Fiduciary Safe Harbor for Automatic Rollovers



The Economic Growth and Tax Relief Reconciliation Act of 2001 added a provision to the Internal Revenue Code which will soon require that "cash-out" distributions from tax-qualified retirement plans be transferred directly to an individual retirement account (or individual retirement annuity) ("IRA"), unless the participant makes an affirmative distribution election. The requirement applies to distributions in excess of $1,000 but less than or equal to $5,000. It does not become effective until the Department of Labor ("DOL") issues final safe harbor regulations for fiduciaries.

On March 1, 2004, the DOL's Employee Benefits Security Administration released a proposed safe harbor regulation that provides guidance on how employers and financial institutions may implement the new requirement. The proposed regulation protects retirement plan fiduciaries from liability under the Employee Retirement Income Security Act of 1974 ("ERISA") by providing a safe harbor in connection with two aspects of the distribution and rollover process: (i) the selection of an IRA provider, and (ii) the selection of investments.

The proposed regulation provides for the investment of distributions in products designed to preserve principal and provide a reasonable rate of return (whether or not guaranteed), consistent with liquidity, and taking into account the extent to which charges can be assessed against the IRA. Such products generally include money market funds, interest-bearing savings accounts, and certificates of deposit. For this purpose, the investment product would have to be offered by a state or federally regulated financial institution and seek to maintain a stable dollar value equal to the amount invested.

Fees and expenses attendant to an IRA, including investments of such plan, may not exceed certain limits. First, fees and expenses may not exceed those charged by the provider for comparable individual account plans established for rollovers that are not subject to the automatic rollover requirement. Second, fees and expenses may be charged only against the income earned by the IRA, with the exception of charges assessed for establishing the IRA.

The proposed regulation requires disclosure to participants and beneficiaries of the plan's procedures governing automatic rollovers, including an explanation of the nature of the investment product and how fees and expenses will be allocated. In addition, the disclosure must identify a plan contact for information concerning the plan's procedures, IRA providers, and the fees and expenses associated with the IRA. The proposed regulation would also condition safe harbor relief on the furnishing of this information to the plan's participants and beneficiaries in a summary plan description or a summary of material modification in advance of the rollover.

The safe harbor relief provided for in the proposed regulation is conditioned on the fiduciary not engaging in prohibited transactions in connection with the selection of an IRA provider or investment product. However, in this regard, the DOL published concurrently with the proposed regulation a proposed class exemption that is intended to address prohibited transactions resulting from an IRA provider's selection of itself as the provider of an IRA.

The DOL is proposing to make the final safe harbor regulation effective six months after the date of publication in the Federal Register. Final regulations are expected to be issued in June 2004, which would make the requirement effective before the end of this year.