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Employee Benefits Security Administration

EBSA Proposed Rule

Fiduciary Responsibility Under the Employee Retirement Income Security Act of 1974; Automatic Rollovers; Proposed Rule [01/07/2003]

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Volume 68, Number 4, Page 991-994




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Part IV










Department of Labor










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Pension and Welfare Benefits Administration






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29 CFR Part 2550






Fiduciary Responsibility Under the Employee Retirement Income Security 
Act of 1974; Automatic Rollovers; Proposed Rule




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DEPARTMENT OF LABOR


Pension and Welfare Benefits Administration


29 CFR Part 2550


RIN 1210-AA92


 
Fiduciary Responsibility Under the Employee Retirement Income 
Security Act of 1974; Automatic Rollovers


AGENCY: Pension and Welfare Benefits Administration, Labor.


ACTION: Request for information.


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SUMMARY: Section 657(c) of the Economic Growth and Tax Relief 
Reconciliation Act of 2001 directs the Department of Labor (Department) 
to develop, through regulations, safe harbors relating to the automatic 
rollovers of certain mandatory tax-qualified plan distributions to 
individual retirement plans. Under these safe harbors, the designation 
of an institution and the investment of funds by a plan administrator 
to receive automatic rollovers in accordance with section 401(a)(31)(B) 
of the Internal Revenue Code (Code) would be deemed to satisfy the 
fiduciary requirements of section 404(a) of the Employee Retirement 
Income Security Act (ERISA). The purpose of this document is to request 
information from the public on issues relating to the development of 
these safe harbors and to assist in drafting regulations. The 
Department also seeks information on low-cost individual retirement 
plans for purposes of transfers under section 401(a)(31)(B) of the Code 
and for other uses that promote the preservation of assets for 
retirement income.


DATES: Written or electronic responses should be submitted to the 
Department of Labor on or before March 10, 2003.


RESPONSES: Written responses (preferably, at least three copies) should 
be addressed to the Office of Regulations and Interpretations, Pension 
and Welfare Benefits Administration, Room N-5669, U.S. Department of 
Labor, Washington, DC 20210, Attention: Automatic Rollovers RFI. All 
responses will be available for public inspection at the Public 
Disclosure Room, Pension and Welfare Benefits Administration, Room N-
1513, U.S. Department of Labor, Washington, DC 20210. Electronic 
responses should contain ``Automatic Rollovers RFI'' in the subject 
line and be addressed to e-ORI@pwba.dol.gov.


FOR FURTHER INFORMATION CONTACT: Stacey A. Gillis or Katherine D. 
Lewis, Office of Regulations and Interpretations, Pension and Welfare 
Benefits Administration, Room N-5669, U.S. Department of Labor, 
Washington, DC 20210, telephone (202) 693-8510. This is not a toll-free 
number.


SUPPLEMENTARY INFORMATION:


A. Background


    Tax-qualified retirement plans are permitted to make 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\ Recipients may choose to roll the 
plan distribution (cash-out) into an IRA \2\ or another qualified plan, 
or they may retain the cash-out as a taxable distribution. Prior to 
making a distribution, plan administrators are required to provide the 
participant with a written explanation of the Code provisions under 
which the participant may elect to have the distribution transferred 
directly to an IRA or another qualified plan, the provision requiring 
tax withholding if the distribution is not directly transferred and the 
provisions under which the distribution will not be taxed if the 
participant transfers the distribution to an IRA or another qualified 
plan within 60 days of receipt.\3\ In recent years, both plan sponsors 
and participants have indicated an interest in establishing rollover 
accounts as the default form of distribution option to encourage 
preservation of the amount distributed for retirement purposes and to 
mitigate the tax consequences to the participant with respect to the 
amount distributed.
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    \1\ Code sections 411(a)(11) and 417(e).
    \2\ ``IRA'' means an individual retirement account under section 
408(a) of the Code and an individual retirement annuity under 
section 408(b) of the Code.
    \3\ Code section 402(f).
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    In July 2000, the Internal Revenue Service (Service) issued Revenue 
Ruling 2000-36 \4\ approving a plan amendment which permitted a direct 
rollover to an IRA as the default distribution option for an 
involuntary cash-out of a qualified plan distribution of an amount 
greater than $1,000 but less than or equal to $5,000, whenever a 
separating employee failed to make an affirmative election to either 
choose a direct rollover or take a taxable cash payment. The Service 
held that the plan amendment requiring the direct rollover to an IRA in 
these circumstances did not cause the plan to fail to satisfy the 
requirements of sections 401(a)(31) and 411(d)(6) of the Code. The plan 
amendment also provided that in the case of a default direct rollover, 
the plan administrator would select an IRA trustee, custodian, or 
issuer that is unrelated to the employer, establish the IRA with that 
trustee, custodian, or issuer on behalf of any separating employee, and 
make the initial investment choices for the account.
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    \4\ Rev. Rul. 2000-36, 2000-2 C.B. 140.
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    In this ruling, the Department advised the Treasury and the Service 
that, under Title I of the ERISA, in the context of a default direct 
rollover described in the ruling, the participant will cease to be a 
participant covered under the plan within the meaning of 29 CFR 2510.3-
3(d)(2)(ii)(B), where the distribution constitutes the entire benefit 
rights of a participant, and the distributed assets will cease to be 
plan assets within the meaning of 29 CFR 2510.3-101. However, the 
Department also noted that the selection of an IRA trustee, custodian 
or issuer and IRA investment for purposes of a default direct rollover 
would constitute a fiduciary act subject to the general fiduciary 
standards and prohibited transaction provisions of ERISA.\5\ In 
addition, the Department stated 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 summary plan description furnished to participants and 
beneficiaries.
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    \5\ See the Department's information letter to Diana Orantes 
Ceresi (Feb. 19, 1998) regarding the factors a plan fiduciary should 
consider in selecting a service provider. Among other things, a 
responsible plan fiduciary must engage in an objective process 
designed to elicit information necessary to assess the 
qualifications of the service provider, the quality of the services 
offered and the reasonableness of the fees charged in light of the 
services provided. Such process should also be designed to avoid 
self-dealing, conflicts of interest or other improper influence.
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    Subsequent to the issuance of Revenue Ruling 2000-36, section 657 
of the Economic Growth and Tax Relief Reconciliation Act of 2001 
(EGTRRA), Public Law 107-16, amended section 401(a)(31) of the Code to 
require that, absent an affirmative election by the participant, 
certain mandatory distributions from a qualified retirement plan must 
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, the trust will 
not constitute a qualified trust unless the plan of which the trust is 
a


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part provides that if a mandatory distribution of more than $1,000 is 
made and the distributee (generally the participant) does not elect to 
have such distribution paid directly to an eligible retirement plan or 
receive the distribution directly, the plan administrator must transfer 
such distribution to an IRA of a designated trustee or issuer. 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''.
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    \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), i.e. ``IRA'. ?
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    Additionally, section 657(a) of EGTRRA added a notice requirement 
in section 401(a)(31)(B)(i) of the Code requiring the plan 
administrator to notify the distributee 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 IRA.\7\
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    \7\ Conforming amendments to Code sections 401(a)(31) and 
402(f)(1) were also made by section 657 of EGTRRA.
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    As part of these new EGTRRA provisions, section 657(c)(2)(A) 
directs the Department to issue final regulations providing safe 
harbors under which the plan administrator's designation of an 
institution to receive the automatic rollover and the initial 
investment choice for the rolled-over funds would be deemed to satisfy 
the fiduciary requirements of section 404(a) of ERISA. Moreover, the 
provisions requiring all tax-qualified retirement plans to make 
automatic rollovers to IRAs the default option for involuntary 
distributions of certain defined amounts will not become effective 
until the Department issues the safe harbor regulations.
    Section 657(c)(2)(B) of EGTRRA also 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) 
transfers and for other uses that promote the preservation of assets 
for retirement income.


B. Issues Under Consideration


Automatic Rollover Safe Harbors


    The Department is interested in comments regarding appropriate 
standards for the development of safe harbors under which the 
designation of an institution providing an IRA to receive the automatic 
rollover of funds and the initial investment choice for the rolled-over 
funds would be deemed to satisfy the fiduciary requirements of section 
404(a) of ERISA. A list of some of the issues with respect to which 
comments are requested is included below. Responses on other issues 
pertinent to the Department's consideration are also invited.
    As a framework for these comments, the Department notes that 
existing Treasury regulations describe fundamental requirements that 
must be satisfied in order for IRAs to maintain their tax 
classification under the Code.\8\ Any standards made part of a safe 
harbor would supplement such requirements.
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    \8\ For example, with respect to individual retirement accounts, 
26 CFR 1.408-2(b)(2)(i) states that the trustee of an individual 
retirement account must be a bank (as defined in Sec.  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 Service, that the manner in which the trust will 
be administered will be consistent with Sec.  408(e) of the Code and 
with the regulation. With respect to individual retirement 
annuities, 29 CFR Sec.  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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Request for Information


    1. Standards for Safe Harbor Entity: What criteria should apply to 
the Department's determination that an IRA custodian, trustee or issuer 
(IRA provider) qualifies as a safe harbor entity? Should the standards 
differ depending on whether the IRA is an account or an annuity? Should 
IRA providers who are existing plan service providers receive any 
special consideration if plan investments can be rolled directly in-
kind without transaction fees for liquidating plan investments and 
purchasing IRA investments?
    2. Standards for Safe Harbor Initial Investment: What criteria 
should apply to the Department's determination that an initial 
investment qualifies as a safe harbor investment? Should consideration 
be given to including or excluding specific investment vehicles in the 
safe harbor? If mutual funds are included, should they be limited to 
passively invested mutual funds such as index funds or include all 
publicly traded mutual funds? Should the criteria include specific 
asset allocation standards?
    3. Establishment Costs: What is the range of establishment costs 
that IRA providers charge for the establishment or set-up of IRAs of 
the typical size of an automatic rollover and how do they vary? What 
factors should be considered in determining the reasonableness of these 
costs imposed by an IRA provider under the safe harbor? Should 
regulations clarify that establishment costs are either an expense of 
the distributing plan or a charge to the IRA funds of the account-
holder?
    4. Termination Costs: What is the range of termination costs that 
IRA providers charge for the termination or closure of IRAs of the 
typical size of an automatic rollover and how do they vary? What 
factors should be considered in determining the reasonableness of these 
costs imposed by an IRA provider under the safe harbor?
    5. Maintenance Fees: What is the range of maintenance and 
administrative fees that IRA providers charge for maintaining and 
administering IRAs of the typical size of an automatic rollover and how 
do they vary? What factors should be considered in determining the 
reasonableness of these fees imposed by an IRA provider under the safe 
harbor?
    6. Investment Fees: What types of fees would be associated with the 
initial investment of the IRA? What types of fees would be associated 
with the ongoing investment vehicle of the IRA? What factors should be 
considered in determining the reasonableness of these fees imposed by 
an IRA provider under the safe harbor? Should the IRA principal be 
guaranteed with all investment fees, maintenance fees and establishment 
costs being charged to investment earnings?
    7. Surrender Charges: What is the range of surrender charges that 
investment vehicles for IRAs of the typical size of an automatic 
rollover are subject to upon surrender or redemption, how do they vary 
and what circumstances trigger their imposition? What factors should be 
considered in determining the reasonableness of these charges imposed 
by an IRA provider under the safe harbor?
    8. Transfers within One Year: Do IRA providers refund or waive in 
whole or part establishment costs, termination costs, maintenance fees 
or surrender charges for IRAs that are withdrawn or directly rolled 
over within one year of establishment by the account-holder? Should the 
Department consider refund or waiver features in determining whether an 
IRA provider or initial investment qualifies for safe harbor treatment?
    9. Prohibited Transaction Relief: Is there a need for prohibited 
transaction relief that would enable a plan sponsor, as the plan 
administrator, to select itself or an affiliate as the IRA provider, or 
to choose an initial investment in which it may have an interest? If 
relief is needed, what safeguards should be imposed with respect to 
such relief?
    10. Legal Impediments: What legal impediments are plan 
administrators


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likely to encounter in establishing IRAs for automatic rollovers on 
behalf of separating employees? What legal impediments are financial 
institutions likely to encounter in designing and marketing IRAs for 
automatic rollovers?
    11. Disclosure: Should the regulation impose any additional 
disclosure requirements on safe harbor IRA providers?
    12. Low-Cost IRAs: Is there a need for special consideration of IRA 
providers who provide low-cost IRAs for automatic rollovers? What 
criteria should be used to demonstrate low-cost or the promotion of the 
preservation of assets for retirement income by IRA providers? What 
kinds of low-cost IRA products are available?
    13. Current Practices: How many qualified retirement plans 
currently have mandatory distribution provisions? Typically, what are 
those provisions? How many mandatory distributions occur annually and 
what is the form of distribution? What are the associated costs?
    14. EGTRRA Provisions: What additional administrative costs will 
compliance with the EGTRRA automatic rollover requirements impose on 
qualified retirement plans and the assets of plan participants?


Impact on Small Entities


    In responding to the questions above, please address the 
anticipated annual impact of any proposals on small business and small 
plans (plans with fewer than 100 participants).
    All submitted responses will be made a part of the record of the 
proceeding referred to herein and will be available for public 
disclosure.


    Signed at Washington, DC, this 2nd day of January 2003.
Ann L. Combs,
Assistant Secretary, Pension and Welfare Benefits Administration, 
Department of Labor.
[FR Doc. 03-281 Filed 1-6-03; 8:45 am]

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