• DOL Issues Proposed Regulations Regarding Fiduciary Responsibilities in Connection with Automatic Rollover Safe Harbor
  • March 22, 2004
  • Law Firm: Winston & Strawn LLP - Chicago Office
  • As part of the Economic Growth and Tax Relief Reconciliation Act of 2001 ("EGTRRA"), the Internal Revenue Code ("Code") was amended to provide for the automatic rollover of certain mandatory distributions (commonly referred to as "cashouts") from tax qualified plans. Under this new provision a plan administrator is required to automatically rollover a cashout to an individual retirement plan if (i) the actuarial present value of a participant's accrued benefit in a defined benefit plan or his or her account balance in a defined contribution plan is between $1,000 and $5,000, (ii) the plan provides for mandatory cashouts of benefits of $5,000 or less , (iii) the participant does not elect to have such distribution paid directly to an eligible retirement plan, such as an individual retirement account or individual retirement annuity or tax qualified plan and (iv) the participant does not elect to receive the distribution directly. EGTRRA also directed the Department of Labor to issue regulations providing a safe harbor under which a 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 ERISA Section 404(a). Last January, the DOL requested information on a variety of issues relating to the development of this safe harbor, and recently published proposed regulations on this subject.

    The proposed regulations, which would become effective six months after they are published in final form in the Federal Register, apply solely for purposes of determining whether a fiduciary satisfies the requirements for a safe harbor. They are not intended to be the exclusive means by which a fiduciary might satisfy his or her responsibility with respect to automatic rollover of mandatory distributions.

    With respect to the scope of these regulations, they apply to any mandatory distribution from a tax-qualified plan. For these purposes, a plan is permitted to disregard rollover contributions from another plan, so that if for example, a participant had a vested account balance of $4,000, without regard to a $40,000 rollover distribution, and the Plan provided for disregarding rollover distributions in determining mandatory distributions, these purposed DOL regulations would apply.

    Five other conditions must be satisfied to enable a fiduciary to take advantage of the safe harbor. First, the mandatory distribution must be made to an individual retirement account or individual retirement annuity. Second, the mandatory distribution must be invested 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 the individual retirement plan. For this purpose, the product must be offered by a state or federally regulated financial institution such as a bank or insurance company, and must seek to maintain a stable dollar value equal to the amount invested in the product by the individual retirement plan. Such investments would typically include money market funds, interest bearing savings accounts or bank certificates of deposit. Third, the proposed regulation, which clarifies that there is nothing in the safe harbor to prevent the charging of fees and other expenses in connection with the establishment and maintenance of these rollover accounts, also sets certain limits on these fees. First, the fees and expenses charged to such plans may not exceed the fees and expenses charged by the provider or comparable individual retirement plans established for rollover distributions that are not subject to the Code's automatic rollover rule. Second, with the exception of charges assessed for the establishment of the plan, fees and expenses may only be assessed against plan income. Fourth, participants must be furnished either a summary plan description, or summary of material modifications, that describe the Plan's automatic rollover provisions, and include a plan contact person. Fifth, both the fiduciary's selection of the individual retirement plan and the investment of funds would not result in a prohibited transaction, unless there is a statutory and administrative exemption.

    With respect to this last condition, the DOL published a proposed class exemption 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 in such plan in connection with a mandatory distribution from the provider's own pension plan. The purpose of this proposed exemption is to permit regulated financial institutions such as banks or insurance companies to select themselves or their affiliates to receive automatic rollovers from their own plans, and select their own funds or investment products for automatic rollovers from their own plans.

    In accordance with EGTRRA, the DOL gave consideration to providing special relief with respect to the use of low cost individual retirement plans for purposes of the automatic rollovers, but concluded that the structure of the proposed regulations was sufficient for that purpose. The DOL did, however, request further comments upon whether further relief should be provided.

    After these automatic rollover safe harbor regulations are finalized, plan fiduciaries will be required, in order to implement them, to amend their plans, distribute required disclosures, and identify appropriate institutions and investment products.