Provider maintains or causes to 
be maintained for a period of six (6) years from the date of each 
Mandatory Distribution the records necessary to enable the persons 
described in paragraph (b) of this section to determine whether the 
applicable conditions of this exemption have been met. Such records 
must be readily available to assure accessibility by the persons 
identified in paragraph (b) of this section.
    (b) Notwithstanding any provisions of section 504(a)(2) and (b) of 
the Act, the records referred to in paragraph (a) of this section are 
unconditionally available at their customary location for examination 
during normal business hours by--
    (1) Any duly authorized employee or representative of the 
Department of Labor or the Internal Revenue Service; and
    (2) Any account holder of an individual retirement plan established 
pursuant to this exemption, or any duly authorized representative of 
such account holder.
    (c) A prohibited transaction will not be considered to have 
occurred if, due to circumstances beyond the control of the Individual 
Retirement Plan Provider, the records are lost or destroyed prior to 
the end of the six-year period, and no party in interest other than the 
Individual Retirement Plan Provider shall be subject to the civil 
penalty that may be assessed under section 502(i) of ERISA or to the 
taxes imposed by sections 4975(a) and (b) of the Code if the records 
are not maintained or are not available for examination as required by 
paragraph (b).

IV. Definitions

    (a) The term ``individual retirement plan'' means an individual 
retirement plan described in section 7701(a)(37) of the Code. For 
purposes of this exemption, the term individual retirement plan shall 
not include an individual retirement plan which is an employee benefit 
plan covered by Title I of ERISA.
    (b) The term ``Employee Pension Benefit Plan'' refers to an 
employee pension benefit plan defined in ERISA section 3(2)(A).
    (c) The term ``Automatic Rollover Regulation'' refers to the 
regulation promulgated by the Department at 29 CFR 2550.404a-2.
    (d) The term ``Individual Retirement Plan Provider'' means an 
entity that is eligible to serve as an individual retirement account 
trustee under section 408(a)(2) of the Code, or for purposes of an 
individual retirement annuity described in section 408(b) of the Code, 
an insurance company which is qualified to do business under the law of 
the jurisdiction in which the annuity contract, or endowment contract 
(described in 26 CFR 1.408-3(e)), is sold.
    (e) The term ``Eligible Investment Product'' means an investment 
product designed to preserve principal and provide a reasonable rate of 
return, whether or not such return is guaranteed, consistent with 
liquidity. For this purpose, the product must be offered by a Regulated 
Financial Institution and 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. Such term includes money 
market funds maintained by registered investment companies, and 
interest-bearing savings accounts and certificates of deposit of a bank 
or similar financial institution. In addition, the term includes 
``stable value products'' issued by a financial institution that are 
fully benefit-responsive to the individual retirement plan account 
holder, i.e., that provide a liquidity guarantee by a financially 
responsible third party of principal and previously accrued interest 
for

[[Page 57970]]

liquidations or transfers initiated by the individual retirement plan 
account holder exercising his or her right to withdraw or transfer 
funds under the terms of an arrangement that does not include 
substantial restrictions to the account holder's access to the 
individual retirement plan's assets.
    (f) The term ``Regulated Financial Institution'' means an entity 
that: (i) Is 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.
    (g) An ``affiliate'' of a person includes:
    (1) Any person directly or indirectly controlling, controlled by, 
or under common control with, the person; or
    (2) Any officer, director, partner or employee of the person;
    (h) The term ``control'' means the power to exercise a controlling 
influence over the management or policies of a person other than an 
individual.
    (i) The term ``Mandatory Distribution'' means the automatic 
rollover of a mandatory distribution described in section 401(a)(31)(B) 
of the Code, or 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.

    Signed at Washington, DC, this 20th day of September, 2004.
Ivan L. Strasfeld,
Director, Office of Exemption Determinations, Employee Benefits 
Security Administration, U.S. Department of Labor.
[FR Doc. 04-21592 Filed 9-27-04; 8:45 am]

BILLING CODE 4510-29-P