Information Request; Fiduciary Responsibility Under ERISA When Using Automatic Rollovers

[Federal Register: January 7, 2003 (Volume 68, Number 4)]
[Proposed Rules]
[Page 991-994]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr07ja03-12]

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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]
BILLING CODE 4510-29-P

• http://a257.g.akamaitech.net/7/257/2422/14mar20010800/edocket.access.gpo.gov/2003/03-281.htm (TEXT)
• https://benefitslink.com/DOL/autorollovers.pdf (PDF)