|On September 27, 2004, the Department of Labor (“DOL”) issued final regulations establishing a safe harbor for plan fiduciaries making an automatic rollover of an involuntary cash-out distribution not exceeding $5,000. The final regulations replace the proposed regulations issued in March 2004. DOL Reg. §2550.404a-2.
Effective date. The final regulations will be effective for mandatory distributions made on or after March 28, 2005.
Changes from proposed regulations. The final regulations generally follow the proposed regulations, but differ from the proposed regulations in three respects:
- Written agreement enforceable by participant. The final regulations specifically require the plan fiduciary to enter into a written agreement with the IRA provider with respect to the automatic rollover funds. The written agreement must include the regulatory requirements for satisfying the safe harbor (see below). The written agreement must provide that the participant has the right to enforce the terms of the agreement against the IRA provider with respect to the rolled-over funds.
- Annual fees not limited to income. The proposed regulations specifically limited to the IRA’s income the fees and expenses the IRA provider could charge for the rollover IRA, except for establishment of the IRA. The final regulations eliminate this requirement. However, the final regulations retain the requirement that the fees and expenses for the automatic rollover IRA may not exceed those the IRA provider charges for “comparable” IRAs that are not automatic rollover IRAs.
- Mandatory distributions not exceeding $1,000. The final regulations extend the safe harbor to mandatory distributions of $1,000 or less. If the fiduciary satisfies the same requirements that apply to distributions not exceeding $5,000, the fiduciary has the same safe harbor protection for mandatory distributions of account balances not exceeding $1,000.
Protection of the safe harbor. Satisfying the requirements of the safe harbor assures that the distributing plan fiduciary satisfies ERISA’s fiduciary standards with respect to two acts: (1) the selection of the IRA provider; and (2) the investment of the funds rolled over in the mandatory distribution.
Safe harbor not exclusive. Like the proposed regulations, the final regulations are not the exclusive means of satisfying the distributing plan’s fiduciary responsibility with respect to an automatic rollover. However, without following the safe harbor regulations, the distributing fiduciary must be able to establish it has satisfied ERISA’s fiduciary standards.
Other safe harbor requirements. Except as described above, the final regulations do not modify the general investment requirements for the automatic rollover IRA that the DOL included in the proposed regulations: (1) the vested account balance subject to the automatic rollover may not exceed $5,000; (2) the plan must make the automatic rollover to an IRA; and (3) the IRA must invest the rolled over amount in a product designed to preserve principal (such as a money market fund, interest-bearing savings account or certificate of deposit) offered by a state or federally regulated bank, savings association, credit union, insurance company or mutual fund. As required by the proposed regulations, the final regulations require the plan to furnish participants an SPD or SMM that describes the automatic rollover provisions, describes how the IRA assets will be invested and the applicable fees, and provides contact information for participant questions. Finally, neither the selection of the IRA provider nor the investment of the funds may result in a prohibited transaction, except that the DOL finalized a class exemption available to an IRA provider that is the plan sponsor (see the next paragraph).
Class exemption for automatic rollover into proprietary IRA. Contemporaneously with the release of the final regulations, the DOL finalized the class exemption to permit a plan sponsor whose severed participants are subject to the automatic rollover provisions, to establish the rollover IRA using the sponsor’s own IRA or an IRA of an affiliate of the sponsor. The exemption also permits the plan fiduciary to invest the IRA in the sponsor’s or affiliate’s proprietary investment products and to charge certain fees for establishing and maintaining the IRA. The final class exemption generally follows the proposed exemption, which includes satisfying the requirements of the automatic rollover regulations. However, unlike the regulations, the class exemption retains the condition of the proposed exemption that limits fees and expenses, except for establishment charges, to the IRA’s income. The class exemption has the same effective date as the final regulations.
Good faith compliance. The preamble to the DOL regulations notes that a plan fiduciary may rely on the final regulations for purposes of satisfying its ERISA fiduciary responsibility with respect to an involuntary cash-out distribution made before the effective date of the final regulations. However, the class exemption is not available before the March 28, 2005, effective date.
SunGard Corbel will present a Web seminar in the near future to provide an overview of the final regulations and the class exemption. In addition, this Fall’s ERISA Workshop will include a thorough examination of the final regulations and the class exemption and the implications of the new guidance for practitioners. For further information regarding the Web seminar or the ERISA Workshop, and for registration, go to our Web site.
We are currently reviewing our plan documents and forms to determine what actions need to be taken as a result of these regulations. We will send a follow-up e-mail once we have made this determination.