[Federal Register Volume 69, Number 41 (Tuesday, March 2, 2004)]
[Notices]
[Pages 9846-9852]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-4552]


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DEPARTMENT OF LABOR

Employee Benefits Security Administration

[Application No. D-11203]


Proposed Class Exemption for the Establishment, Investment and 
Maintenance of Certain Individual Retirement Plans Pursuant to an 
Automatic Rollover of a Mandatory Distribution

AGENCY: Employee Benefits Security Administration, Labor.

ACTION: Notice of proposed class exemption.

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SUMMARY: This document contains a notice of pendency before the 
Department of Labor (the Department) of a proposed class exemption from 
certain prohibited transaction restrictions of the Employee Retirement 
Income Security Act of 1974 (ERISA) and from certain taxes imposed by 
the Internal Revenue Code of 1986 (the Code). If granted, the proposed 
exemption would permit a fiduciary of a plan who is also the employer 
maintaining the plan to establish, on behalf of its separated 
employees, an individual retirement plan at a financial institution 
which is the employer or an affiliate, in connection with an automatic 
rollover of a mandatory distribution described in section 401(a)(31)(B) 
of the Code. Relief is also being proposed to permit a plan fiduciary 
to select a proprietary product as the initial investment for such 
individual retirement plan. Finally, relief is proposed for the receipt 
of certain fees by the individual retirement plan provider in 
connection with the establishment or maintenance of the individual 
retirement plan and the initial investment of the mandatory 
distribution. If granted, the proposed exemption would affect plan 
sponsors, plan fiduciaries, individual retirement plan providers and 
individual retirement plan account holders.

DATES: Written comments and requests for a public hearing must be 
received by the Department on or before April 1, 2004.

ADDRESSES: All written comments and request for a public hearing should 
be sent to: Office of Exemption Determinations, (Attention: D-11203), 
Employee Benefits Security Administration, Room N-5649, U.S. Department 
of Labor, 200 Constitution Ave, NW., Washington, DC 20210. Comments and 
requests for a hearing also may be submitted to EBSA via fax at (202) 
219-0204, or by e-mail to [email protected] by the end of the 
comment period. The application and comments received will be available 
for public inspection in EBSA's Public Documents Room, U.S. Department 
of Labor, Room N-1513, 200 Constitution Ave, NW., Washington, DC.

FOR FURTHER INFORMATION CONTACT: Allison Padams Lavigne or Karen Lloyd, 
Office of Exemption Determinations, Employee Benefits Security 
Administration, U.S. Department of Labor, Washington, DC 20210, at 
(202) 693-8540 (this is not a toll-free number).

SUPPLEMENTARY INFORMATION: Notice is hereby given of the pendency 
before the Department of a proposed class exemption from the 
restrictions of sections 406(a), 406(b)(1) and 406(b)(2) of ERISA and 
from the taxes imposed by section 4975(a) and (b) of the Code, by 
reason of section 4975(c)(1)(A) through (E) of the Code.
    The Department is proposing this class exemption on its own motion 
pursuant to section 408(a) of ERISA and section 4975(c)(2) of the Code, 
and in accordance with the procedures set forth in 29 CFR 2570, subpart 
B (55 FR 32836, August 10, 1990).\1\
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    \1\ Section 102 of Reorganization Plan No. 4 of 1978 generally 
transferred the authority of the Secretary of the Treasury to issue 
exemptions under section 4975(c)(2) of the Code to the Secretary of 
Labor.

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[[Page 9847]]

I. Executive Order 12866

    Under Executive Order 12866, the Department must determine whether 
the regulatory action is ``significant'' and therefore subject to the 
requirements of the Executive Order and subject to review by the Office 
of Management and Budget (OMB). Under section 3(f), the order defines a 
``significant regulatory action'' as an action that is likely to result 
in a rule (1) having an annual effect on the economy of $100 million or 
more, or adversely and materially affecting a sector of the economy, 
productivity, competition, jobs, the environment, public health or 
safety, or State, local or tribal governments or communities (also 
referred to as ``economically significant''); (2) creating serious 
inconsistency or otherwise interfering with an action taken or planned 
by another agency; (3) materially altering the budgetary impacts of 
entitlement grants, user fees, or loan programs or the rights and 
obligations of recipients thereof; or (4) raising novel legal or policy 
issues arising out of legal mandates, the President's priorities, or 
the principles set forth in the Executive Order. Pursuant to the terms 
of the Executive Order, it has been determined that this action is 
``significant'' and therefore subject to review by the Office of 
Management and Budget (OMB). Accordingly, this action has been reviewed 
by OMB.
    The proposed prohibited transaction class exemption is being 
published concurrently with a proposed regulation on Fiduciary 
Responsibility under the Employee Retirement Income Security Act of 
1974 Automatic Rollover Safe Harbor. The proposed exemption will permit 
plan fiduciaries that are also employers maintaining a pension plan to 
establish, for separated employees, individual retirement plans at 
financial institutions that are the employer or an affiliate, in 
connection with an automatic rollover of a mandatory distribution 
described in section 401(a)(31)(B) of the Code. The proposed exemption 
also permits plan fiduciaries to select a proprietary product as the 
initial investment for an individual retirement plan. Finally, the 
proposed exemption provides relief from what would otherwise be a 
prohibited transaction for the receipt of certain fees by Individual 
Retirement Plan Providers in connection with the establishment or 
maintenance of the individual retirement plan and the initial 
investment of the mandatory distribution.
    In general, the costs and benefits that may accrue to fiduciaries 
have been described and quantified in connection with the economic 
impact of the proposed regulation describing the safe harbor for 
automatic rollovers of mandatory distributions also published in 
today's issue of the Federal Register. Fiduciaries of pension plans who 
are also employers maintaining the plan who would establish these 
individual retirement plans at a financial institution which is the 
employer or affiliate are included within the estimates of affected 
plans and separated participants presented in the proposed regulations.
    Certain additional costs may accrue to plan fiduciaries that select 
the proprietary products of an employer or an affiliate for investment 
of individual retirement plans. Specifically, in connection with the 
acquisition of an Eligible Investment Product, section I(h) of the 
proposed exemption provides that plan fiduciaries are not permitted to 
charge a sales commission to the individual retirement plans of their 
separated employees. In contrast to individual retirement plans not 
described in section 401(a)(31)(B) of the Code, individual retirement 
plans that do not generate sales commissions may result in a cost to 
some Individual Retirement Plan Providers. Because the Department has 
no basis for determining the extent to which plan fiduciaries will use 
one or more proprietary products, the number of accounts that could be 
rolled over into such products, or the lost income, if any, that may 
result from unpaid sales commissions, the Department has not estimated 
a cost for this provision of the proposed exemption. However, many of 
the proprietary products permitted under the exemption generally do not 
charge a sales commission in connection with an initial purchase. In 
any case, it is likely that a plan fiduciary will use a proprietary 
product for these individual retirement plans only if it is financially 
beneficial to do so, for example, as a way to retain deposits and 
increase earnings. The Department requests comments on benefits and 
costs that pertain specifically to the conditions of this proposed 
exemption.

II. Paperwork Reduction Act

    The proposed exemption permits a fiduciary of a pension plan that 
is also the employer maintaining the plan to establish, on behalf of 
its separated employees, an individual retirement plan at a financial 
institution that is the employer or an affiliate, in connection with an 
automatic rollover of a mandatory distribution described in section 
401(a)(31)(B) of the Code. Relief is also being provided that would 
permit a plan fiduciary to select a proprietary product as the initial 
investment for such an individual retirement plan. Finally, relief is 
proposed for the receipt of certain fees by the Individual Retirement 
Plan Provider and the initial investment of the mandatory distribution.
    The proposed exemption includes certain notice and recordkeeping 
requirements that are meant to inform separated employees and allow for 
verification by interested persons that the terms of the exemption have 
been met with respect to the automatic rollover of mandatory 
distributions and investments. Specifically, prior to an automatic 
rollover of a mandatory distribution, a plan fiduciary is required to 
notify a participant that the distribution may be rolled over into a 
proprietary investment selected by the plan fiduciary. Notification 
that a proprietary investment may be selected is to be provided in 
connection with a written explanation required under section 402(f) of 
the Code or in the plan's summary plan description or summary of 
materials modifications thereto.
    In the Department's view, neither alternative will result in a 
measurable burden. The additional information required to be included 
to meet this condition, though important, would require only a minor 
alteration to an existing disclosure. The fiduciary would also retain 
flexibility under the proposed exemption as to the most efficient 
method of conveying the required information. As such, no burden for 
plan fiduciaries is expected to arise from the notice requirement in 
the proposed exemption.
    The Individual Retirement Plan Provider is also required to 
maintain or to cause to be maintained, for a period of six years, 
records relating to the automatic rollover that are necessary to enable 
certain described persons to determine whether the conditions of the 
proposed exemption had been met. Because these records would 
customarily be maintained as a part of usual business practices, this 
condition is not expected to impose a burden on Individual Retirement 
Plan Providers.
    Because no burden is expected to arise in connection with the 
notice and recordkeeping requirements in the proposed exemption, the 
Department has not made a submission for OMB approval of an information 
collection request in in connection with the proposed exemption. The 
Department requests comments on any potential impact of the notice and 
recordkeeping requirements of the proposed exemption.

[[Page 9848]]

III. Background

    Under the Code, tax-qualified retirement plans are permitted to 
incorporate provisions requiring 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.\2\ A distribution by a plan in compliance with such a provision 
is termed a mandatory distribution, commonly referred to as a ``cash-
out.'' Separating participants may choose to roll the cash-out, which 
is an eligible rollover distribution,\3\ into an eligible retirement 
plan,\4\ or they may retain the cash-out as taxable distribution. 
Within a reasonable period of time prior to making a mandatory 
distribution, plan administrators are required by section 402(f) of the 
Code to provide a separating participant with a written notice 
explaining, among other things, the following: the Code provisions 
under which the participant may elect to have the cash-out transferred 
directly to an eligible retirement plan and that if an election is not 
made, such cash-out is subject to the automatic rollover provisions of 
Code section 401(a)(31)(B); the provision requiring income tax 
withholding if the cash-out is not directly transferred to an eligible 
retirement plan; and the provisions under which the distribution will 
not be taxed if the participant transfers the account balance to an 
eligible retirement plan within 60 days of receipt.\5\
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    \2\ Code sections 411(a)(11) and 417(e). See Code section 
411(a)(11)(D) for circumstances where the amount of a cash-out may 
be greater than $5,000, based on a participant's prior rollover 
contribution to the plan.
    \3\ See Code section 402(f)(2)(A).
    \4\ See Code section 402(f)(2)(B).
    \5\ Code section 402(f)(1).
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    As part of the Economic Growth and Tax Relief Reconciliation Act of 
2001 (EGTRRA),\6\ section 401(a)(31) of the Code was amended to require 
that, absent an affirmative election by the participant, certain 
mandatory distributions from a tax-qualified retirement plan be 
directly transferred to an individual retirement plan \7\ 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,\8\ the trust will 
not constitute a qualified trust unless the plan of which the trust is 
a part provides that if a mandatory distribution of more than $1,000 is 
to be made and the participant does not elect to have such distribution 
paid directly to an eligible retirement plan or to receive the 
distribution directly, the plan administrator must transfer such 
distribution to an individual retirement plan. Section 657(a) of EGTRRA 
also added a notice requirement in section 401(a)(31)(B)(i) of the Code 
requiring the plan administrator to notify the participant 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 individual retirement plan.\9\
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    \6\ Pub. L. 107-16, June 7, 2001, 115 Stat. 38.
    \7\ 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).
    \8\ 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) of the Code) does 
not exceed $5,000.'' The Treasury and the IRS have advised the 
Department that the requirements of Code section 401(a)(31)(B) apply 
to a broad range of retirement plans including plans established 
under Code sections 401(a), 401(k), 403(a), 403(b) and 457.
    \9\ Conforming amendments to Code sections 401(a)(31) and 
402(f)(1) were also made by section 657 of EGTRRA.
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    Section 657(c)(2)(A) of EGTRRA directed the Department to issue 
regulations providing safe harbors under which (1) a plan 
administrator's designation of an institution to receive the automatic 
rollover and (2) the initial investment choice for the rolled-over 
funds would be deemed to satisfy the fiduciary responsibility 
provisions of section 404(a) of ERISA. Section 657(c)(2)(B) of EGTRRA 
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) automatic rollovers and for other uses that 
promote the preservation of assets for retirement income.
    Where the plan administrator (or other fiduciary) \10\ of a plan is 
a financial institution or an affiliate, and is an individual 
retirement plan provider,\11\ the plan administrator may determine to 
designate itself or its affiliate as the individual retirement plan 
provider. In addition, the plan administrator may determine to invest 
the mandatory distribution in an investment product in which it or its 
affiliate has an interest. In this regard, section 406(a)(1) prohibits 
in part, a fiduciary of a plan from causing the plan to engage in a 
transaction that constitutes a direct or an indirect sale, exchange or 
leasing of any property between the plan and a party in interest; 
lending of money or other extension of credit between the plan and a 
party in interest; furnishing of goods, services, or facilities between 
the plan and a party in interest; and a transfer to, or use by or for 
the benefit of, a party in interest of any assets of the plan. Section 
406(b)(1) and (b)(2) prohibits a fiduciary with respect to a plan from 
dealing with the assets of the plan in his own interest or for his own 
account; and from acting in his individual or in any other capacity in 
any transaction involving the plan on behalf of a party (or 
representing a party) whose interests are adverse to the interests of 
the plan or the interests of its participants or beneficiaries. 
Accordingly, a violation of section 406(a) and/or (b) may occur if the 
plan administrator or other fiduciary designates itself or an affiliate 
as the provider of the individual retirement plan. Also, additional 
violations may occur if the plan fiduciary determines to invest the 
mandatory distribution in an investment which it or its affiliate has 
an interest. Section 408(b)(2) of ERISA provides a conditional 
statutory exemption for the provision of services by a party in 
interest to a plan and the payment of reasonable compensation to the 
party in interest. However, section 408(b)(2) of ERISA does not provide 
relief from the prohibitions described in section 406(b) of ERISA.\12\ 
If a plan fiduciary uses the authority, control or responsibility which 
makes such person a fiduciary to cause the plan to pay an additional 
fee to such fiduciary or to a person in which he has an interest which 
may affect the exercise of such fiduciary's best judgment as a 
fiduciary, then a violation of section 406(b) of ERISA would occur.
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    \10\ Although the provisions of section 401(a)(31)(B) of the 
Code state that the ``plan administrator'' will make the transfer to 
an individual retirement plan, the Department has determined to 
provide relief for any plan fiduciary affiliated with the plan 
sponsor who makes the decisions described herein with respect to the 
automatic rollover.
    \11\ The Department uses the term individual retirement plan 
provider, defined in section IV(d), to refer to the entity that is 
providing the rollover individual retirement plan. For purposes of 
this exemption, the individual retirement plan provider will either 
be the plan fiduciary that is the sponsor of the plan from which the 
rollover was made, or an affiliate.
    \12\ See 29 CFR 2550.408b-2(e).
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    The Department notes that this proposed class exemption provides 
relief for a plan fiduciary's designation of itself or an affiliate as 
individual retirement plan provider to receive automatic rollovers of 
mandatory distributions from plans for which it or an affiliate serves 
as the plan sponsor.\13\ In addition, relief is provided for the 
selection of the plan fiduciary's (or an

[[Page 9849]]

affiliate's) proprietary investment products as the initial investment 
designation for the mandatory distributions of its plan participants. 
The proposed exemption does not cover any subsequent investment 
decisions made by the individual retirement plan provider on behalf of 
the individual retirement plan account holder.\14\ Additionally, the 
Department anticipates that, where a plan fiduciary which is unrelated 
to the plan sponsor recommends itself as individual retirement plan 
provider, and recommends its own proprietary investments as the initial 
investment of the mandatory distribution, such determinations will 
ultimately be subject to the independent approval of the plan sponsor 
and, therefore, may not result in prohibited transactions.\15\
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    \13\ See ERISA section 3(16)(B).
    \14\ The Department notes that where a distribution constitutes 
the entire benefit rights of a participant, 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), and the distributed assets will 
cease to be plan assets within the meaning of 29 CFR 2510.3-101 for 
purposes of Title I of ERISA. Nevertheless, if the assets are rolled 
over into an individual retirement plan, the prohibitions of section 
4975 of the Code will continue to apply. See 29 CFR 2510.3-
101(a)(1).
    \15\ To the extent that an independent plan fiduciary provides 
investment advice to a plan within the meaning of regulation 29 CFR 
2510.3-21(c)(1)(ii)(B), and recommends an investment in its own 
proprietary investment product, the presence of an unrelated second 
fiduciary (e.g., plan sponsor) acting on the investment advisor's 
recommendations on behalf of the plan is not sufficient to insulate 
the advisor from fiduciary liability under section 406(b) of ERISA. 
See Advisory Opinions 84-03A and 84-04A issued by the Department on 
January 4, 1984.
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Discussion of the Proposed Exemption

    Section I of the proposal describes the transactions that are 
covered by the exemption. The plan fiduciary who provides the notice in 
section II(a) and meets the additional requirements described below 
would be able to be the individual retirement plan provider for its 
separated employees and to make an initial decision to invest the 
mandatory distribution in an investment product in which such plan 
fiduciary or its affiliate has an interest. Additionally, relief is 
provided for the receipt of fees by the individual retirement plan 
provider for the receipt of fees by the individual retirement plan 
provider in connection with the establishment or maintenance of the 
individual retirement plan, and as a result of the investment of the 
mandatory distribution in an investment product in which the plan 
fiduciary or its affiliate has an interest.
    Under the proposal, a plan fiduciary must, in connection with the 
written explanation provided pursuant to section 402(f) of the Code or 
in the plan's summary plan description or summary of material 
modifications thereto, notify the participant prior to the mandatory 
rollover distribution that, absent his or her election, the mandatory 
distribution will be rolled over to an individual retirement plan 
provided by the plan fiduciary or an affiliate, and that the plan 
fiduciary may select its own proprietary investment as the initial 
investment of the mandatory distribution. In any case, the plan's 
summary plan description or summary of material modifications thereto 
will describe the plan's rollover provisions effectuating the 
requirements of section 401(a)(31)(B) of the Code.
    The plan fiduciary must comply with the requirements of the 
Automatic Rollover Regulation. The term ``Automatic Rollover 
Regulation'' refers to the regulation promulgated by the Department at 
29 CFR 2550.401a-2, which is proposed elsewhere in this issue of the 
Federal Register.
    The plan fiduciary must be the employer, any of whose employees are 
covered by the plan from which the automatic rollover of the mandatory 
distribution is made, or an affiliate.
    Under the proposal, the individual retirement plan must be 
established and maintained for the exclusive benefit of the account 
holder of the individual retirement plan, his or her spouse or their 
beneficiaries. Under section IV(a) of the proposed exemption, the term 
individual retirement plan is defined in section 7701(a)(37) of the 
Code. Section 7701(a)(37) defines individual retirement plan as an 
individual retirement account described in section 408(a) of the Code 
and an individual retirement annuity described in section 408(b) of the 
Code. For purposes of this exemption, the term individual retirement 
plan shall not include an individual retirement plan which is an 
employee benefit plan covered by Title I of ERISA.\18\
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    \18\ See 29 CFR 2510.3-2(d).
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    The proposal requires that the terms of the individual retirement 
plan, including the fees and expenses for establishing and maintaining 
the individual retirement plan, be no less favorable than those 
available to comparable individual retirement plans for distributions 
not described in section 401(a)(31)(B) of the Code.
    Under the proposed exemption, the individual retirement plan must 
be invested in an ``Eligible Investment Product.'' Section IV(e) 
defines the term ``Eligible Investment Product'' to mean an investment 
product designed to preserve principal and provide a reasonable rate of 
return, whether or not such return is guaranteed, consistent with 
liquidity. For this purpose, the product must be offered by a Regulated 
Financial Institution and must seek to maintain a stable dollar value 
equal to the amount invested in the product by the individual 
retirement plan. Such term includes money market funds maintained by 
registered investment companies, and interest-bearing savings accounts 
and certificates of deposit of a bank or a similar financial 
institution.\19\ In addition, the term includes ``stable value 
products'' issued by a financial institution that are fully benefit-
responsive to the individual retirement plan account holder, i.e., that 
provide a liquidity guarantee by a financially responsible third party 
of principal and previously accrued interest for liquidations or 
transfers initiated by the individual retirement plan account holder 
exercising his or her right to withdraw or transfer funds under the 
terms of an arrangement that does not include substantial restrictions 
to the account holder's access to the assets of the individual 
retirement plan. The Department requests comments as to whether an 
annuity provider described in section 408(b) of the Code currently 
offers Eligible Investment Products as defined herein.
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    \19\ The investment of plan assets in bank deposits may be 
covered by ERISA section 408(b)(4) and Code section 4975(d)(4).
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    The exemption would not apply to the initial investment transaction 
entered into by an individual retirement plan unless the Eligible 
Investment Product is provided by a Regulated Financial Institution. A 
Regulated Financial Institution is defined under the exemption as an 
entity that: (i) Is subject to state or federal regulation, and (ii) is 
a bank or savings association, the deposits of which are insured by the 
Federal Deposit Insurance Corporation; a credit union, the member 
accounts of which are insured within the meaning of section 101(7) of 
the Federal Credit union Act; an insurance company, the products of 
which are protected by state guarantee associations; or an investment 
company registered under the Investment Company Act of 1940.
    The Department expects that a Regulated Financial Institution whose 
investment product is selected by the plan fiduciary on behalf of the 
individual retirement plan will be a solvent institution capable of 
honoring its ultimate financial obligation to the account holder.
    In addition, the proposal requires that the rate of return or the 
investment performance of the individual retirement plan investment(s) 
be no less

[[Page 9850]]

favorable than the rate of return or investment performance of an 
identical investment that could have been made at the same time by a 
comparable individual retirement plan for distributions not described 
in section 401(a)(31)(B) of the Code.
    The proposal does not permit the individual retirement plan to pay 
a sales commission in connection with the acquisition of an Eligible 
Investment Product.
    Under the proposed exemption, the individual retirement plan 
account holder must be able to, within a reasonable time after request 
and without penalty to the principal amount of the investment, transfer 
his individual retirement plan balance to a different investment 
offered by the individual retirement plan provider, or transfer his or 
her individual retirement plan balance to another individual retirement 
plan sponsored at a different financial institution. The Department 
wants to ensure that, once the account holder discovers that an 
individual retirement plan has been established on his or her behalf, 
he or she is able to make appropriate investment decisions with respect 
to the assets of the individual retirement plan or to change individual 
retirement plan providers without penalty.
    The proposal limits the fees that may be paid by the individual 
retirement plan, as follows: (i) The fees and expenses attendant to the 
individual retirement plan, including the investment of the assets of 
such plan, (e.g., establishment charges, maintenance fees, investment 
expenses, termination costs, and surrender charges) shall not exceed 
the fees and expenses charged by the individual retirement plan 
provider for comparable individual retirement plans established for 
eligible rollover distributions that are not subject to the automatic 
rollover provisions of section 401(a)(31)(B) of the Code; (ii) the fees 
and expenses, other than establishment charges, attendant to the 
individual retirement plan, may be charged only against the income 
earned by the individual retirement plan; and (iii) the fees and 
expenses shall not exceed reasonable compensation with in the meaning 
of section 4975(d)(2) of the Code. Accordingly, establishment fees for 
the individual retirement plan may be paid out of the principal of the 
mandatory distribution, provided that such fees do not exceed the fees 
charged to comparable individual retirement plans containing rollover 
distributions not described in section 401(a)(31)(B) of Code.
    The proposed exemption applies only to the automatic rollover of a 
mandatory distribution described in section 401(a)(31) (B) of the Code. 
At present, such distributions are limited to nonforfeitable accrued 
benefits, the present value of which is in excess of $1,000, but is 
less than or equal to $5,000. For purposes of determining the present 
value of such benefits, section 401(a)(31)(B) references Code section 
411(a)(11). Section 411(a)(11)(A) of the Code provides that, in 
general, if the present value of any nonforfeitable accrued benefit 
exceeds $5,000, such benefit may not be immediately distributed without 
the consent of the participant. Section 411(a)(11)(D) of the Code also 
provides a special rule that permits plans to disregard that portion of 
a nonforfeitable accrued benefit that is attributable to amounts rolled 
over from other plans (and earnings thereon) in determining the $5,000 
limit. Inasmuch as section 401(a)(31)(B) of the Code requires the 
automatic rollover of mandatory distributions, as determined under 
section 411(a)(11), which would include prior rollover contributions, 
the proposed exemption, if granted, would provide relief in the case of 
automatic rollovers of mandatory distributions containing such prior 
rollover contributions.
    Lastly, the proposal contains a recordkeeping requirement. The 
individual retirement plan provider must maintain records to enable 
certain persons to determine whether the applicable conditions of the 
exemption have been met. The records must be available for examination 
by the IRS, the Department, and account holders and their beneficiaries 
for at least six years from the date of each automatic rollover.

General Information

    The attention of interested persons is directed to the following:
    (1) Before an exemption may be granted under section 408(a) of 
ERISA and section 4975(c)(2) of the Code, the Department must find that 
the exemption is administratively feasible, in the interests of the 
plan and of its participants and beneficiaries and protective of the 
rights of participants and beneficiaries of such plan.
    (2) The proposed exemption, if granted, will be supplemental to, 
and not in derogation of, any other provisions of ERISA and the Code 
including statutory or administrative exemptions and transitional 
rules. Furthermore, the fact that a transaction is subject to an 
administrative or statutory exemption is not dispositive of whether the 
transaction is in fact a prohibited transaction;
    (3) The proposed exemption, if granted, will not extend to 
transactions prohibited under section 406(b)(3) of ERISA and section 
4975(c)(1)(F) of the Code; and
    (4) If granted, the pending class exemption will be applicable to a 
particular transaction only if the transaction satisfies the conditions 
specified in the exemption.

Written Comments

    All interested persons are invited to submit written comments or 
requests for a hearing on the proposed exemption to the address and 
within the time period set forth above. All comments and requests for a 
hearing will be made a part of the record. Comments and requests for a 
hearing should state the reasons for the writer's interest in the 
proposed exemption. Comments received will be available for public 
inspection at the address set forth above.

Proposed Exemption

    The Department has under consideration the granting of the 
following class exemption, under the authority of section 408(a) of 
ERISA and section 4975(c)(2) of the Code, and in accordance with the 
procedures set forth in 29 CFR 2570, subpart B (55 FR 32836, August 10, 
1990).

I. Transactions

    The restrictions of sections 406(a)(1)(A) through (D), 406(b)(1) 
and 406(b)(2) of the Act, and the taxes imposed by section 4975(a) and 
(b) of the Code, by reason of section 4975(c)(1)(A) through (E) of the 
Code, shall not apply to (i) the fiduciary of an Employee Pension 
Benefit Plan (plan) using its authority to designate itself or an 
affiliate as Individual Retirement Plan Provider to receive the 
automatic rollover of a mandatory distribution described in section 
401(a)(31)(B) of the Code, (ii) the initial investment of the mandatory 
distribution by the plan fiduciary in an investment product in which 
the plan fiduciary or its affiliate has an interest, (iii) the receipt 
of fees by the Individual Retirement Plan Provider in connection with 
the establishment or maintenance of the individual retirement plan, and 
(iv) the receipt of investment fees by the Individual Retirement Plan 
Provider or an affiliate as a result of the investment of the mandatory 
distribution in an investment product in which the plan fiduciary or an 
affiliate has an interest, provided that the conditions set forth in 
sections II and III are satisfied.

II. Conditions

    (a) In connection with the written explanation provided to the 
separating

[[Page 9851]]

participant pursuant to section 402(f) of the Code, or in the plan's 
summary plan description or summary of material modifications thereto, 
the plan fiduciary notifies the participant that, absent his or her 
election, the mandatory distribution will be rolled over to an 
individual retirement plan offered by the plan fiduciary or an 
affiliate, and that the plan fiduciary may select its own proprietary 
investment for the initial investment of the mandatory distribution.
    (b) The requirements of the Automatic Rollover Regulation are met.
    (c) The plan fiduciary is the employer any of whose employees are 
covered by the plan from which the automatic rollover of the mandatory 
distribution is made, or an affiliate.
    (d) The individual retirement plan is established and maintained 
for the exclusive benefit of the individual retirement plan account 
holder, his or her spouse or their beneficiaries.
    (e) The terms of the individual retirement plan, including the fees 
and expenses for establishing and maintaining the individual retirement 
plan, are no less favorable than those available to comparable 
individual retirement plans for distributions not described in section 
401(a)(31)(B) of the code.
    (f) The mandatory distribution is invested in an Eligible 
Investment Product(s), as defined in section IV(e).
    (g) The rate of return or the investment performance of the 
individual retirement plan investment(s) is no less favorable than the 
rate of return or investment performance of an identical investment(s) 
that could have been made at the same time by comparable individual 
retirement plans for distributions not described in section 
401(a)(31)(B) of the code.
    (h) The individual retirement plan does not pay a sales commission 
in connection with the acquisition of an eligible Investment Product.
    (i) The individual retirement plan account holder may, within a 
reasonable period of time after his or her request and without penalty 
to the principal amount of the investment, transfer his individual 
retirement plan balance to a different investment offered by the 
Individual Retirement Plan Provider, or transfer his individual 
retirement plan balance to an individual retirement plan sponsored at a 
different financial institution.
    (j) (1) Fees and expenses attendant to the individual retirement 
plan, including the investment of the assets of such plan, (e.g., 
establishment charges, maintenance fees, investment expenses, 
termination costs, and surrender charges) shall not exceed the fees and 
expenses charged by the Individual Retirement Plan Provider for 
comparable individual retirement plans established for eligible 
rollover distributions that are not subject to the automatic rollover 
provisions of section 401(a)(31)(B) of the Code;
    (2) Fees and expenses attendant to the individual retirement plan, 
with the exception of establishment charges, may be charged only 
against the income earned by the individual retirement plan; and
    (3) Fees and expenses are not in excess of reasonable compensation 
within the meaning of section 4975(d)(2) of the Code.
    (k) The present value of the nonforfeitable accrued benefit, as 
determined under section 411(a)(11) of the Code, does not exceed the 
maximum amount under section 401(a)(31)(B) of the Code.

III. Recordkeeping

    (a) The Individual Retirement Plan Provider maintains or causes to 
be maintained for a period of six (6) years from the date of each 
automatic rollover the records necessary to enable the persons 
described in paragraph (b) of this section to determine whether the 
applicable conditions of this exemption have been met. Such records 
must be readily available to assure accessibility by the persons 
identified in paragraph (b) of this section.
    (b) Notwithstanding any provisions of section 504(a)(2) and (b) of 
the Act, the records referred to in paragraph (a) of this section are 
unconditionally available at their customary location for examination 
during normal business hours by--
    (1) Any duly authorized employee or representative of the 
Department of Labor or the Internal Revenue Service; and
    (2) Any account holder of an individual retirement plan established 
pursuant to this exemption, or any duly authorized representative of 
such account holder.
    (c) A prohibited transaction will not be considered to have 
occurred if, due to circumstances beyond the control of the Individual 
Retirement Plan Provider, the records are lost or destroyed prior to 
the end of the six-year period, and no party in interest other than the 
Individual Retirement Plan Provider shall be subject to the civil 
penalty that may be assessed under section 502(i) of ERISA or to the 
taxes imposed by sections 4975(a) and (b) of the Code if the records 
are not maintained or are not available for examination as required by 
paragraph (b).

IV. Definitions

    (a) The term ``individual retirement plan'' means an individual 
retirement plan described in section 7701(a)(37) of the Code. For 
purposes of this exemption, the term individual retirement plan shall 
not include an individual retirement plan which is an employee benefit 
plan covered by Title I of ERISA.
    (b) The term ``Employee Pension Benefit Plan'' refers to an 
employee pension benefit plan defined in ERISA section 3(2)(A).
    (c) The term ``Automatic Rollover Regulation'' refers to the 
regulation promulgated by the Department at 29 CFR 2550.404a-2.
    (d) The term ``Individual Retirement Plan Provider'' means an 
entity that is eligible to serve as an individual retirement account 
trustee under section 408(a)(2) of the Code, or for purposes of an 
individual retirement annuity described in section 408(b) of the Code, 
an insurance company which is qualified to do business under the law of 
the jurisdiction in which the annuity contract, or endowment contract 
(described in 26 CFR 1.408-3 (e)), is sold.
    (e) The term ``Eligible Investment Product'' means an investment 
product designed to preserve principal and provide a reasonable rate of 
return, whether or not such return is guaranteed, consistent with 
liquidity. For this purpose, the product must be offered by a Regulated 
Financial Institution and must seek to maintain a stable dollar value 
equal to the amount invested in the product by the individual 
retirement plan. Such term includes money market funds maintained by 
registered investment companies, and interest-bearing savings accounts 
and certificates of deposit of a bank or similar financial institution. 
In addition, the term includes ``stable value products'' issued by a 
financial institution that are fully benefit-responsive to the 
individual retirement plan account holder, i.e., that provide a 
liquality guarantee by a financially responsible third party of 
principal and previously accrued interest for liquidations or transfers 
initiated by the individual retirement plan account holder exercising 
his or her right to withdraw or transfer funds under the terms of an 
arrangement that does not include substantial restrictions to the 
account holder's access to the individual retirement plan's assets.
    (f) The term ``Regulated Financial Institution'' means an entity 
that: (i) Is

[[Page 9852]]

subject to state or federal regulation, and (ii) is a bank or savings 
association, the deposits of which are insured by the Federal Deposit 
Insurance Corporation; a credit union, the member accounts of which are 
insured within the meaning of section 101(7) of the Federal Credit 
Union Act; an insurance company, the products of which are protected by 
state guarantee associations; or an investment company registered under 
the Investment Company Act of 1940.
    (g) An ``affiliate'' of a person includes: (1) Any person directly 
or indirectly controlling, controlled by, or under common control with, 
the person; or (2) Any officer, director, partner or employee of the 
person;
    (h) The term ``control'' means the power to exercise a controlling 
influence over the management or policies of a person other than an 
individual.

    Signed at Washington, DC, this 5th day of February.
Ivan L. Strasfeld,
Director, Office of Exemption Determinations, Employee Benefits 
Security Administration, Department of Labor.
[FR Doc. 04-4552 Filed 3-1-04; 8:45 am]
BILLING CODE 4510-29-M