[18052]
September 29, 2004
TO: PENSION MEMBERS No. 49-04
PENSION OPERATIONS ADVISORY COMMITTEE No. 64-04
TRANSFER AGENT ADVISORY COMMITTEE No. 74-04
RE: DOL ISSUES FINAL REGULATIONS ON AUTOMATIC IRA ROLLOVERS
The Department of Labor issued final safe harbor regulations and a prohibited
transaction exemption implementing the automatic IRA rollover provisions of the Economic
Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA).1 We are pleased to inform you
that, as the Institute suggested,2 the Department has eliminated the requirement (contained in
the proposed regulations) that would have restricted fees and expenses chargeable to an
automatic rollover IRA to the income earned by the IRA. The Department also clarified the
effect of the statutory relief provided in ERISA section 404(c)(3) in a manner consistent with the
Institute’s recommendations.
Overview
Under section 657 of EGTRRA,3 qualified plans must establish a default mechanism
under which amounts subject to the provision are automatically rolled over to an IRA
designated by the plan administrator, unless the participant affirmatively elects otherwise. The
Department’s final regulations establish a safe harbor under which a fiduciary will be deemed
to have satisfied its fiduciary responsibilities in connection with automatic rollovers to IRAs,
provided that a number of conditions are satisfied. Notably, compliance with the safe harbor is
not intended to represent the exclusive means by which a fiduciary may satisfy its duties under
ERISA.
1 The final safe harbor regulations are available at: http://www.dol.gov/ebsa/regs/fedreg/final/2004021591.pdf.
The final prohibited transaction exemption is available at:
http://www.dol.gov/ebsa/regs/fedreg/notices/2004021592.pdf.
2 See Institute Memorandum (#17344) to Pension Members No. 24-04 and Pension Operations Advisory Committee
No. 29-04, dated April 2, 2004; see also Institute Memorandum (#15741) to Pension Members No. 12-03 and Pension
Operations Advisory Committee No. 15-03, dated March 12, 2003.
3 See Institute Memorandum (#13566) to Pension Members No. 21-01 and Pension Operations Advisory Committee
No. 35-01, dated May 31, 2001.
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Conditions Under The Safe Harbor
• Fees and Expenses. As noted above, the final regulations do not contain the rule in the
proposed regulations that would have limited the fees on an automatic rollover IRA to
the income earned by the IRA. Consistent with the Institute’s recommendation, the final
regulations retain a comparability standard as the only fee standard. Specifically, fees
and expenses attendant to an IRA, including its investments, may not exceed the fees
and expenses charged by the IRA provider for comparable IRAs established outside of
the automatic rollover process.
• Agreements With IRA Providers. The final regulations contain a new provision that
requires a written agreement between the plan fiduciary and the IRA provider. The
written agreement must address, among other things, the investment product into
which the rolled-over funds will be invested, the fees and expenses attendant to the IRA,
and the right of the participant to enforce the terms of the agreement against the IRA
provider. The Department states that a plan fiduciary may rely on the commitments of
the IRA provider set forth in the agreement and would not be required to monitor the
provider’s compliance with the terms of the agreement following a rollover into an IRA.
• Investment Products. As in the proposed regulations, the rolled-over funds must be
invested in a product designed to preserve principal and provide a reasonable rate of
return, whether or not such return is guaranteed, consistent with liquidity. For these
purposes, the investment product must seek to maintain, over the term of the
investment, the dollar value that is equal to the amount invested in the product by the
IRA. In addition, the investment product selected must be offered by a state or federally
regulated financial institution, which must be (1) an investment company registered
under the Investment Company Act of 1940, (2) a bank or savings association, (3) a
credit union, or (4) an insurance company.
• Rollover Amounts Less Than $1,000. Unlike the proposed regulations, the final rules
extend safe harbor relief to mandatory distributions of $1,000 or less. The final
regulations retain the requirement that the present value of the nonforfeitable accrued
benefits as determined under Code section 411(a)(11) may not exceed the maximum
amount under Code section 401(a)(31)(B).
• Definition of “Individual Retirement Plan.” As in the proposed regulations, the final
regulations require that mandatory distributions be directed to an “individual
retirement plan” within the meaning of Code section 7701(a)(37). This provision defines
the term to mean an individual retirement account under Code section 408(a) or an
individual retirement annuity under Code section 408(b). The Department also clarified
that the safe harbor does not limit the number of IRA providers that an employer may
designate as recipients of automatic rollovers.
• Notice to Participants. The final regulations, like the proposed rules, require
participants to be furnished with a summary plan description (SPD) or summary of
material modifications (SMM) that describes the plan’s automatic rollover provisions.
This description must include (1) an explanation that the mandatory distribution will be
invested in an investment product designed to preserve principal and provide a
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reasonable rate of return and liquidity, (2) a statement on how fees and expenses
attendant to the IRA will be allocated (i.e., the extent to which the plan or plan sponsor
will bear any costs relating to the IRA), (3) the name, address and phone number of a
plan contact, (4) the IRA provider, and (5) the fees and expenses attendant to the IRA.
ERISA Section 404(c)(3)
As suggested by the Institute, the Department addressed the relationship between the
statutory relief provided in ERISA section 404(c)(3) (as added by EGTRRA) and the
Department’s safe harbor relief provided under ERISA section 404(a). Specifically, the
Department confirmed that its safe harbor regulations constitute the guidance referred to in
ERISA section 404(c)(3).4 Moreover, the Department clarified that the plan fiduciary’s
responsibilities with respect to automatic rollovers ends when the rollover assets are placed
with the IRA provider pursuant to an agreement that satisfies the safe harbor’s conditions.
Beneficiary Designations
Consistent with the Institute’s recommendations, the Department clarified that a
beneficiary designation under the distributing plan would cease to control a distribution of the
rolled-over funds from an IRA upon the death of the IRA owner. In the Department’s view, the
rollover distribution of an entire plan benefit into an IRA ends the individual’s status as a plan
participant, and the distributed assets cease to be plan assets under Title I of ERISA. The
Department further clarified that nothing in its regulations precludes an IRA provider from
applying its own default beneficiary rules until the IRA owner makes an affirmative
designation under the terms of the IRA.
Anticipated Code Guidance
The preamble states that the Treasury Department and the IRS have informed the
Department that guidance under the Internal Revenue Code on the application of the automatic
rollover rules is anticipated prior to the effective date of the Department’s final regulations. The
Institute had requested guidance under the Code in response to the Department’s 2003 request
for information on automatic rollovers.5
Prohibited Transaction Class Exemption
In addition to the safe harbor regulations, the Department issued its final class
prohibited transaction exemption on the automatic rollover rules. The exemption permits a
plan fiduciary that is also an IRA provider to establish automatic rollover IRAs for its own
4 ERISA section 404(c)(3) provides plan fiduciaries with statutory relief under ERISA section 404(c) for automatic
rollovers “upon (A) the earlier of (i) a rollover of all or a portion of the amount to another individual retirement
account or annuity; or (ii) one year after the transfer is made; or (B) a transfer that is made in a manner consistent
with guidance provided by the Secretary.” The Department’s safe harbor regulations were issued under section
657(c)(2) of EGTRRA; that provision directed the Department to prescribe safe harbor guidance under which the
designation of institutions and investment of funds would be deemed to satisfy the fiduciary requirements of ERISA
section 404(a).
5 See Institute Memorandum (#15741) to Pension Members No. 12-03 and Pension Operations Advisory Committee
No. 15-03, dated March 12, 2003.
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employees. The conditions in the final class exemption largely reflect the conditions set forth in
the final safe harbor regulations. One significant difference, however, is that the class
exemption retains the rule that limits fees and expenses (other than establishment fees) to the
income earned by the IRA. The Department noted that the removal of this requirement would
increase the potential for self-dealing.
Effective Date
The final regulations apply to any rollover of a mandatory distribution made on or after
March 28, 2005.
Thomas T. Kim
Associate Counsel
Attachment (in .pdf format)
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attachments for memo 18052.