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Employee Benefits Security Administration

EBSA Proposed Rule

Fiduciary Responsibility Under the Employee Retirement Income Security Act of 1974 Automatic Rollover Safe Harbor [03/02/2004]

[PDF Version]

Volume 69, Number 41, Page 9899-9909


[[Page 9899]]

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Part II





Department of Labor





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Employee Benefits Security Administration



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29 CFR Part 2550



Fiduciary Responsibility Under the Employee Retirement Income Security 
Act of 1974 Automatic Rollover Safe Harbor; Proposed Rule


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DEPARTMENT OF LABOR

Employee Benefits Security Administration

29 CFR Part 2550

RIN 1210-AA92

 
Fiduciary Responsibility Under the Employee Retirement Income 
Security Act of 1974 Automatic Rollover Safe Harbor

AGENCY: Employee Benefits Security Administration, Labor.

ACTION: Proposed regulation.

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SUMMARY: This document contains a proposed regulation that, upon 
adoption, would establish a safe harbor pursuant to which a fiduciary 
of a pension plan subject to Title I of the Employee Retirement Income 
Security Act of 1974, as amended (ERISA), will be deemed to have 
satisfied his or her fiduciary responsibilities in connection with 
automatic rollovers of certain mandatory distributions to individual 
retirement plans. This proposed regulation, if finalized, would affect 
employee pension benefit plans, plan sponsors, administrators and 
fiduciaries, and plan participants and beneficiaries.

DATES: Written comments on the proposed regulation should be received 
by the Department of Labor on or before April 1, 2004.

ADDRESSES: Comments (preferably at least three copies) should be 
addressed to the Office of Regulations and Interpretations, Employee 
Benefits Security Administration, Room N-5669, U.S. Department of 
Labor, 200 Constitution Avenue NW., Washington, DC 20210. Attn: 
Automatic Rollover Regulation. Comments also may be submitted 
electronically to e-ori@dol.gov. All comments received will be 
available for public inspection at the Public Disclosure Room, N-1513, 
Employee Benefits Security Administration, 200 Constitution Avenue NW., 
Washington, DC 20210.

FOR FURTHER INFORMATION CONTACT: Lisa M. Alexander or Kristen L. 
Zarenko, Office of Regulations and Interpretations, Employee Benefits 
Security Administration, (202) 693-8510. This is not a toll-free 
number.

SUPPLEMENTARY INFORMATION:

A. Background

    Under the Internal Revenue Code of 1986, as amended (Code), tax-
qualified retirement plans are permitted to incorporate provisions 
requiring an immediate distribution to a separating participant without 
the participant's consent if the present value of the participant's 
vested accrued benefit does not exceed $5,000.\1\ A distribution by a 
plan in compliance with such a provision is termed a mandatory 
distribution, commonly referred to as a ``cash-out''. Separating 
participants may choose to roll the cash-out, which is an eligible 
rollover distribution,\2\ into an eligible retirement plan,\3\ or they 
may retain the cash-out as a taxable distribution. Within a reasonable 
period of time prior to making a mandatory distribution, plan 
administrators are required to provide a separating participant with a 
written notice explaining, among other things, the following: the Code 
provisions under which the participant may elect to have the cash-out 
transferred directly to an eligible retirement plan and that if an 
election is not made, such cash-out is subject to the automatic 
rollover provisions of Code section 401(a)(31)(B); the provision 
requiring income tax withholding if the cash-out is not directly 
transferred to an eligible retirement plan; and the provisions under 
which the distribution will not be taxed if the participant transfers 
the account balance to an eligible retirement plan within 60 days of 
receipt.\4\
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    \1\ Code sections 411(a)(11) and 417(e). See Code section 
411(a)(11)(D) for circumstances where the amount of a cash-out may 
be greater than $5,000, based on a participant's prior rollover 
contribution into the plan.
    \2\ See Code section 402(f)(2)(A).
    \3\ See Code section 402(f)(2)(B).
    \4\ Code section 402(f)(1).
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    As part of the Economic Growth and Tax Relief Reconciliation Act of 
2001 (EGTRRA),\5\ section 401(a)(31) of the Code was amended to require 
that, absent an affirmative election by the participant, certain 
mandatory distributions from a tax-qualified retirement plan be 
directly transferred to an individual retirement plan \6\ of a 
designated trustee or issuer. Specifically, section 657(a) of EGTRRA 
added a new section 401(a)(31)(B)(i) to the Code to provide that, in 
the case of a trust that is part of an eligible plan,\7\ the trust will 
not constitute a qualified trust unless the plan of which the trust is 
a part provides that if a mandatory distribution of more than $1,000 is 
to be made and the participant does not elect to have such distribution 
paid directly to an eligible retirement plan or to receive the 
distribution directly, the plan administrator must transfer such 
distribution to an individual retirement plan. Section 657(a) of EGTRRA 
also added a notice requirement in section 401(a)(31)(B)(i) of the Code 
requiring the plan administrator to notify the participant in writing, 
either separately or as part of the notice required under section 
402(f) of the Code, that the participant may transfer the distribution 
to another individual retirement plan.\8\
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    \5\ Pub. L. 107-16, June 7, 2001, 115 Stat. 38.
    \6\ Section 401(a)(31)(B)(i) of the Code requires the transfer 
to be made to an ``individual retirement plan'', which section 
7701(a)(37) of the Code defines to mean an individual retirement 
account described in section 408(a) and an individual retirement 
annuity described in section 408(b).
    \7\ Section 657(a)(1)(B)(ii) of EGTRRA defines an ``eligible 
plan'' as a plan which provides for an immediate distribution to a 
participant of any ``nonforfeitable accrued benefit for which the 
present value (as determined under section 411(a)(11) of the Code) 
does not exceed $5,000.'' The Treasury and the IRS have advised the 
Department that the requirements of Code section 401(a)(31)(B) apply 
to a broad range of retirement plans including plans established 
under Code sections 401(a), 401(k), 403(a), 403(b) and 457. The 
Department notes that the safe harbor proposed herein applies only 
to employee benefit pension plans covered under title I of ERISA. 
See infra fn. 15.
    \8\ Conforming amendments to Code sections 401(a)(31) and 
402(f)(1) were also made by section 657 of EGTRRA.
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    Section 657(c)(2)(A) of EGTRRA directed the Department of Labor 
(Department) to issue regulations providing safe harbors under which 1) 
a plan administrator's designation of an institution to receive the 
automatic rollover and 2) the initial investment choice for the rolled-
over funds would be deemed to satisfy the fiduciary responsibility 
provisions of section 404(a) of ERISA. Section 657(c)(2)(B) of EGTRRA 
states that the Secretaries of Labor and Treasury may provide, and 
shall give consideration to providing, special relief with respect to 
the use of low-cost individual retirement plans for purposes of Code 
section 401(a)(31)(B) automatic rollovers and for other uses that 
promote the preservation of assets for retirement income.
    Section 657(c)(2)(A) of EGTRRA further provides that the Code 
provisions requiring automatic rollovers of certain mandatory 
distributions to individual retirement plans will not become effective 
until the Department of Labor issues safe harbor regulations.
    On January 7, 2003, the Department published a notice in the 
Federal Register requesting information on a variety of issues relating 
to the development of a safe harbor pursuant to section 657(c)(2)(A) 
and (B) of EGTRRA.\9\ In response to this request for information 
(RFI), the Department received 17 comment letters. Copies of these 

[[Page 9901]]

http://www.dol.gov/ebsa/regs/cmt_rolloverRFI.html.

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    \9\ 68 FR 991. http://www.dol.gov/ebsa/regs/fedreg/proposed/2003000281.htm
.

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    Set forth below is an overview of the proposed safe harbor 
regulation and a review of the comments received in response to the 
RFI.

B. Overview of Proposal

1. Scope

    Consistent with the directive in section 657(c)(2)(A) of EGTRRA, 
paragraph (a)(1) of Sec.  2550.404a-2 provides that the proposed safe 
harbor applies only to the automatic rollover of a mandatory 
distribution described in section 401(a)(31)(B) of the Code. At 
present, such distributions are limited to nonforfeitable accrued 
benefits (generally referred to as vested benefits), the present value 
of which is in excess of $1,000, but less than or equal to $5,000. For 
purposes of determining the present value of such benefits, section 
401(a)(31)(B) references Code section 411(a)(11). Section 411(a)(11)(A) 
of the Code provides that, in general, if the present value of any 
nonforfeitable accrued benefit exceeds $5,000, such benefit may not be 
immediately distributed without the consent of the participant. Section 
411(a)(11)(D) of the Code also provides a special rule that permits 
plans to disregard that portion of a nonforfeitable accrued benefit 
that is attributable to amounts rolled over from other plans (and 
earnings thereon) in determining the $5,000 limit. Inasmuch as section 
401(a)(31)(B) of the Code requires the automatic rollover of mandatory 
distributions, as determined under section 411(a)(11), which would 
include prior rollover contributions, the proposal provides safe harbor 
coverage for the automatic rollover of mandatory distributions 
containing such prior rollover contributions. One commenter on the RFI 
suggested that the safe harbor should extend to amounts of $1,000 or 
less. While the Department agrees with the commenter that similar 
considerations may be relevant to such rollovers, the Department did 
not adopt this suggestion in light of Congress's direction to provide a 
safe harbor for automatic rollovers of mandatory distributions 
described in section 401(a)(31)(B) of the Code.
    Paragraph (b) of the proposed regulation provides that, if the 
conditions of the safe harbor are satisfied, fiduciaries will be deemed 
to have satisfied their fiduciary duties under section 404(a) of ERISA 
with respect to both the selection of an individual retirement plan 
provider and the investment of funds in connection with an automatic 
rollover of a mandatory distribution described in section 401(a)(31)(B) 
of the Code to an individual retirement plan, within the meaning of 
section 7701(a)(37) of the Code.
    The proposal makes clear that the standards set forth in the 
proposed regulation apply solely for purposes of determining compliance 
with the safe harbor and that such standards are not intended to 
represent the exclusive means by which a fiduciary might satisfy his or 
her duties under ERISA with respect to automatic rollovers of mandatory 
distributions described in section 401(a)(31)(B) of the Code.
    As noted above, section 657(c)(2)(B) of EGTRRA provides that the 
Secretary of the Treasury and the Secretary of Labor shall consider and 
may provide special relief with respect to the use of low-cost 
individual retirement plans. The Department considered the provision of 
such special relief and believes that the framework of the safe harbor 
encourages the use of low-cost individual retirement plans for purposes 
of rollovers under section 401(a)(31)(B) of the Code. The Department 
specifically invites public comment on whether, given the conditions of 
the proposal, further relief is necessary in this regard. If so, 
commenters are encouraged to specifically address what relief is 
necessary and why, as well as identify approaches to providing such 
relief.

2. Conditions

    Safe harbor relief under the proposed regulation is dependent on a 
fiduciary satisfying six conditions. In general, the conditions 
address: (1) The amount of mandatory distributions; (2) qualifications 
for an individual retirement plan; (3) permissible investment products; 
(4) permissible fees and expenses; (5) required disclosures to 
participants and beneficiaries; and 6) prohibited transactions. Each of 
the conditions is discussed below.
    The first condition, described in paragraph (c)(1) of the proposed 
regulation, provides that, for the automatic rollover of mandatory 
distributions, the present value of the nonforfeitable accrued benefit, 
as determined under section 411(a)(11) of the Code, does not exceed the 
maximum amount permitted under section 401(a)(31)(B) of the Code. This 
condition was discussed in ``Scope'', above.
    The second condition, described in paragraph (c)(2) of the proposed 
regulation, provides that the mandatory distribution be directed to an 
individual retirement plan within the meaning of section 7701(a)(37) of 
the Code. Section 7701(a)(37) defines the term individual retirement 
plan to mean an individual retirement account described in section 
408(a) of the Code and an individual retirement annuity described in 
section 408(b) of the Code. Accordingly, a bank, insurance company, 
financial institution or other provider of an individual retirement 
plan under the safe harbor is required to satisfy the requirements of 
the Code and regulations issued thereunder.\10\ This approach is 
consistent with the majority of comments received in response to the 
RFI. These commenters argued that additional criteria are unnecessary 
and, if imposed, may only serve to limit the number of providers 
available or willing to establish and maintain the small rollover 
accounts covered by the safe harbor. Other commenters suggested that 
the fiduciaries should be required to consider an individual retirement 
plan provider's financial stability, taking into account such matters 
as credit ratings or insurance coverage. The Department is unaware of 
any problems attributable to weaknesses in the existing Code and 
regulatory standards for individual retirement plan providers. The 
Department, therefore, believes that, given the limited scope of the 
proposed safe harbor, existing Code and regulatory standards are 
sufficiently protective of separating participants and their 
beneficiaries who would become individual retirement plan account 
holders, without imposing unnecessary burdens on either plans or 
individual retirement plan providers.
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    \10\ For example, with respect to individual retirement 
accounts, 26 CFR 1.408-2(b)(2)(i) provides that the trustee of an 
individual retirement account must be a bank (as defined in section 
408(n) of the Code and regulations thereunder) or another person who 
demonstrates, in the manner described in paragraph (e) of the 
regulation, to the satisfaction of the Internal Revenue Service, 
that the manner in which the trust will be administered will be 
consistent with section 408 of the Code and regulations thereunder. 
With respect to individual retirement annuities, 26 CFR 1.408-3 
describes, among other things, requirements that must be met in 
order to maintain the tax-qualified status of such annuity 
arrangements.
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    The third condition, described in paragraph (c)(3) of the proposed 
regulation, defines the type of investment products in which a 
mandatory distribution can be invested under the safe harbor. 
Specifically, the proposal provides for the investment of mandatory 
distributions in investment products designed to preserve principal and 
provide a reasonable rate of return, whether or not such return is 
guaranteed, consistent with liquidity, and taking into account the 
extent to which charges can be assessed against an individual 
retirement plan. For this purpose, the product must be offered by

[[Page 9902]]

a state or federally regulated financial institution, and must seek to 
maintain a stable dollar value equal to the amount invested in the 
product by the individual retirement plan.
    For purposes of this condition, a ``regulated financial 
institution'' is defined in the proposal as 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 guarantee associations; or an investment company registered under 
the Investment Company Act of 1940.
    This condition reflects the Department's view that, given the 
nature and amount of the automatic rollovers, investments under the 
safe harbor should be designed to minimize risk, preserve assets for 
retirement and maintain liquidity. Such safe harbor investment products 
would typically include money market funds maintained by registered 
investment companies,\11\ and interest-bearing savings accounts and 
certificates of deposit of a bank or a similar financial institution. 
In addition, safe harbor investment products would include ``stable 
value products'' issued by a regulated financial institution that are 
fully benefit-responsive to the individual retirement plan account 
holder. Such products must 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.
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    \11\ Regarding money market mutual funds, prospectuses for such 
funds generally state that ``an investment in the [money market 
mutual] Fund is not insured or guaranteed by the Federal Deposit 
Insurance Corporation or any other government agency. Although the 
Fund seeks to preserve the value of your [the investor's] investment 
at $1.00 per share, it is possible to lose money by investing in the 
Fund.''
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    The majority of the commenters on the RFI supported inclusion in 
the safe harbor of an investment product that favored retention of 
principal and income over growth. A number of commenters suggested 
that, in addition to such products, the safe harbor should include 
investment products identical or similar to those in which the 
participant had directed his or her investments prior to the mandatory 
distribution. Some argued that retaining such investments outside the 
plan might, in fact, result in some cost savings (e.g., lower 
administrative expenses, avoiding termination charges, etc.). Some 
commenters also argued for inclusion of participant investments in 
qualifying employer securities as a safe harbor investment option. The 
Department does not believe that an investment strategy adopted by a 
participant while in a defined contribution plan or chosen by a plan 
fiduciary at a particular point in time would necessarily continue to 
be appropriate for the participant in the context of an automatic 
rollover, particularly given the relatively small account balances 
covered by the safe harbor. For this reason, the Department did not 
adopt these suggestions.
    The fourth condition addresses the extent to which fees and 
expenses can be assessed against an individual retirement plan, 
including the investments of such plan. Most of the commenters on the 
RFI argued that the safe harbor should permit fees and expenses 
attendant to the establishment and maintenance of an individual 
retirement plan to be charged against the assets in the individual 
retirement plan and the safe harbor should not impose limits on such 
fees and expenses, noting that competition in the marketplace will 
serve to control costs. These commenters also noted that the costs 
attendant to maintaining individual retirement plans to handle 
mandatory distributions will be higher than for other types of 
accounts, because the amounts contributed are small, future 
contributions are unlikely, and the account holders generally will be 
passive or not in contact with the individual retirement plan 
providers.
    There is nothing in the safe harbor that would preclude 
establishment, maintenance and other fees and expenses from being 
charged against the individual retirement plan of an account holder. On 
the other hand, the safe harbor does establish limits on the amount of 
such fees and expenses that can be charged against an individual 
retirement plan. While the Department agrees that competition in the 
marketplace may serve to keep administrative and investment management 
costs down, the Department nonetheless believes that, given the 
importance of cost considerations in connection with the selection of 
service providers by plan fiduciaries generally and the importance of 
protecting principal in connection with automatic rollover 
distributions, the safe harbor should contain some limits on the fees 
and expenses that may be assessed against an individual retirement plan 
established for mandatory distributions. In this regard, the Department 
attempted to strike a balance in the proposal between the application 
of a marketplace principle and the investment goal of preserving 
principal.
    Under paragraph (c)(4) of the proposed regulation, fees and 
expenses attendant to an individual retirement plan, including 
investments of such plan, (e.g., establishment charges, maintenance 
fees, investment expenses, termination costs and surrender charges) may 
not exceed certain limits. The first limit, provided in paragraph 
(c)(4)(i), is intended to ensure that fees and expenses charged to 
individual retirement plans established in connection with a mandatory 
distribution are not inconsistent with the marketplace. This limit 
provides that the fees and expenses charged to such plans may not 
exceed the fees and expenses charged by the provider for comparable 
individual retirement plans established for rollover distributions that 
are not subject to the automatic rollover provisions of section 
401(a)(31)(B) of the Code.
    The second limit, provided in paragraph (c)(4)(ii), is intended to 
protect the investment principal by providing that fees and expenses 
attendant to the individual retirement plan may be charged only against 
the income earned by the plan, with the exception of charges assessed 
for the establishment of the plan. The Department understands that in 
some instances providers will charge a one-time, typically small, fee 
to set up an individual retirement plan. While providers are not 
required to limit establishment charges to the income earned by 
individual retirement plans, these charges, nonetheless, may not exceed 
establishment charges assessed against comparable individual retirement 
plans established for rollover distributions that are not subject to 
the automatic rollover provisions of section 401(a)(31)(B) of the Code. 
If a provider, therefore, imposes no establishment or set-up charge on 
its comparable individual retirement plan customers, it may not impose 
a charge on plans established for rollover distributions under section 
401(a)(31)(B) of the Code.
    The fifth condition is intended to ensure that participants and 
beneficiaries are informed of the plan's procedures governing automatic 
rollovers, including an explanation about the nature of the investment 
product in which the mandatory distribution will be invested, and how

[[Page 9903]]

fees and expenses attendant to the individual retirement plan will be 
allocated (i.e., the extent to which expenses will be borne by the 
account holder alone or shared with the distributing plan or plan 
sponsor). In addition, the disclosure must identify a plan contact for 
further information concerning the plan's procedures, individual 
retirement plan providers, and the fees and expenses attendant to the 
individual retirement plan. In this regard, paragraph (c)(5) of the 
proposed regulation conditions safe harbor relief on the furnishing of 
this information to the plan's participants and beneficiaries in a 
summary plan description (SPD) or a summary of material modifications 
(SMM) in advance of an automatic rollover. For purposes of this 
condition, a plan contact can be identified by reference to a person, 
position or office, along with an address and phone number of the 
contact. It is anticipated that the contact, in response to requests 
from separated participants on whose behalf distributions have been 
made to an individual retirement plan, would be able to identify the 
individual retirement plan provider to whom a distribution was made for 
the particular participant.
    One commenter on the RFI argued against the establishment of any 
new disclosure requirements under the safe harbor, given the 
requirements that already exist under the Code. Another commenter 
argued that the safe harbor should require individual notices to each 
separated participant on whose behalf an individual retirement plan is 
established informing him or her of the provider's name, address and 
phone number, and any other information needed by the account holder to 
take action with regard to the distributed funds.
    This condition is consistent with the Department's statement in a 
footnote to Revenue Ruling 2000-36 requiring that plan provisions 
governing the default direct rollover of distributions, including the 
participant's ability to affirmatively opt out of the arrangement, must 
be described in the plan's SPD furnished to participants.\12\ We 
believe this approach to disclosure similarly serves to ensure that 
participants and beneficiaries are provided, and have access to, 
sufficient information about automatic rollovers, while avoiding the 
imposition of unnecessary costs and burdens on pension plans and 
individual retirement plan providers.
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    \12\ Revenue Ruling 2000-36, 2000-2 C.B. 140.
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    Paragraph (c)(6) of the proposed regulation conditions safe harbor 
relief on the plan fiduciary not engaging in prohibited transactions in 
connection with the selection of an individual retirement plan provider 
or investment product, unless such actions are covered by a statutory 
or administrative exemption issued under section 408(a) of ERISA. In 
this regard, the Department is publishing a proposed class exemption in 
today's Federal Register that is intended to deal with prohibited 
transactions resulting from an individual retirement plan provider's 
selection of itself as the provider of an individual retirement plan 
and/or issuer of an investment held by such plan in connection with 
mandatory distributions from the provider's own pension plan. 
Specifically, the proposed exemption is intended to permit a bank or 
other regulated financial institution as defined therein to (1) select 
itself or an affiliate as the individual retirement plan trustee, 
custodian or issuer to receive automatic rollovers from its own plan 
and (2) select its own funds or investment products for automatic 
rollovers from its own plan. In the absence of this exemption, a bank 
or other financial institution would be required to direct automatic 
rollovers from its own plan for its own employees to a competitor as 
the individual retirement plan provider.

C. Miscellaneous Issues

    In response to the Department's RFI, a number of commenters 
identified possible legal impediments that fiduciaries, banks and other 
financial institutions might encounter in connection with automatic 
rollovers. These impediments included perceived conflicts with state 
laws on signature requirements and escheat, Code requirements, and 
requirements under the USA PATRIOT Act.\13\
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    \13\ Pub. L. No. 107-56, October 26, 2001, 115 Stat. 272.
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    With regard to Code requirements that may possibly conflict with or 
impede the establishment of individual retirement plans for purposes of 
automatic rollovers of mandatory distributions under section 
401(a)(31)(B) of the Code, the Department has been informed that staff 
of the Department of the Treasury and the Internal Revenue Service are 
reviewing the current rules and regulations affecting such 
distributions and that guidance addressing the application of these 
rules to the automatic rollover of mandatory distributions is 
anticipated in advance of or simultaneously with the Department's 
issuance of a final safe harbor regulation.
    With regard to the provisions of the USA PATRIOT Act (Act), a 
number of commenters pointed out that the customer identification and 
verification provisions of the Act may preclude banks and other 
financial institutions from establishing individual retirement plans 
without the participation of the participant or beneficiary on whose 
behalf the fiduciary is required to make an automatic rollover. In most 
of the situations where a fiduciary is required to make an automatic 
rollover to an individual retirement plan, the participant or 
beneficiary is unable to be located or is otherwise not communicating 
with the plan concerning the distribution of plan benefits. 
Accordingly, if the customer identification and verification provisions 
of the Act were construed to require participant or beneficiary 
participation when an individual retirement plan is established on his 
or her behalf, fiduciaries will be unable to comply with the automatic 
rollover requirements of the Code and utilize this safe harbor. 
Commenters also noted that such an interpretation of the Act would 
limit the ability of fiduciaries to make distributions from terminating 
defined contribution plans on behalf of missing plan participants and 
beneficiaries.
    In response to these issues, Treasury staff, along with staff of 
the other Federal functional regulators,\14\ have advised the 
Department that they interpret the customer identification and 
verification (CIP) requirements of section 326 of the Act and 
implementing regulations to require that banks and other financial 
institutions implement their CIP compliance program with respect to an 
account, including an individual retirement plan, established by an 
employee benefit plan in the name of a former participant (or 
beneficiary) of such plan, only at the time the former participant or 
beneficiary first contacts such institution to assert ownership or 
exercise control over the account. CIP compliance will not be required 
at the time an employee benefit plan establishes an account and 
transfers the funds to a bank or other financial institution for 
purposes of a distribution of benefits from the plan to a separated 
employee.\15\ In January 2004, Treasury staff, along with staff of the 
other Federal functional regulators, issued guidance on this matter in 
the form of

[[Page 9904]]

a question and answer, published in a set of ``FAQs: Final CIP Rule,'' 
on the regulators'' Web sites.\16\
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    \14\ The term ``other Federal functional regulators'' refers to 
the other agencies responsible for administration and regulations 
under the Act.
    \15\ It is the Department's understanding that this 
interpretation applies to a broad spectrum of employee benefit plans 
including those covered by title I of ERISA and those established 
under Code provisions.
    \16\ See FAQs: Final CIP Rule at: http://www.occ.treas.gov/10.pdf http://www.fincen.gov/finalciprule.pdf http://

www.ots.treas.gov/docs/25188.pdf http://www.fdic.gov/news/news/financial/2004/FIL0404a.html_____________________________________-



    Issues raised by commenters concerning the possible application of 
state laws are beyond the scope of this regulation.

D. Effective Date

    As discussed above, section 657(c)(2)(A) of EGTRRA provides that 
the requirements of section 401(a)(31)(B) of the Code requiring 
automatic rollovers of mandatory distributions to individual retirement 
plans do not become effective until the Department issues final safe 
harbor regulations. Inasmuch as it appears clear that Congress did not 
intend fiduciaries to be subject to the automatic rollover requirements 
under the Code in the absence of a safe harbor, the Department believes 
the effective date of the rollover requirement must be determined by 
reference to the effective date of the final safe harbor regulation, 
that is the date on which plan fiduciaries may avail themselves of the 
relief provided by the safe harbor. In this regard, the Department is 
proposing to make the final safe harbor regulation effective 6 months 
after the date of publication in the Federal Register in order to 
afford plan fiduciaries adequate time to amend their plans, distribute 
required disclosures and identify institutions and products that would 
afford relief under the final safe harbor regulation.

E. Request for Comments

    The Department invites comments from interested persons on all 
aspects of the proposed safe harbor provided herein, including the 
proposed effective date. Comments (preferably at least three copies) 
should be addressed to the Office of Regulations and Interpretations, 
Employee Benefits Security Administration, Room N-5669, U.S. Department 
of Labor, 200 Constitution Avenue NW., Washington, DC 20210. Attn: 
Automatic Rollover Regulation. Comments also may be submitted 
electronically to e-ori@dol.gov. All comments received will be 
available for public inspection at the Public Disclosure Room, N-1513, 
Employee Benefits Security Administration, 200 Constitution Avenue NW., 
Washington, DC 20210.
    The Department has limited the comment period to 30 days in order 
to issue a final regulation on the earliest possible date, taking into 
account Congress's expectation that regulations would be issued in June 
2004. The Department believes that, in light of the earlier published 
request for information and the limited number of issues presented for 
consideration by the proposal, the provided 30-day comment period 
affords interested persons an adequate amount of time to analyze the 
proposal and submit comments thereon.

F. Regulatory Impact Analysis

Summary

    The purpose of this proposed regulation is to establish conditions 
under which a fiduciary will be deemed to satisfy the fiduciary 
obligations under section 404(a) of ERISA in connection with the 
automatic rollover of a mandatory distribution as described in amended 
Code section 401(a)(31)(B). The EGTRRA amendment is estimated to have 
significant costs and benefits in that it annually will provide 241,000 
former participants with preserved retirement savings of about $249 
million and immediate tax savings of about $71 million. Included in 
those 241,000 participants are 98,000 who are assumed to be passive or 
non-responsive. Establishing individual retirement plans for these 
participants for automatic rollovers of mandatory distributions will 
reduce ordinary plan administrative expenses attributable to those 
participants by an estimated $9.5 million in the first year.
    The amendment will generate one-time administrative compliance 
costs of an estimated $139 million, and individual retirement plan 
establishment and maintenance fees totaling $14.4 million in the first 
year. Automatic rollovers of mandatory distributions may give rise to 
other costs as well, such as investment expenses, termination charges, 
and surrender charges, but the magnitude of some of those expenses will 
relate to the actual investment products selected. The range of 
possible costs that relate to investment products is considered too 
broad to support meaningful estimates.
    The savings that will arise from this safe harbor are expected to 
substantially outweigh its costs and transfers. The guidance provided 
by this proposed regulation is expected to result in an aggregate 
savings of administrative compliance costs for plans of about $92 
million by lessening the time required to select an individual 
retirement plan provider, investment product, and fee structure that 
are consistent with the provisions of Code section 401(a)(31)(B) and 
ERISA section 404(a) with respect to automatic rollovers of mandatory 
distributions. Other benefits not quantified here are expected to 
accrue to fiduciaries through greater certainty and reduced exposure to 
risk, and to former plan participants through the proposed regulatory 
standards concerning individual retirement plan providers, investment 
products, preservation of principal, rates of return, liquidity, and 
fees and expenses.
    One-time costs associated with modifying a summary plan description 
or summary of material modifications to satisfy the safe harbor 
conditions are expected to amount to about $13 million.
    The proposed safe harbor will preserve the principal amounts of 
automatic rollovers of mandatory distributions by ensuring that the 
various fees and expenses that apply to the individual retirement plans 
established for mandatory distributions are not more costly than those 
charged by the provider to individual retirement plans for comparable 
rollover distributions that are not subject to the automatic rollover 
provisions of Code section 401(a)(31)(B). If adopted as proposed, this 
guidance may also result in a transfer of individual retirement plan 
costs to other individual retirement plans or to plan sponsors to the 
extent that earnings and available profit are less than the fees that 
the individual retirement plan provider would ordinarily charge for 
comparable individual retirement plans.
    Further discussion of costs and benefits and the data and 
assumptions underlying these estimates will be found below.

Executive Order 12866 Statement

    Under Executive Order 12866, the Department must determine whether 
a regulatory action is ``significant'' and therefore subject to the 
requirements of the Executive Order and subject to review by the Office 
of Management and Budget (OMB). Under section 3(f) of the Executive 
Order, a ``significant regulatory action'' is an action that is likely 
to result in a rule (1) having an annual effect of 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

[[Page 9905]]

thereof; or (4) raising novel legal or policy issues arising out of 
legal mandates, the President's priorities, or the principles set forth 
in the Executive Order. OMB has determined that this action is 
significant under section 3(f)(4) because it raises novel legal or 
policy issues arising from the President's priorities. Accordingly, the 
Department has undertaken an analysis of the costs and benefits of the 
proposed regulation. OMB has reviewed this regulatory action.
1. Costs and Benefits of the EGTRRA Amendment
    The impact of the amendment to Code section 401(a)(31) is 
distinguishable from the impact of the proposed regulation, and is 
expected to affect, in the aggregate, fiduciaries, plan participants, 
and certain regulated financial institutions. Fiduciaries will incur 
initial administrative expenses to select providers and investment 
products. Plan participants who may otherwise receive a cash 
distribution and pay ordinary income tax and penalties on the amount 
distributed will not pay those taxes because the amounts would have 
been retained in the pension system to earn additional tax-deferred 
income for retirement. As a result of the amendment, certain costs and 
fees will also be incurred by pension plans in connection with 
automatic rollovers and the investments for individual retirement 
plans. Finally, certain regulated financial institutions will receive 
additional deposits and earnings potential, and incur costs and charge 
fees for account maintenance.
    After the effective date of the amendment, plans that currently 
mandate immediate distributions for amounts of greater than $1,000 but 
not exceeding $5,000 will, absent an affirmative election of a 
different alternative, make direct transfers of these distributions to 
an individual retirement plan. To implement this change, fiduciaries 
and their professional service providers will need to review the new 
requirements and select individual retirement plan providers and 
investment products. The amount of time required for this activity will 
vary, but based on 680,000 retirement plans and an assumed hourly rate 
of $68, the aggregate cost of each hour is over $46 million. An effort 
involving an average of 3 hours would result in an aggregate one-time 
cost of about $139 million. For this estimate we have conservatively 
assumed that all plans provide for such mandatory distributions and 
will need to take action to implement procedures for automatic 
rollovers to individual retirement plans. The proportion of pension 
plans that provide for such mandatory distributions is not known, but 
is believed based on anecdotal evidence to be very high. This total 
cost may be lessened to the extent that fewer plans will need to 
address the automatic rollover requirement, or that the assistance of 
service providers to multiple plans results in greater efficiency.
    The Census Bureau's 1996 Survey of Program Participation (SIPP), 
Wave 7 Pension Benefits Module collected information as to the number, 
uses, and values of lump sum distributions from private pension plans 
in 1997. The survey responses show whether a distribution was mandatory 
or voluntary, and whether the amount involved was ``Rolled over into 
another plan, an IRA, or an individual retirement annuity'' (``rolled 
over''). The number of lump sum distributions between $1,001 and $5,000 
that were characterized as mandatory and put to other specific uses 
enumerated in the survey instrument (``lump sums'') has been used for 
the purpose of this analysis to approximate the number of participants 
in plans with mandatory distribution provisions that might fail to make 
an affirmative election. The number of automatic rollovers of mandatory 
distributions that will occur because of the Code amendment may be 
smaller than the number of lump sums because some of these participants 
may have made an affirmative election. It seems reasonable to assume 
that distributions rolled over would have involved an affirmative 
election, and that the number of participants making affirmative 
elections will be largely unchanged. The number of lump sums is assumed 
to represent an upper bound of the number of participants potentially 
affected by the automatic rollover provisions of Code section 
401(a)(31)(B).
    SIPP data show that in 1997 about 143,000 mandatory lump sum 
distributions of $1,001 to $5,000 were made. Using the midpoint of the 
reported groupings of distribution amounts (e.g., $1,500 for $1,001 to 
$1,999) the total amount of retirement savings distributed was about 
$415 million, or an average of $2,900 per former participant. The 
account balances and present values of accrued benefits (``accounts'') 
of an additional 98,000 participants were left in plans during the same 
year for reasons that are not known. Although there is some uncertainty 
with respect to this assumption, this number has been used here as a 
proxy for a number of participants that did not receive mandatory 
distributions because they were passive or non-responsive. Assuming 
that the accounts of these participants were comparable in size and 
would also be automatically rolled over after the amendment is 
effective, the aggregate amount of automatic rollovers of mandatory 
distributions to individual retirement plans for 241,000 participants 
would be about $699 million per year ($415 million plus $284 million). 
Only $415 million of this total represents retirement savings that 
would not otherwise have been preserved, given that the $284 million 
was already maintained in retirement plans.
    The amount of some mandatory distributions subject to the automatic 
rollover requirements of section 401(a)(31)(B) of the Code may be more 
than $5,000. This can occur where the present value of the 
nonforfeitable accrued benefits immediately distributable includes 
additional funds attributable to prior rollover contributions (and the 
earnings thereon).
    The Department did not attempt to estimate the number or dollar 
amount of mandatory distributions eligible for relief under the 
proposed safe harbor regulation that may exceed $5,000. Adequate data 
to support such estimates are not currently available.
    The Department believes it is probable that the number of mandatory 
distributions containing prior rollover contributions that will be 
subject to the automatic rollover requirement of section 401(a)(31)(B) 
of the Code will be small but the number of plans affected and the 
dollar amount of some of these mandatory distributions might be large.
    A large majority of 401(k) plan participants are in plans that 
accept rollover contributions, according to the Bureau of Labor 
Statistics. There is some evidence, however, that rollovers into 
qualified plans are infrequent, which suggests that the number of 
participants whose accounts include amounts attributable to prior 
rollover contributions may be small. The number of such participants 
that will eventually become the owners of an automatic rollover 
individual retirement plan will be further limited by a number of 
factors, on which no data are available. Some plans will not mandate 
distribution of accounts that include prior rollover contributions and 
therefore exceed $5,000. Some accounts of participants with prior 
rollover contributions will accumulate more than $5,000 of additional 
contributions, thereby becoming ineligible for mandatory distributions. 
Some participants whose accounts do not accumulate more than $5,000 
will

[[Page 9906]]

affirmatively direct, upon leaving employment, the disposition of their 
accounts. Compared with other participants, those with prior rollover 
contributions, especially those with large rollover contributions, may 
be more likely to accumulate more than $5,000 from new contributions 
and more likely to affirmatively direct the disposition of their 
accounts.
    The Department invites comments on the potential economic impact of 
the safe harbor established by this proposed regulation in connection 
with the mandatory distributions of accounts valued at more than 
$5,000.
    The Joint Committee on Taxation's May 26, 2001 estimates of budget 
effects for this provision of EGTRRA indicated revenue losses on the 
order of about $30 million per year, which suggests a substantially 
lower estimate of the aggregate preservation of retirement savings, 
amounting to about $83 million for private plan participants. The 
reason for this difference is unknown. Interpreting these differing 
estimates as ends of a range, ordinary income tax and penalty savings 
are expected to amount to between $30 million and $112 million per 
year, while aggregate retirement savings are expected to increase by 
between $83 million and $415 million per year. For purposes of 
discussion, midpoint values of $71 million and $249 million are used 
here. These savings for former participants and distributions of 
amounts previously retained in plans also represent increased deposits 
to regulated financial institutions.
    The establishment and maintenance of individual retirement plans 
for automatic rollovers of mandatory distributions will generate costs 
to individual retirement plans that may be defrayed by administrative 
fees to the extent that the individual retirement plan providers charge 
them. Certain investments may also generate fees. Some individual 
retirement plan providers may have termination fees, and some 
investments may have surrender charges associated with them that would 
be incurred at a later time when a former participant chose to exercise 
control over the account. With interpretive guidance, fiduciaries and 
the regulated financial institutions will have increased certainty 
regarding the limitations on costs, fees, and charges for individual 
retirement plans. In the absence of the proposed safe harbor and the 
fiduciary's desire to make use of the safe harbor, such costs and fees 
could be paid by plan sponsors or charged to individual retirement 
plans. However, it has been assumed here that in the absence of 
guidance, most fees would be charged against individual retirement 
plans. Aggregate annual establishment fees for rollovers arising from 
the amendment each year are estimated to range from a negligible amount 
to $2.4 million at the upper end of a range based on typical 
establishment fees for comparable individual retirement plan rollovers 
that range from no charge to $10 per account. Annual maintenance fees, 
which typically range from $7 to $50, with a mid-point of $29, are 
estimated to range from $1.7 million to $12 million, implying a mid-
point estimate of $6.9 million, for individual retirement plans 
established in the first year. Assuming that individual retirement 
plans continue to be established at a constant rate of 241,000 plans 
per year and that, at an upper bound, no account holders assume control 
of their plans, maintenance fees would continue to grow at an average 
rate of $6.9 million annually.
    As noted earlier, although establishment and maintenance fees are 
relatively predictable based on comparable individual retirement plans 
for rollover distributions available in the marketplace, the types of 
investment products available and the actual choices that may be made 
by fiduciaries are considered to be too variable to support a 
meaningful estimate of investment fees, termination charges, and 
surrender fees.
    Plans will benefit from administrative cost savings under the Code 
amendment for those 98,000 accounts that previously remained in pension 
plans but are assumed to be subject to mandatory rollover provisions 
under EGTRRA. Ordinary administrative costs that typically range from 
$45 to $150 per participant will be saved when accounts are rolled 
over, reducing plan expenses by about $4.4 million to $14.7 million, or 
an average of $9.5 million in the first year. Assuming an annual 
rollover of 98,000 accounts that would have remained in pensions plans, 
cost savings to plans would continue to increase at an average of $9.5 
million per year. The cost savings realized in each year will continue 
to accumulate through the future years that the accounts would 
otherwise have remained in the pension plan.
    For the estimated 8 percent of these accounts that were in defined 
benefit plans, a small savings of approximately $144,000 would be 
realized from reduced funding risk and corresponding premium payments 
to the Pension Benefit Guaranty Corporation (PBGC).
2. Benefits and Costs of the Proposed Regulation
    The proposed regulation will benefit fiduciaries by affording them 
greater assurance of compliance and reduced exposure to risk. 
Specificity as to the types of entities that may receive the rollovers, 
the investment choices, and the limitations on fees will lessen the 
time required to comply with the EGTRRA amendment. The substantive 
conditions of the safe harbor will benefit former participants by 
directing their retirement savings to individual retirement plans, 
providers, regulated financial institutions, and investment products 
that minimize risk and offer preservation of principal and liquidity. 
The limitation of fees and expenses will also benefit individual 
retirement plan account holders. Fees and expenses for the individual 
retirement plans will be limited under the safe harbor to those that 
would be charged by the provider to comparable individual retirement 
plans established for rollover distributions that are not subject to 
automatic rollover provisions of the Code, thereby preserving 
principal. The limitation of maintenance fees to the extent of income 
earned will also serve to maintain principal.
    The benefits of greater certainty for fiduciaries and protection of 
participants cannot be specifically quantified. The proposed regulation 
is, however, expected to reduce one-time startup administrative 
compliance costs by as much as $92 million by narrowing the range of 
individual retirement plan providers and investment products 
fiduciaries might otherwise consider, assuming a savings of 2 of the 3 
hours that compliance would otherwise require.
    No estimate is made for the impact of the limitation on fees 
charged to the subject individual retirement plans compared to those 
charged by individual retirement plan providers for comparable 
individual account plans established for rollover distributions that 
are not subject to section 401(a)(31)(B) of the Code because the 
Department is not aware of a basis for judging whether and in what 
magnitude providers would charge different fees absent the safe harbor.
    The proposal may affect the manner in which fees and expenses would 
otherwise have been allocated among plan sponsors and individual 
retirement plans. Under section 2550.404a-2(c)(4)(ii) of the proposed 
regulation, fees and expenses may be charged only against the income 
earned by the individual retirement plan. In some instances, 
particularly in the case of

[[Page 9907]]

smaller individual retirement plans and when interest rates are low, 
the credited interest, together with any profit the individual 
retirement plan provider might otherwise derive from holding the plan, 
may not cover the cost incurred by the provider to maintain the plan. 
The Department believes that in these circumstances individual 
retirement plan providers will offset or subsidize any such uncovered 
costs either through increased maintenance fees on larger automatic 
rollovers, through increased administrative charges to plan sponsors, 
or possibly both. Because such uncovered costs (if any) derive from a 
provision of this proposed regulation, any associated offsets or 
subsidies would be attributable to it as well. The Department would 
welcome comments on the probable incidence and magnitude of any such 
uncovered costs and associated offsets or subsidies.
    Plans will incur costs in connection with the proposed safe harbor 
to modify summary plan descriptions or provide a summary of material 
modifications. This cost is estimated to be about $13 million.
3. Alternatives
    In preparation for drafting the proposed regulation, the Department 
published an RFI (68 FR 991) requesting comment on issues relating to 
the development of safe harbors for automatic rollovers and assistance 
in drafting regulations. The Department received 17 comments from the 
general public, service providers, and professional associations 
involved with pension planning, investing, and retirement accounts. 
Commenters opined on potential costs, issues of fiduciary liability and 
prohibited transaction relief, technical considerations involving state 
and federal laws, disclosures to participants, and draft language for 
the proposed regulation. Responses to the RFI informed the drafting 
process by permitting the Department to consider alternatives for 
achieving the regulatory objective at the initial stages. A more 
detailed discussion of the comments and the considerations given the 
alternatives by the Department is provided earlier in the preamble.

Paperwork Reduction Act

    This Notice of Proposed Rulemaking is not subject to the 
requirements of the Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et 
seq.) because it does not contain a ``collection of information'' as 
defined in 44 U.S.C. 3502(3). It is expected that this proposed rule 
will result in a modification of retirement plan Summary Plan 
Descriptions, an information collection request approved separately 
under OMB control number 1210-0039. However, this modification is not 
considered to be substantive or material in the context of that 
information collection request as a whole. In addition, the methodology 
for calculating burden under the Paperwork Reduction Act for the 
Summary Plan Description takes into account a steady rate of change in 
Summary Plan Descriptions that is estimated to accommodate the change 
that would be made by this proposed rulemaking. As a result, the 
Department has not made a submission for OMB approval in connection 
with this rulemaking.

Regulatory Flexibility Act

    The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) (RFA) imposes 
certain requirements with respect to Federal rules that are subject to 
the notice and comment requirements of section 553(b) of the 
Administrative Procedure Act (5 U.S.C. 551 et seq.) and which are 
likely to have a significant economic impact on a substantial number of 
small entities. Unless an agency determines that a proposed rule is not 
likely to have a significant economic impact on a substantial number of 
small entities, section 603 of the RFA requires that the agency present 
an initial regulatory flexibility analysis at the time of the 
publication of the notice of proposed rulemaking describing the impact 
of the rule on small entities and seeking public comment on such 
impact. Small entities include small businesses, organizations and 
governmental jurisdictions.
    For purposes of analysis under the RFA, the Employee Benefits 
Security Administration (EBSA) proposes to continue to consider a small 
entity to be an employee benefit plan with fewer than 100 participants. 
The basis of this definition is found in section 104(a)(2) of ERISA, 
which permits the Secretary of Labor to prescribe simplified annual 
reports for pension plans which cover fewer than 100 participants. 
Under section 104(a)(3), the Secretary may also provide for exemptions 
or simplified annual reporting and disclosure for welfare benefit 
plans. Pursuant to the authority of section 104(a)(3), the Department 
has previously issued at 29 CFR 2520.104-20, 2520.104-21, 2520.104-41, 
2520.104-46 and 2520.104b-10 certain simplified reporting provisions 
and limited exemptions from reporting and disclosure requirements for 
small plans, including unfunded or insured welfare plans covering fewer 
than 100 participants and which satisfy certain other requirements.
    Further, while some large employers may have small plans, in 
general small employers maintain most small plans. Thus, EBSA believes 
that assessing the impact of this proposed rule on small plans is an 
appropriate substitute for evaluating the effect on small entities. The 
definition of small entity considered appropriate for this purpose 
differs, however, from a definition of small business which is based on 
size standards promulgated by the Small Business Administration (SBA) 
(13 CFR 121.201) pursuant to the Small Business Act (15 U.S.C. 631 et 
seq.). EBSA therefore requests comments on the appropriateness of the 
size standard used in evaluating the impact of this proposed rule on 
small entities. The Department does not expect that the financial 
institutions potentially impacted by this proposal will be small 
entities.
    EBSA has preliminarily determined that this rule will not have a 
significant economic impact on a substantial number of small entities. 
In support of this determination, and in an effort to provide a sound 
basis for this conclusion, EBSA has prepared the following initial 
regulatory flexibility analysis.
    Section 657(c)(2)(A) of EGTRRA directed the Department to issue 
regulations providing safe harbors under which a plan administrator's 
designation of an institution to receive automatic rollovers of 
mandatory distributions pursuant to section 401(a)(31)(B) of the Code 
and the initial investment choice for the rolled-over funds would be 
deemed to satisfy the fiduciary responsibility provisions of section 
404(a) of ERISA. This EGTRRA provision further provided that the Code 
provisions requiring automatic rollovers of certain mandatory 
distributions to individual retirement plans would not become effective 
until the Department issued safe harbor regulations. Before issuing 
this proposal, the Department requested comments on the potential 
design of the safe harbor.
    The conditions set forth in this proposed regulation are intended 
to satisfy the EGTRRA requirement that the Department prescribe 
regulations providing for safe harbors, while meeting the objectives of 
offering greater certainty to fiduciaries concerning their compliance 
with the requirements of ERISA section 404(a), and of preserving assets 
of former plan participants for retirement income purposes. In 
describing the financial institutions, investment products, and fee 
arrangements that fall within the safe harbor, the Department has 
attempted to strike a balance between the interests of

[[Page 9908]]

fiduciaries, individual retirement plan providers, and the investment 
goal of preserving principal.
    The proposed rule would impact small plans that include provisions 
for the mandatory distribution of accounts with a value exceeding 
$1,000 and not greater than $5,000. It has been assumed for the 
purposes of this analysis that all plans include such provisions, 
although the number may actually be somewhat lower. On this basis, it 
is expected that the proposal will affect 611,800 small plans. The 
proportion of the total of 241,000 participants estimated to be 
affected annually by the amendment to Code section 401(a)(31)(B) that 
were in small plans is not known. Similarly, there are no available 
data on the number of participants that will separate from employment 
with account balances of more than $5,000 (because of prior rollover 
contributions) that may be, depending on the provisions of the 
distributing plans, automatically rolled over under EGTRRA. It is 
assumed that all 611,800 small plans will need to address compliance 
with the Code amendment and section 404(a) of ERISA.
    As described above, the costs and benefits of the Code amendment 
and safe harbor proposal are distinguishable, and estimated separately. 
As also noted, the proposed regulation is expected to substantially 
reduce the cost of compliance with the Code amendment. The initial cost 
of the Code amendment for small plans is expected to be about $124 
million. The one-time savings from the proposed regulation is estimated 
at about $83 million for small plans compared with $9 million for large 
plans, due to the significantly larger number of small plans. The 
condition of the safe harbor requiring disclosure of specific 
information in a summary plan description or summary of material 
modification is expected to result in costs of about $11 million. 
Preparation of this information is in most cases accomplished by 
professionals that provide services to employee benefit plans. Where 
fiduciaries prepare these materials themselves, it is assumed that 
persons at the professional level of budget analysts or financial 
managers will complete the necessary work.
    The benefits of greater certainty afforded fiduciaries by the safe 
harbor are substantial but cannot be specifically quantified.
    Prior to publication of this proposed regulation, the Department 
published an RFI requesting comments and suggestions from the general 
public on developing guidelines to assist fiduciaries in selecting 
institutions and investment products for individual retirement plans. 
The Department specifically requested in the RFI that commenters, 
``address the anticipated annual impact of any proposals on small 
businesses and small plans (plans with fewer than 100 participants).'' 
The Department received three comments that pertained specifically to 
small plans, the first of which cautioned that plan sponsors would be 
deterred from sponsoring plans with a mandatory distribution provision 
by placement of any additional burdens on them. Another comment 
indicated that, because of technological improvements, the burden on 
small plans would be manageable. Finally, a third commenter noted that 
annual costs would not be any higher for small plans.
    To the Department's knowledge, there are no federal regulations 
that might duplicate, overlap, or conflict with the proposed regulation 
for safe harbors under section 404(a) of ERISA.

Congressional Review Act

    The notice of proposed rulemaking being issued here is subject to 
the provisions of the Congressional Review Act provisions of the Small 
Business Regulatory Enforcement Fairness Act of 1996 (5 U.S.C. 801 et 
seq.) and, if finalized, will be transmitted to the Congress and the 
Comptroller General for review.

Unfunded Mandates Reform Act

    Pursuant to provisions of the Unfunded Mandates Reform Act of 1995 
(Pub. L. 104-4), this rule does not include any Federal mandate that 
may result in expenditures by State, local, or tribal governments, or 
the private sector, which may impose an annual burden of $100 or more.

Federalism Statement

    Executive Order 13132 (August 4, 1999) outlines fundamental 
principles of federalism and requires the adherence to specific 
criteria by federal agencies in the process of their formulation and 
implementation of policies that have substantial direct effects on the 
States, the relationship between the national government and the 
States, or on the distribution of power and responsibilities among the 
various levels of government. This proposed rule would not have 
federalism implications because it has no substantial direct effect on 
the States, on the relationship between the national government and the 
States, or on the distribution of power and responsibilities among the 
various levels of government. Section 514 of ERISA provides, with 
certain exceptions specifically enumerated, that the provisions of 
Titles I and IV of ERISA supersede any and all laws of the States as 
they relate to any employee benefit plan covered under ERISA. The 
requirements implemented in this proposed rule do not alter the 
fundamental provisions of the statute with respect to employee benefit 
plans, and as such would have no implications for the States or the 
relationship or distribution of power between the national government 
and the States.

List of Subjects in 29 CFR Part 2550

    Employee benefit plans, Exemptions, Fiduciaries, Investments, 
Pensions, Prohibited transactions, Real estate, Securities, Surety 
bonds, Trusts and trustees.

    For the reasons set forth in the preamble, the Department proposes 
to amend Subchapter F, Part 2550 of Title 29 of the Code of Federal 
Regulations as follows:

SUBCHAPTER F--FIDUCIARY RESPONSIBILITY UNDER THE EMPLOYEE RETIREMENT 
INCOME SECURITY ACT OF 1974

PART 2550--RULES AND REGULATIONS FOR FIDUCIARY RESPONSIBILITY

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

    Authority: 29 U.S.C. 1135; sec. 657, Pub. L. 107-16, 115 Stat. 
38; and Secretary of Labor's Order No. 1-2003, 68 FR 5374 (Feb. 3, 
2003). Sec. 2550.401b-1 also issued under sec. 102, Reorganization 
Plan No. 4 of 1978, 43 FR 47713 (Oct. 17, 1978), 3 CFR, 1978 Comp. 
332, effective Dec. 31, 1978, 44 FR 1065 (Jan. 3, 1978), 3 CFR, 1978 
Comp. 332. Sec. 2550.401c-1 also issued under 29 U.S.C. 1101. Sec. 
2550.404c-1 also issued under 29 U.S.C. 1104. Sec. 2550.407c-3 also 
issued under 29 U.S.C. 1107. Sec. 2550.408b-1 also issued under 29 
U.S.C. 1108(b)(1) and sec. 102, Reorganization Plan No. 4 of 1978, 3 
CFR, 1978 Comp. p. 332, effective Dec. 31, 1978, 44 FR 1065 (Jan. 3, 
1978), and 3 CFR, 1978 Comp. 332. Sec. 2550.412-1 also issued under 
29 U.S.C. 1112.

    2. Add Sec.  2550.404a-2 to read as follows:


Sec.  2550.404a-2  Safe harbor for automatic rollovers to individual 
retirement plans.

    (a) In general. (1) Pursuant to section 657(c) of the Economic 
Growth and Tax Relief Reconciliation Act of 2001, Public Law 107-16, 
June 7, 2001, 115 Stat. 38, this section provides a safe harbor under 
which a fiduciary of an employee pension benefit plan subject to Title 
I of the Employee Retirement Income Security Act of 1974, as amended 
(the Act), 29 U.S.C. 1001 et seq., will be deemed to have satisfied his 
or her fiduciary duties under section 404(a) of

[[Page 9909]]

the Act in connection with an automatic rollover of a mandatory 
distribution described in section 401(a)(31)(B) of the Internal Revenue 
Code of 1986, as amended (the Code).
    (2) The standards set forth in this section apply solely for 
purposes of determining whether a fiduciary meets the requirements of 
this safe harbor. Such standards are not intended to be the exclusive 
means by which a fiduciary might satisfy his or her responsibilities 
under the Act with respect to automatic rollovers of mandatory 
distributions described in section 401(a)(31)(B) of the Code.
    (b) Safe harbor. A fiduciary that meets the conditions of paragraph 
(c) of this section is deemed to have satisfied his or her duties under 
section 404(a) of the Act with respect to both the selection of an 
individual retirement plan provider and the investment of funds in 
connection with an automatic rollover of a mandatory distribution 
described in section 401(a)(31)(B) of the Code to an individual 
retirement plan, within the meaning of section 7701(a)(37) of the Code.
    (c) Conditions. With respect to an automatic rollover of a 
mandatory distribution described in section 401(a)(31)(B) of the Code, 
a fiduciary shall qualify for the safe harbor described in paragraph 
(b) of this section if:
    (1) The present value of the nonforfeitable accrued benefit, as 
determined under section 411(a)(11) of the Code, does not exceed the 
maximum amount under section 401(a)(31)(B) of the Code;
    (2) The mandatory distribution is to an individual retirement plan 
within the meaning of section 7701(a)(37) of the Code;
    (3)(i) The mandatory distribution is invested in an investment 
product designed to preserve principal and provide a reasonable rate of 
return, whether or not such return is guaranteed, consistent with 
liquidity, and taking into account paragraph (c)(4) of this section. 
For this purpose, the product must be offered by a state or federally 
regulated financial institution, as defined in paragraph (c)(3)(ii) of 
this section, and must seek to maintain a stable dollar value equal to 
the amount invested in the product by the individual retirement plan, 
and
    (ii) For purposes of this section, a regulated financial 
institution shall be: a bank or savings association, the deposits of 
which are insured by the Federal Deposit Insurance Corporation; a 
credit union, the member accounts of which are insured within the 
meaning of section 101(7) of the Federal Credit Union Act; an insurance 
company, the products of which are protected by state guarantee 
associations; or an investment company registered under the Investment 
Company Act of 1940;
    (4)(i) Fees and expenses attendant to the individual retirement 
plan, including investments of such plan, (e.g., establishment charges, 
maintenance fees, investment expenses, termination costs and surrender 
charges) shall not exceed the fees and expenses charged by the 
individual retirement plan provider for comparable individual 
retirement plans established for rollover distributions that are not 
subject to the automatic rollover provisions of section 401(a)(31)(B) 
of the Code, and
    (ii) Fees and expenses attendant to the individual retirement plan 
may be charged only against the income earned by the individual 
retirement plan, with the exception of charges assessed for the 
establishment of the individual retirement plan;
    (5) Participants have been furnished a summary plan description, or 
a summary of material modifications, that describes the plan's 
automatic rollover provisions effectuating the requirements of section 
401(a)(31)(B) of the Code, including an explanation that the mandatory 
distribution will be invested in an investment product designed to 
preserve principal and provide a reasonable rate of return and 
liquidity, a statement indicating how fees and expenses attendant to 
the individual retirement plan will be allocated, and the name, address 
and phone number of a plan contact (to the extent not otherwise 
provided in the summary plan description or summary of material 
modifications) for further information concerning the plan's automatic 
rollover provisions, the individual retirement plan provider and the 
fees and expenses attendant to the individual retirement plan; and
    (6) Both the fiduciary's selection of an individual retirement plan 
and the investment of funds would not result in a prohibited 
transaction under section 406 of the Act, unless such actions are 
exempted from the prohibited transaction provisions by a prohibited 
transaction exemption issued pursuant to section 408(a) of the Act.

    Signed at Washington, DC, this 24th day of February, 2004.
Ann L. Combs,
Assistant Secretary, Employee Benefits Security Administration, 
Department of Labor.
[FR Doc. 04-4551 Filed 3-1-04; 8:45 am]

BILLING CODE 4150-29-P