Automatic Rollovers with EGTRRA

[Guest dubya]

My understanding on the new EGTRRA rules on automatic distributions indicates that an IRA is the default choice for distribution amounts over $1,000, but under $5,000. However, the fiduciary has liability for this IRA, until the earlier of when the participant moves the money to a different IRA, or 1 year after the date the money goes into the IRA.

A question I have is that if the employer has fiduciary liability for a year, is this still considered a distribution at the time the money goes into this IRA? It would seem odd that the employer can be held liable for amounts that are outside of a Plan.

Also, consider the following scenario: A 401(k) plan has self-directed accounts, in which a participant has made investment elections, lets assume all of which would be considered aggressive investment decisions. This participant terminates with an account balance of $4,000. Plan document instructs the employer to pay out immediately. Paperwork is sent to the participant, who does nothing. Employer sets up an IRA and moves the money into that IRA. For the next year (unless the participant intervenes), employer has liability.

The problem I see with this scenario is that you go from a participant account in a plan in which the participant has made his own investment choices, to an IRA account where for up to a year, the money is invested at the employer's discretion. I realize that most employers will want to make this IRA investment choice prudently, but isn't the employer taking on liability that could otherwise be avoided if the money stayed in the Plan?

Any comments are appreciated.

Finally, am I correct in that these new automatic distribution rules are not effective for up to 3 years, until the Secratary of Labor issues final regs? If so, do you see a problem if an employer would in fact decide to follow them starting now?

Thanks

[R. Butler]

Not only are their fiduciary issues, but what institution will actually set up an IRA without the participant's signature?

[MWeddell]

Look at Revenue Ruling 2000-36 regarding making a direct rollover to an IRA the default form of payment prior to this provision in EGTRRA becoming effective. Just because the employer has some fiduciary responsibility over the IRA investment doesn't negate the fact that this is a distribution out of the qualified plan.

[Guest dubya]

Thanks for the replies