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Proposed Class Exemption for Services Provided in Connection With the Termination of Abandoned Individual Account Plans [03/10/2005]
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Volume 70, Number 46, Page 12074-12080
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DEPARTMENT OF LABOR
Employee Benefits Security Administration
RIN 1210-zA05
[Application No. D-11201]
Proposed Class Exemption for Services Provided in Connection With
the Termination of Abandoned Individual Account Plans
AGENCY: Employee Benefits Security Administration, Department of Labor.
ACTION: Notice of proposed class exemption.
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SUMMARY: This document contains a notice of a proposed class exemption
from certain prohibited transaction restrictions of the Employee
Retirement Income Security Act of 1974 (ERISA or the Act) and from
certain taxes imposed by the Internal Revenue Code of 1986, as amended
(the Code). If granted, the proposed class exemption would permit a
``qualified termination administrator'' (QTA) of an individual account
plan that has been abandoned by its sponsoring employer to select
itself or an affiliate to provide services to the plan in connection
with the termination of the plan, and to pay itself or an affiliate
fees for those services. The proposed exemption also would permit a
qualified termination administrator of an abandoned plan to: Designate
itself or an affiliate as provider of an individual retirement plan or
other account; select a proprietary investment product as the initial
investment for the rollover distribution of benefits for a participant
or beneficiary who fails to make an election regarding the disposition
of such benefits; and pay itself or its affiliate fees in connection
therewith. This exemption is being proposed in connection with the
Department's proposed regulation to be promulgated at 29 CFR 2578,
relating to the Termination of Abandoned Individual Account Plans, and
2550.404a-3, relating to the Safe Harbor For Rollover Distributions
from Terminated Individual Account Plans, which are being published
simultaneously in this issue of the Federal Register. The proposed
exemption, if granted, would affect individual account plans, the
participants and beneficiaries of such plans, certain plan service
providers, and the fiduciaries of such plans.
DATES: Written comments and requests for a public hearing on the
proposed exemption shall be submitted to the Department on or before
May 9, 2005.
ADDRESSES: All written comments and requests for a public hearing
(preferably three (3) copies) concerning the proposed class exemption
should be sent to: U.S. Department of Labor, Employee Benefits Security
Administration, Room N-5649, 200 Constitution Avenue, NW., Washington,
DC 20210, Attention: Plan Termination Class Exemption Proposal.
Comments and requests for a hearing alternatively may be sent by fax to
(202) 219-0204 or submitted electronically to moffitt.betty@dol.gov by
the end of the comment period. All comments received will be available
for public inspection in EBSA's Public Documents Room, N-1513, Employee
Benefits Security Administration, U.S. Department of Labor, 200
Constitution Ave. NW., Washington, DC 20210.
FOR FURTHER INFORMATION CONTACT: Brian Buyniski, Office of Exemption
Determinations, Employee Benefits Security Administration, U.S.
Department of Labor, Washington, DC 20210, (202) 693-8540. This is not
a toll free number.
SUPPLEMENTARY INFORMATION: This document contains a notice that the
Department is proposing a class exemption from the restrictions of
sections 406(a)(1)(A) through (D), 406(b)(1) and (b)(2) of the Act and
from the taxes imposed by section 4975 (a) and (b) of the Code, by
reason of section 4975(c)(1)(A) through (E) of the Code. The exemption
proposed herein is being proposed by the Department on its own motion
pursuant to section 408(a) of the Act and section 4975(c)(2) of the
Code, and in accordance with the procedures set forth in 29 CFR 2570,
subpart B (55 FR 32836, August 10, 1990).\1\
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\1\ Section 102 of Reorganization Plan No. 4 of 1978, 5 U.S.C.
App. 1 (1996) generally transferred the authority of the Secretary
of the Treasury to issue exemptions under section 4975(c)(2) of the
Code to the Secretary of Labor.
For purposes of this proposed exemption, references to specific
provisions of Title I of the Act, unless otherwise specified, refer
also to the corresponding provisions of the Code.
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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.
It has been determined that the proposed exemption is significant
for ``raising novel policy issues'' under section 3(f)(4) of the
Executive Order. Accordingly, the proposed exemption has been reviewed
by OMB.
The proposed class exemption is being published concurrently with a
proposed regulation entitled, ``Termination of Abandoned Individual
Account Plans.'' The proposed exemption permits a QTA of an individual
account plan that has been abandoned by its sponsoring employer to
select itself or an affiliate to provide services to the plan in
connection with the termination of the plan, and to pay itself or an
affiliate fees for those services, provided that such fees are
consistent with the conditions of the proposed exemption. The proposed
exemption would also permit a QTA to: Designate itself or an affiliate
as a provider of an individual retirement plan or other account; select
a proprietary investment product as the initial investment for the
rollover distribution of benefits for a participant or beneficiary who
fails to make an election regarding the disposition of such benefits;
and, pay itself or its affiliate in connection with the rollover. The
Department has assumed that all QTAs will take advantage of the
proposed class exemption.
The proposed exemption would provide conditional relief for QTAs
that terminate and wind up the affairs of plans that have been
abandoned by the plan sponsor. Because compliance with the proposed
regulation is a condition of the proposed exemption, the proposed
exemption will only be used in connection with the proposed regulation.
In general, the costs and benefits that may be associated with
compliance with the proposed exemption have been described and
quantified in connection with the economic impact of the proposed
regulation.
Certain other costs may be incurred in connection with the
conditions of the proposed exemption by QTAs that
[[Page 12075]]
select their own proprietary products or those of an affiliate for
investment of individual retirement plans and other accounts. These
costs would not otherwise be incurred by the QTA absent the conditions
of the prohibited transaction exemption. For example, a QTA that rolls
over an individual account from an abandoned plan into an individual
retirement plan is not permitted, under the exemption, to charge a
sales commission in connection with the investment product. In
addition, the Regulated Financial Institution is limited with regard to
certain fees and expenses that may be charged against the individual
retirement plan or other account. Foregone commissions and fees may
correspond to costs for some Regulated Financial Institutions.
The Department has no basis for estimating the impact of the wide
array of factors that could affect these particular costs, such as the
amount of fees or expenses that might not be fully charged to the
individual retirement plans or other accounts, the extent to which QTAs
will use one or more proprietary products, the number of account
balances that could be rolled over into individual retirement plans or
other accounts, or the aggregate effect of unpaid sales commissions.
Therefore, the Department has not estimated a cost for these provisions
of the proposed exemption. However, QTAs are in no event required to
make use of individual retirement plans or other accounts offered by
the QTA or an affiliate. In any case, it is likely that a QTA will use
its own or an affiliate's individual retirement plans or accounts and
investment products only if it is financially beneficial to do so, for
example, as a way to retain deposits and increase earnings.
Paperwork Reduction Act
As part of its continuing effort to reduce paperwork and respondent
burden, the Department of Labor conducts a preclearance consultation
program to provide the general public and Federal agencies with an
opportunity to comment on proposed and continuing collections of
information in accordance with the Paperwork Reduction Act of 1995 (PRA
95) (44 U.S.C. 3506(c)(2)(A)). This helps to ensure that requested data
will be provided in the desired format, reporting burden (time and
financial resources) is minimized, collection instruments are clearly
understood, and the impact of collection requirements on respondents
can be properly assessed.
The proposed exemption, if granted, will only be used by certain
QTAs that also take advantage of the proposed regulation on Termination
of Abandoned Individual Account Plans, if finalized, published
elsewhere in this issue of the Federal Register. The Department has
combined the burdens for the two proposed rules, along with the burden
for the proposed regulation, Safe Harbor for Rollover Distributions
From Terminated Individual Account Plans, also published today, under
one Information Collection Request (ICR). By combining the three
collections of information, the Department believes that the general
public will gain a better understanding of the burden impact as it
relates to terminating plans. The specific burden for the proposed
exemption includes a recordkeeping requirement for a QTA that
terminates an abandoned plan and chooses to roll over the account
balances of missing or nonresponsive participants into individual
retirement plans offered by the QTA or an affiliate of the QTA. The
hour and cost burdens for the ICR are described more fully in the
preamble to the proposed regulation, Termination of Abandoned
Individual Account Plans under the section on The Paperwork Reduction
Act.
Background
Thousands of individual account plans have, for a variety of
reasons, been abandoned by their sponsors. Financial institutions
holding the assets of these abandoned plans often do not have the
authority or incentive to perform the responsibilities otherwise
required of the plan administrator with respect to such plans. At the
same time, participants and beneficiaries are frequently unable to
access their plan benefits. As a result, the assets of many of these
plans are diminished by ongoing administrative costs, rather than being
paid to the plan's participants and beneficiaries.
Over the past few years, the Department of Labor's Employee
Benefits Security Administration (EBSA) has seen an increase in the
number of requests for assistance from participants who are unable to
obtain access to the money in their individual account plans. According
to these participants, even though a bank or other service provider of
the plan may be holding their money, neither the bank nor the
participants are able to locate anyone with authority under the plan to
authorize benefit distributions.
In some cases, plan abandonment occurs when the sponsoring employer
ceases to exist by virtue of a formal bankruptcy proceeding. In other
cases, abandonment occurs because the plan sponsor has been
incarcerated, died, or simply fled the country. Whatever the causes of
abandonment, participants in these so-called ``orphan plan'' or
``abandoned plan'' situations are effectively denied access to their
benefits and are otherwise unable to exercise their rights as
guaranteed under ERISA. At the same time, benefits in such plans are at
risk of being significantly diminished by ongoing administrative
expenses, rather than being distributed to participants and
beneficiaries.
EBSA responded to these requests for assistance with a series of
enforcement initiatives, including the National Enforcement Project on
Orphan Plans (NEPOP), which began in 1999. NEPOP focuses primarily on
identifying abandoned plans, locating their fiduciaries, if possible,
and requiring those fiduciaries to manage and terminate (including
making benefit distributions to participants and beneficiaries) the
plans in accordance with ERISA. When no fiduciary can be found, the
Department often requests that a Federal court appoint an independent
fiduciary to manage, terminate, and distribute the assets of the plan.
During 2002, the ERISA Advisory Council created the Working Group
on Orphan Plans to study the causes and extent of the orphan plan
problem. On November 8, 2002, after public hearings and testimony, the
Advisory Council issued a report, entitled Report of the Working Group
on Orphan Plans, concluding that the problems posed by abandoned plans
are very serious and substantial for plan participants, administrators,
and the government. In particular, the Report states that ``plan
participants may suffer economic hardship as a result of their
inability to obtain a distribution from an orphan plan; plan service
providers may be besieged with requests for distributions, although
unauthorized to act; and the government may be forced to handle the
termination of hundreds or thousands of plans that have been
abandoned.'' Although the Advisory Council's Report estimated that
abandoned plans currently represent only about two percent of all
defined contribution plans and less than one percent of total plan
assets for such plans, the Report also indicated that the orphan plan
problem may grow in difficult economic times.
Taking into account the problem of abandoned plans and the
Department's efforts to date, the Advisory Council generally
recommended measures (whether regulatory, legislative, or both) to
encourage service providers to voluntarily terminate abandoned plans
and distribute assets to participants and
[[Page 12076]]
beneficiaries. Specific recommendations of the Advisory Council
included new regulations setting forth criteria for determining when a
plan is abandoned, procedures for terminating abandoned plans and
distributing assets, and rules defining who may terminate and wind up
such plans.
Having carefully considered the recommendations of the Advisory
Council, as well as the comments of the various parties testifying
before the Council's Working Group on Orphan Plans, the Department is
publishing in this issue of the Federal Register proposed regulations
addressing these issues to be codified at 29 CFR parts 2550 and 2578
(Termination of Abandoned Individual Account Plans). One proposed
regulation would establish a regulatory framework pursuant to which
financial institutions and other entities holding the assets of an
abandoned individual account plan can take action to terminate the plan
and distribute benefits to the plan's participants and beneficiaries,
with limited liability. The other proposed regulation would establish a
simplified method for filing a special terminal report for abandoned
individual account plans. Lastly, the third regulation would provide a
safe harbor for rollover distributions from all terminated plans,
whether abandoned or not, on behalf of participants who fail to elect a
specific distribution.
The Department notes that a trustee or issuer of an individual
retirement plan within the meaning of section 7701(a)(37) of the Code
that qualifies under the proposed Termination of Abandoned Individual
Account Plans regulation (hereinafter the QTA Regulation) as a
``qualified termination administrator'' \2\ may select itself or an
affiliate to provide termination services to the plan which will result
in the receipt of compensation by the QTA or its affiliate. Moreover,
if a participant or beneficiary of the abandoned plan fails to make a
timely election as to the form of distribution of his or her benefits
pursuant to the proposed QTA Regulation, the QTA will be required to
distribute the participant's or beneficiary's benefits in the form of a
direct rollover into an individual retirement plan, or to an account
(other than an individual retirement plan in the case of a rollover on
behalf of a non-spousal beneficiary), if the abandoned plan was
intended to be in compliance with section 401(a) of the Code.
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\2\ See proposed regulation 29 CFR 2578.1(g), which states that
an eligible qualified termination administrator is qualified only if
it holds assets of the plan that is considered abandoned and if it
is eligible to serve as an individual retirement plan trustee or
issuer under section 7701(a)(37) of the Code.
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If the QTA is a financial institution or an affiliate of a
financial institution, and is eligible to establish and maintain
individual retirement plans, it may designate itself or its affiliate
as the individual retirement plan provider or other account provider.
In addition, the QTA may invest the rollover distribution in the
individual retirement plan or other account into a proprietary
investment product.
In this regard, section 406(a)(1) of the Act prohibits in part, a
fiduciary of a plan from causing the plan to engage in a transaction
that constitutes a direct or an indirect sale, exchange or leasing of
any property between the plan and a party in interest; lending of money
or other extension of credit between the plan and a party in interest;
furnishing of goods, services, or facilities between the plan and a
party in interest; and a transfer to, or use by or for the benefit of,
a party in interest of any assets of the plan. Section 406(b)(1) and
(b)(2) of the Act prohibits a fiduciary with respect to a plan from
dealing with the assets of the plan in his own interest or for his own
account; and from acting in his individual or in any other capacity in
any transaction involving the plan on behalf of a party (or
representing a party) whose interests are adverse to the interests of
the plan or the interests of its participants or beneficiaries.
A violation of section 406(a) and/or (b) of the Act may occur if
the QTA determines to pay itself or an affiliate for services rendered
to the plan from the assets of an abandoned plan. Also, additional
violations may occur if the QTA designates itself or an affiliate as
the provider of an individual retirement plan or other account
established for the benefit of participants and beneficiaries who do
not make an election as to the form of distribution. Finally, a
prohibited transaction may occur if the QTA determines to invest the
rollover distribution in the QTA's own proprietary investment product.
Section 408(b)(2) of the Act provides a conditional statutory
exemption for the provision of services by a party in interest to a
plan and the payment of reasonable compensation to the party in
interest. However, section 408(b)(2) of the Act does not provide relief
from the prohibitions described in section 406(b) of the Act.\3\
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\3\ See 29 CFR section 2550.408b-2(e).
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The Department, therefore, is proposing this class exemption which,
if granted, would provide conditional relief for a QTA of an abandoned
individual account plan to use its authority to select itself or an
affiliate to provide services in connection with the termination of the
plan, and to pay itself or an affiliate fees for the services
performed. With respect to the participants and beneficiaries who
failed to elect a distribution option, the proposed exemption also
would permit a qualified termination administrator of an abandoned
individual account plan to designate itself or an affiliate as an
individual retirement plan provider or other account provider and to
select the QTA's (or an affiliate's) proprietary investment product for
rollover distributions of the benefits of a participant or beneficiary.
Lastly, the proposal would provide relief for the QTA to pay itself or
its affiliate fees in connection with such transactions.
Description of the Proposed Exemption
Section I describes the transactions that are covered by the
proposed exemption. Under section I(a), relief is provided from the
restrictions of sections 406(a)(1)(A) through (D), 406(b)(1) and
406(b)(2) of the Act and the taxes imposed by section 4975(a) and (b)
of the Code, by reason of section 4975(c)(1)(A) through (E) of the
Code, for a ``qualified termination administrator'' within the meaning
of section V(a) of this proposed exemption, to use its authority in
connection with the termination of an abandoned individual account plan
to select itself or an affiliate to provide services to the plan and to
pay itself or an affiliate fees for services provided as a QTA.
Under section I(b), the proposed exemption provides relief from the
restrictions of sections 406(a)(1)(A) through (D), 406(b)(1) and
406(b)(2) of the Act and the taxes imposed by section 4975(a) and (b)
of the Code, by reason of section 4975(c)(1)(A) through (E) of the
Code, for a QTA, to use its authority in connection with the
termination of an abandoned individual account plan to: (i) Designate
itself or an affiliate as provider of an individual retirement plan or
other account to receive the account balance of a participant that does
not provide direction as to the disposition of such assets, (ii) make
the initial investment of the distributed proceeds in a proprietary
investment product, (iii) receive fees in connection with the
establishment or maintenance of the individual retirement plan or other
account, and (iv) receive investment fees as a result of the investment
of the individual retirement plan or other account's assets in a
proprietary investment product in which the QTA or an affiliate has an
interest.
[[Page 12077]]
The following conditions would apply to a transaction described in
section I(a) of the proposed exemption. The QTA must comply with the
requirements of the proposed QTA Regulation, which is published
elsewhere in this issue of the Federal Register.
Under the proposal, fees and expenses paid to the QTA and its
affiliate: (i) Are consistent with industry rates for such or similar
services, based on the experience of the QTA, and (ii) are not in
excess of rates charged by the QTA (or its affiliate) for the same or
similar services provided to customers that are not individual account
plans terminated pursuant to the proposed QTA Regulation, if the QTA
(or its affiliate) provides the same or similar services to such other
customers. The reference to ``industry rates'' and ``based on the
experience of the QTA'' is intended to enable a QTA, who possesses
knowledge about the services needed for a plan termination and industry
rates for such or similar services, to engage or retain itself, an
affiliate, and other service providers without going through a
potentially timely and costly bidding process. By permitting QTAs to
rely on their own industry expertise, the Department believes QTAs can
minimize plan termination costs and, thereby, maximize the benefits
payable to a plan's participants and beneficiaries.
The following conditions would apply to a transaction described in
I(b) of the proposed exemption. The conditions of the proposed QTA
Regulation must be met. The QTA must also inform the participant or
beneficiary in the notice required by the proposed QTA Regulation that:
(1) Absent his or her election within the 30-day period from receipt of
the notice to be provided by the QTA to inform participants of their
election options, the QTA will directly roll over the account balance
of the participant or beneficiary to an individual retirement plan or
other account offered by the QTA or its affiliate; and (2) the account
balance may be invested in the QTA's own proprietary investment
product, which is designed to preserve principal and provide a
reasonable rate of return and liquidity.
Under the proposal, the individual retirement plan or other account
must be established and maintained for the exclusive benefit of the
individual retirement plan or other account holder, his or her spouse
or their beneficiaries.
The terms of the individual retirement plan or other account,
including the fees and expenses for establishing and maintaining the
individual retirement plan or other account, must be no less favorable
than those available to comparable individual retirement plans or other
accounts established for reasons other than the receipt of a rollover
distribution described in the proposed QTA Regulation.
The proposal requires that the distribution must be invested in an
Eligible Investment Product, as defined in section V(c) of this
proposed exemption. The rate of return or the investment performance
received by the individual retirement plan or other account from an
investment product must be no less than that received by comparable
individual retirement plans or other accounts that are not established
pursuant to the proposed QTA Regulation but are invested in the same
product. For example, the rate of return received by the individual
retirement plan for an investment in a one-year certificate of deposit
which is an Eligible Investment Product cannot be less than the rate of
return received by an individual retirement plan or other account
established for reasons other than the receipt of a rollover
distribution that is invested in an identical one-year certificate of
deposit.
The proposal does not permit the individual retirement plan or
other account to pay a sales commission in connection with the
acquisition of an Eligible Investment Product.
Under the proposed exemption, the individual retirement plan or
other account holder must be able to, within a reasonable period of
time after his or her request and without penalty to the principal
amount of the investment, transfer his or her individual retirement
plan or other account balance to a different investment offered by the
QTA or its affiliate. Also, the individual retirement plan holder may
transfer his or her individual retirement plan balance to an individual
retirement plan sponsored by a different financial institution.
Similarly, the other account holder may transfer his or her account
balance to another account sponsored by a different financial
institution.
Under the proposal, fees and expenses attendant to the individual
retirement plan or other account, including the investment of the
assets of such plan or account, (e.g., establishment charges,
maintenance fees, investment expenses, termination costs, and surrender
charges) must not exceed the fees and expenses charged by the QTA for
comparable individual retirement plans or other accounts established
for reasons other than the receipt of a rollover distribution made
pursuant to the proposed QTA regulation. Additionally, fees and
expenses attendant to the individual retirement plan or other account,
other than establishment charges, may be charged only against the
income earned by the individual retirement plan or other account.
Finally, fees and expenses shall not exceed reasonable compensation
within the meaning of section 4975(d)(2) of the Code.
Section IV of the proposed exemption contains a recordkeeping
requirement. The QTA must maintain records to enable certain persons to
determine whether the applicable conditions of the class exemption have
been met. The records must be available for examination by the IRS, the
Department, and any account holder or duly authorized representative of
such account holder of an individual retirement plan or other account,
for at least six years from the date the QTA provides notice to the
Department of its determination of plan abandonment and its election to
serve as the QTA.
Lastly, section V of the proposed exemption contains certain
definitions. The term ``qualified termination administrator'' is
defined in section V(a) as an entity that is eligible to serve as a
trustee or issuer of an individual retirement plan within the meaning
of section 7701(a)(37) of the Code and that holds the assets of the
abandoned plan.
The term ``Eligible Investment Product'' is defined in section V(c)
to mean an investment product designed to preserve principal and
provide a reasonable rate of return, whether or not such return is
guaranteed, consistent with liquidity. In this regard, the product must
be offered by a Regulated Financial Institution as defined in section
V(d) and must seek to maintain, over the term of the investment, the
dollar value that is equal to the amount invested in the product by the
individual retirement plan or other account. Such term includes money
market funds maintained by registered investment companies, and
interest-bearing savings accounts and certificates of deposit of a bank
or similar financial institution. In addition, the term includes stable
value products issued by a financial institution that are fully
benefit-responsive to the individual retirement plan or other account
holder. For purposes of this proposed class exemption, the term
``benefit responsive'' means a stable value product that provides a
liquidity guarantee by a financially responsible third party of
principal and previously accrued interest for liquidations or transfers
initiated by the individual retirement plan or other account holder
exercising his or her right to withdraw or transfer funds under the
terms of an
[[Page 12078]]
arrangement that does not include substantial restrictions to the
account holder's access to the individual retirement plan or other
account assets.
The term ``Regulated Financial Institution'' is defined in section
V(d) to mean an entity that: (i) Is subject to state or federal
regulation, and (ii) is a bank or savings association, the deposits of
which are insured by the Federal Deposit Insurance Corporation; a
credit union, the member accounts of which are insured within the
meaning of section 101(7) of the Federal Credit Union Act; an insurance
company, the products of which are protected by state guaranty
associations; or an investment company registered under the Investment
Company Act of 1940.
General Information
The attention of interested persons is directed to the following:
(1) The fact that a transaction is the subject of an exemption
under section 408(a) of the Act and section 4975(c)(2) of the Code does
not relieve a fiduciary or other party in interest or disqualified
person from certain other provisions of the Act and the Code, including
any prohibited transaction provisions to which the exemption does not
apply and the general fiduciary responsibility provisions of section
404 of the Act which require, among other things, that a fiduciary
discharge his duties with respect to the plan solely in the interests
of the participants and beneficiaries of the plan and in a prudent
fashion in accordance with section 404(a)(1)(B) of the Act;
(2) Before an exemption may be granted under section 408(a) of the
Act and section 4975(c)(2) of the Code, the Department must find that
the exemption is administratively feasible, in the interests of plans
and their participants and beneficiaries and protective of the rights
of participants and beneficiaries of such plans;
(3) If granted, the proposed exemption will be applicable to a
transaction only if the conditions specified in the exemption are met;
and
(4) The proposed exemption, if granted, will be supplemental to,
and not in derogation of, any other provisions of the Act and the Code,
including statutory or administrative exemptions and transitional
rules. Furthermore, the fact that a transaction is subject to an
administrative or statutory exemption is not dispositive of whether the
transaction is in fact a prohibited transaction.
Written Comments
All interested persons are invited to submit written comments or
requests for a public hearing on the proposed exemption to the address
and within the time period set forth above. All comments will be made a
part of the record. Comments and requests for a hearing should state
the reasons for the writer's interest in the proposed exemption.
Comments received will be available for public inspection with the
referenced application at the above address.
Proposed Exemption
The Department has under consideration the grant of the following
class exemption under the authority of section 408(a) of the Act and
section 4975(c)(2) of the Code and in accordance with the procedures
set forth in 29 CFR 2570, subpart B (55 FR 32836, 32847, August 10,
1990).
I. Transactions
(a) The restrictions of sections 406(a)(1)(A) through (D),
406(b)(1) and 406(b)(2) of the Act, and the taxes imposed by section
4975(a) and (b) of the Code, by reason of section 4975(c)(1)(A) through
(E) of the Code, shall not apply to a QTA, (as defined in section V (a)
of this proposed class exemption), using its authority in connection
with the termination of an abandoned individual account plan pursuant
to the proposed QTA Regulation to:
(1) Select itself or an affiliate to provide services to the plan,
and
(2) Receive fees for the services performed as a QTA, provided that
the conditions set forth in sections II and IV of this proposed
exemption are satisfied.
(b) The restrictions of sections 406(a)(1)(A) through (D),
406(b)(1) and 406(b)(2) of the Act, and the taxes imposed by section
4975(a) and (b) of the Code, by reason of section 4975(c)(1)(A) through
(E) of the Code, shall not apply to a QTA, using its authority in
connection with the termination of an abandoned individual account plan
pursuant to the proposed QTA Regulation to:
(1) Designate itself or an affiliate as provider of an individual
retirement plan or, under the limited circumstances described in
section (d)(1) of the Rollover Safe Harbor Regulation for Terminated
Plans (20 CFR 2550.404a-3) as provider of an account (other than an
individual retirement plan) for the rollover of the account balance of
the participant or beneficiary of the abandoned individual account plan
who does not provide direction as to the disposition of such assets;
(2) Make the initial investment of the account balance of the
participant or beneficiary in the QTA's or its affiliate's proprietary
investment product;
(3) Receive fees in connection with the establishment or
maintenance of the individual retirement plan or other account; and
(4) Pay itself or an affiliate investment fees as a result of the
investment of the individual retirement plan or other account assets in
the QTA's or its affiliate's proprietary investment product, provided
that the conditions set forth in sections III and IV of this exemption
are satisfied.
II. Conditions for Provision of Termination Services and Receipt of
Fees in Connection Therewith
(a) The requirements of the proposed QTA Regulation are met. The
QTA provides, in a timely manner, any other reasonably available
information requested by the Department regarding the proposed
termination.
(b) Fees and expenses paid to the QTA, and its affiliate, in
connection with the termination of the plan and the distribution of
benefits:
(1) Are consistent with industry rates for such or similar
services, based on the experience of the QTA, and
(2) Are not in excess of rates charged by the QTA (or affiliate)
for the same or similar services provided to customers that are not
plans terminated pursuant to the proposed QTA regulation, if the QTA
(or affiliate) provides the same or similar services to such other
customers.
III. Conditions for Rollover Distributions
(a) The conditions of the proposed QTA Regulation are met.
(b) In connection with the notice to participants and beneficiaries
described in the proposed QTA Regulation, a statement explaining that:
(1) If the participant or beneficiary fails to make an election
within the 30-day period referenced in the proposed QTA Regulation, the
QTA will directly roll over the account balance to an individual
retirement plan or other account offered by the QTA or its affiliate;
(2) The proceeds of the distribution may be invested in the QTA's
(or affiliate's) own proprietary investment product, which is designed
to preserve principal and provide a reasonable rate of return and
liquidity.
(c) The individual retirement plan or other account is established
and maintained for the exclusive benefit of the individual retirement
plan account holder or other account holder, his or her spouse or their
beneficiaries.
(d) The terms of the individual retirement plan or other account,
[[Page 12079]]
including the fees and expenses for establishing and maintaining the
individual retirement plan or other account, are no less favorable than
those available to comparable individual retirement plans or other
accounts established for reasons other than the receipt of a rollover
distribution described in the proposed QTA Regulation.
(e) The distribution proceeds are invested in an Eligible
Investment Product(s), as defined in section V(c) of this proposed
class exemption.
(f) The rate of return or the investment performance of the
individual retirement plan or other account is no less favorable than
the rate of return or investment performance of an identical
investment(s) that could have been made at the same time by comparable
individual retirement plans or other accounts established for reasons
other than the receipt of a rollover distribution described in the
proposed QTA Regulation.
(g) The individual retirement plan or other account does not pay a
sales commission in connection with the acquisition of an Eligible
Investment Product.
(h) The individual retirement plan account holder or other account
holder may, within a reasonable period of time after his or her request
and without penalty to the principal amount of the investment, transfer
his or her account balance to a different investment offered by the QTA
or its affiliate. The individual retirement plan account holder may
also transfer his or her balance to an individual retirement plan
sponsored at a different financial institution or in the case of an
other account holder, to an account sponsored at a different financial
institution.
(i)(1) Fees and expenses attendant to the individual retirement
plan or other account, including the investment of the assets of such
plan or account, (e.g., establishment charges, maintenance fees,
investment expenses, termination costs, and surrender charges) shall
not exceed the fees and expenses charged by the QTA for comparable
individual retirement plans or other accounts established for reasons
other than the receipt of a rollover distribution made pursuant to the
proposed QTA Regulation;
(2) Fees and expenses attendant to the individual retirement plan
or other account, with the exception of establishment charges, may be
charged only against the income earned by the individual retirement
plan or other account; and
(3) Fees and expenses attendant to the individual retirement plan
or other account are not in excess of reasonable compensation within
the meaning of section 4975(d)(2) of the Code.
IV. Recordkeeping
(a) The QTA maintains or causes to be maintained, for a period of
six (6) years from the date the QTA provides notice to the Department
of its determination of plan abandonment and its election to serve as
the QTA described in the proposed QTA Regulation, the records necessary
to enable the persons described in paragraph (b) of this section to
determine whether the applicable conditions of this exemption have been
met. Such records must be readily available to assure accessibility by
the persons identified in paragraph (b) of this section.
(b) Notwithstanding any provisions of section 504(a)(2) and (b) of
the Act, the records referred to in paragraph (a) of this section are
unconditionally available at their customary location for examination
during normal business hours by--
(1) Any duly authorized employee or representative of the
Department of Labor or the Internal Revenue Service; and
(2) Any account holder of an individual retirement plan or other
account established pursuant to this exemption, or any duly authorized
representative of such account holder.
(c) A prohibited transaction will not be considered to have
occurred if the records necessary to enable the persons described in
paragraph (a) to determine whether the conditions of the exemption have
been met are lost or destroyed, due to circumstances beyond the control
of the QTA, then no prohibited transaction will be considered to have
occurred solely on the basis of the unavailability of those records,
and no party in interest other than the QTA shall be subject to the
civil penalty that may be assessed under section 502(i) of the Act or
to the taxes imposed by sections 4975(a) and (b) of the Code if the
records are not maintained or are not available for examination as
required by paragraph (b).
(3) None of the persons described in paragraph (b)(2) of this
section shall be authorized to examine the trade secrets of the QTA or
its affiliates or commercial or financial information that is
privileged or confidential.
V. Definitions
(a) A termination administrator is ``qualified'' for purposes of
the proposed QTA Regulation and this proposed exemption if:
(1) The QTA is eligible to serve as a trustee or issuer of an
individual retirement plan or other account, within the meaning of
section 7701(a)(37) of the Code, and
(2) The QTA holds plan assets of the plan that is considered
abandoned.
(b) The term ``individual retirement plan'' means an individual
retirement plan described in section 7701(a)(37) of the Code. For
purposes of this exemption, the term individual retirement plan shall
not include an individual retirement plan which is an employee benefit
plan covered by Title I of ERISA.
(c) The term ``Eligible Investment Product'' means an investment
product designed to preserve principal and provide a reasonable rate of
return, whether or not such return is guaranteed, consistent with
liquidity. For this purpose, the product must be offered by a Regulated
Financial Institution as defined in paragraph (d) of this section and
shall seek to maintain, over the term of the investment, the dollar
value that is equal to the amount invested in the product by the
individual retirement plan or other account. Such term includes money
market funds maintained by registered investment companies, and
interest-bearing savings accounts and certificates of deposit of a bank
or similar financial institution. In addition, the term includes
``stable value products'' issued by a financial institution that are
fully benefit-responsive to the individual retirement plan account
holder or other account holder, i.e., that provide a liquidity
guarantee by a financially responsible third party of principal and
previously accrued interest for liquidations or transfers initiated by
the individual retirement plan account holder or other account holder
exercising his or her right to withdraw or transfer funds under the
terms of an arrangement that does not include substantial restrictions
to the account holder access to the individual retirement plan or other
account's assets.
(d) The term ``Regulated Financial Institution'' means an entity
that: (i) Is subject to state or federal regulation, and (ii) is a bank
or savings association, the deposits of which are insured by the
Federal Deposit Insurance Corporation; a credit union, the member
accounts of which are insured within the meaning of section 101(7) of
the Federal Credit Union Act; an insurance company, the products of
which are protected by state guaranty associations; or an investment
company registered under the Investment Company Act of 1940.
(e) An ``affiliate'' of a person includes:
[[Page 12080]]
(1) Any person directly or indirectly controlling, controlled by,
or under common control with, the person; or
(2) Any officer, director, partner or employee of the person.
(f) The term ``control'' means the power to exercise a controlling
influence over the management or policies of a person other than an
individual.
(g) The term ``individual account plan'' means an individual
account plan as that term is defined in section 3(34) of the Act.
Signed at Washington, DC, this 23rd day of February, 2005.
Ivan L. Strasfeld,
Director of Exemption, Determinations, Employee Benefits Security
Administration, U.S. Department of Labor.
[FR Doc. 05-4465 Filed 3-9-05; 8:45 am]
BILLING CODE 4510-29-P
