Class Exemption for the Establishment, Investment and Maintenance
of Certain Individual Retirement Plans Pursuant to a Mandatory
Distribution [09/28/2004]
Volume 69, Number 187, Page 57964-57970
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DEPARTMENT OF LABOR
Employee Benefits Security Administration
[Prohibited Transaction Exemption 2004-16; Application No. D-11203]
Class Exemption for the Establishment, Investment and Maintenance
of Certain Individual Retirement Plans Pursuant to a Mandatory
Distribution
AGENCY: Employee Benefits Security Administration, Department of Labor.
ACTION: Grant of class exemption.
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[[Page 57965]]
SUMMARY: This document contains a final 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). The exemption permits 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 a Mandatory Distribution, as defined
herein. Relief also is provided for a plan fiduciary to select a
proprietary product as the initial investment for such individual
retirement plan. Finally, relief is provided 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. The class exemption
affects plan sponsors, plan fiduciaries, Individual Retirement Plan
Providers and individual retirement plan account holders.
EFFECTIVE DATE: The exemption is effective for Mandatory Distributions
made on or after March 28, 2005.
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: On March 2, 2004, the Department published a
notice in the Federal Register (69 FR 9846\1\) 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 proposed exemption was
published concurrently with the proposed Fiduciary Responsibility under
the Employee Retirement Income Security Act of 1974 Automatic Rollover
Safe Harbor to be promulgated at 29 CFR 2550.404a-2 (defined herein as
``Automatic Rollover Regulation''), which also was published on March
2, 2004 (69 FR 9899).
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\1\ As corrected at 69 FR 11043 (March 9, 2004).
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The Department proposed 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).\2\ The notice gave interested persons
an opportunity to comment or request a public hearing on the proposed
exemption. Four comments were received by the Department regarding the
proposed class exemption. No requests for a public hearing were
received. Upon consideration of the comments received, the Department
has determined to grant the proposed exemption subject to certain
modifications. These modifications and the comments are discussed
below.
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\2\ 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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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.
This final prohibited transaction class exemption is being
published concurrently with a final regulation titled ``Fiduciary
Responsibility under the Employee Retirement Income Security Act of
1974 Automatic Rollover Safe Harbor.'' The exemption permits 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 a Mandatory Distribution as that term is defined in
this exemption. The exemption also permits plan fiduciaries to select a
proprietary product as the initial investment for an individual
retirement plan. Finally, the 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 a Mandatory Distribution.
The modifications made to the exemption following the Department's
consideration of comments received on both the proposed exemption and
the proposed Automatic Rollover Regulation are described in detail in
the discussion that follows this summary of costs and benefits. An
overview of the economic impacts of those modifications is presented in
this section.
In general, the costs and benefits that may accrue to fiduciaries
have been described and quantified in connection with the economic
impact of the final regulation describing the safe harbor for automatic
rollovers of mandatory distributions also published in today's issue of
the Federal Register. Although they are not separately identified, the
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 pursuant to
this exemption are included within the estimates of affected plans and
separated employees presented in the final regulation.
The estimates presented in the final regulation have been revised
from the proposal to reflect the provision of the final rule with
respect to the applicability of the safe harbor to mandatory
distributions of $1,000 or less described in section 411(a)(11) of the
Code, provided there is no affirmative distribution election by the
participant and the fiduciary makes a rollover distribution into an
individual retirement plan in accordance with the other conditions of
the regulation, without regard to the fact that such a rollover is not
described in section 401(a)(31) of the Code.
When the Department originally estimated the costs and benefits of
the proposed regulation, which included the potential impact on the
plans of financial institutions and affiliates that might make use of
this exemption, the conditions of both the proposed regulation and the
proposed exemption
[[Page 57966]]
provided that fees and expenses attendant to the individual retirement
plan, other than establishment fees, could be charged only against the
income earned by the individual retirement plan. This condition has not
been modified in the final exemption. Although the condition has been
revised in the final regulation, the change has no impact on the total
estimated fees and expenses attendant to these individual retirement
plans, regardless of whether they are established in accordance with
the conditions of the regulation or exemption. This difference between
the regulation and exemption with respect to this condition is expected
to result in a difference in only the way in which fees and expenses
are allocated between the individual retirement plan and the Individual
Retirement Plan Provider. It is likely that the fees and expenses
attendant to the individual retirement plan offered by the plan
fiduciary or an affiliate will be allocated at least in part to the
Individual Retirement Plan Provider due to the limitation on the amount
that can be charged to the individual retirement plan. The likelihood
of the provider incurring such a limit on the recovery of its cost is
greater when rates of return are low.
Certain other costs may be allocated in connection with the
conditions of the exemption to plan fiduciaries that select the
proprietary products of an employer or an affiliate for investment of
individual retirement plans, that would not be allocated to plan
fiduciaries absent the prohibited transaction that would otherwise
occur. Specifically, in connection with the acquisition of an Eligible
Investment Product, section I(h) of the exemption provides that plan
fiduciaries are not permitted to charge a sales commission to the
individual retirement plans of their separated employees. Foregone
sales commissions may result in costs in the form of a reduction in
profit margin or an operating loss to some Individual Retirement Plan
Providers.
The Department has no basis for estimating a wide array of factors
that would affect costs, such as the amount of fees or expenses that
might not be fully charged to the individual retirement plans, 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. Therefore, the Department has not estimated a cost for
these provisions of the exemption. However, fiduciaries are in no event
required to make use of individual retirement plans offered by the plan
fiduciary or an affiliate. In addition, 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 the individual retirement plans
of itself or an affiliate, or 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.
Paperwork Reduction Act
The final 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 a
Mandatory Distribution. Relief is also being provided for a plan
fiduciary to select a proprietary product as the initial investment for
such an individual retirement plan. Finally, relief is provided for the
receipt of certain fees by the Individual Retirement Plan Provider.
The exemption includes 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.
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 material 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 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
exemption.
Similarly, because the records required to be maintained to enable
verification of adherence to the conditions of the exemption 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.
Accordingly, the Department has made no submission to OMB for
approval of an information collection request in connection with the
proposed or final exemption. Although the Department requested comments
on any potential impact within the terms of the Paperwork Reduction Act
of the notice and recordkeeping requirements of the exemption, no
comments were received.
Discussion of Comments Received
The Department received four comments in response to the notice of
proposed exemption. Additionally, the Department received a number of
comments in connection with the proposed Automatic Rollover Regulation.
Interested persons should refer to the final Automatic Rollover
Regulation, published in this issue of the Federal Register, for
discussion of these comments.
With respect to the proposed exemption, one commenter stated that
the definition of Eligible Investment Product should not be limited to
money market funds because such investments might not keep pace with
inflation. The commenter asserted that a better safe harbor investment
would be any diversified fund that invests in a substantial number of
stocks and/or bonds. Another commenter asked that the definition of
Eligible Investment Product be revised to include alternative default
portfolio allocations for the assets, similar to what is permitted by
the Internal Revenue Service (IRS) for automatic enrollments (i.e.,
balanced funds). The same commenter suggested that the individual
retirement plans should replicate the asset allocation that workers
selected while in active employment. Upon consideration of the
comments, the Department believes that given the nature and the amount
of the automatic rollover, investments should be designed to minimize
risk, preserve assets for retirement and maintain liquidity. Further,
the Department does not believe that an investment strategy adopted by
a participant while in a defined contribution plan would necessarily
continue to be the appropriate strategy for the participant in the
context of an automatic rollover, particularly given the small account
balances covered under this exemption. Accordingly, the Department has
determined not to modify the definition of ``Eligible Investment
Product.''
One commenter on the proposed exemption requested that the dollar
limit on accounts affected by the exemption be raised from $5,000 to
$10,000, and that the $1,000 floor be
[[Page 57967]]
eliminated. The Department has determined to eliminate the $1,000 floor
but retain the $5,000 limit.\3\ In this regard, the Department has
added a new section IV(i) to the exemption to define the term,
``Mandatory Distribution,'' which includes both an automatic rollover
of a mandatory distribution described in section 401(a)(31)(B) of the
Code and a mandatory distribution of one thousand dollars ($1,000) or
less described in section 411(a)(11) of the Code.
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\3\ For a further discussion of this issue, refer to the
preamble to the final Automatic Rollover Regulation, published in
this issue of the Federal Register.
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Finally, a commenter asked that the Department address ``whether a
credit union, or other `Regulated Financial Institution' * * * can
establish [individual retirement plans] at its own institution in order
to satisfy the automatic rollover requirement with respect to
distributions from qualified plans which it maintains for its own
employees.'' The commenter also asked whether such credit union or
``Regulated Financial Institution'' could charge fees in connection
with the establishment and maintenance of such individual retirement
plans. The Department notes that the exemption currently permits a
fiduciary of a plan to designate itself or an affiliate to provide an
individual retirement plan and to receive fees in connection with the
establishment and maintenance of the individual retirement plan, if the
conditions of the exemption are met. Accordingly, a credit union or
other ``Regulated Financial Institution'' may establish individual
retirement plans for distributions from qualified plans it sponsors for
its own employees, provided the credit union or ``Regulated Financial
Institution'' meets the definition of Individual Retirement Plan
Provider.\4\
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\4\ The Department notes that the term ``Regulated Financial
Institution'' is defined in section IV(f) of the exemption and
refers to the entity that can provide the initial investment product
for the Mandatory Distribution. This term is separate from the term
``Individual Retirement Plan Provider,'' defined at section IV(d),
which refers to the entity that may provide the individual
retirement plan for the Mandatory Distribution.
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The Department did not receive any comments on the proposed
exemption regarding the amount of fees and expenses attendant to the
individual retirement plan, including the investment of the assets
thereof. However, the Department notes that such comments were received
in connection with the parallel provisions of the proposed Automatic
Rollover Regulation, and that the fee provisions of the final Automatic
Rollover Regulation were revised in response to the commenters. Unlike
the Automatic Rollover Regulation, the Department has determined to
retain the condition of the exemption (section II(j)(2)) that limits
fees and expenses other than establishment charges to the income earned
by the individual retirement plan. The Department believes that the
removal or modification of this requirement would increase the
potential for self dealing. This situation presents potential
violations of section 406(b) of the Act for which the Department is not
prepared to provide additional relief. However, in accordance with the
modifications made to the Automatic Rollover Regulation, the Department
has revised the language of section II(j)(1). In the proposal, this
condition stated that the fees and expenses attendant to the individual
retirement plan could not exceed 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. As revised, the condition requires an
Individual Retirement Plan Provider to charge fees and expenses that do
not exceed the fees and expenses it charges to comparable individual
retirement plans established for reasons other than the receipt of a
Mandatory Distribution made pursuant to section 401(a)(31)(B) of the
Code. The Department has made the same revision to similar language in
conditions II(e) and II(g).
Description of the Exemption
Section I of the exemption 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 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 exemption, 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
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 sections 401(a)(31)(B) and 411(a)(11) 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 2550.404a-2, which is published 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 Mandatory Distribution is made, or
an affiliate.
Under the exemption, 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 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. See 29 CFR 2510.3-
2(d).
The exemption 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 established for
reasons other than the receipt of a Mandatory Distribution made
pursuant to section 401(a)(31)(B) of the Code. The exemption further
requires that all fees and expenses not be in excess of reasonable
compensation within the meaning of section 4975(d)(2) of the Code.
Corresponding service provider regulations under the Code provide
guidance on the meaning of reasonable compensation under section
4975(d)(2). See 26 CFR 54.4975-6.
[[Page 57968]]
Under the 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 shall seek to maintain, over the term of the
investment, the dollar value that is 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. 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 exemption would not apply to the initial investment transaction
entered into by an individual retirement plan unless the Eligible
Investment Product is offered 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 guaranty associations; or an investment
company registered under the Investment Company Act of 1940.
In addition, the exemption requires that the rate of return or the
investment performance of the individual retirement plan investment(s)
be no less 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 established for reasons
other than the receipt of a Mandatory Distribution made pursuant to
section 401(a)(31)(B) of the Code.
The exemption does not permit the individual retirement plan to pay
a sales commission in connection with the acquisition of an Eligible
Investment Product.
Under the 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.
Section II(j) of the exemption limits the fees that may be paid by
the individual retirement plan, as follows: (1) 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 reasons other than the receipt of a Mandatory
Distribution made pursuant to section 401(a)(31)(B) of the Code; (2)
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 (3) the fees and expenses
shall not exceed reasonable compensation within the meaning of section
4975(d)(2) of the Code. In this regard, an Individual Retirement Plan
Provider who has not previously offered comparable individual
retirement plans will not be able to satisfy condition II(j)(1) of the
exemption.
Lastly, the exemption 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) In accordance with section 408(a) of ERISA and section
4975(c)(2) of the Code, the Department finds 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 exemption is 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 exemption does not extend to transactions prohibited under
section 406(b)(3) of ERISA and section 4975(c)(1)(F) of the Code; and
(4) The class exemption is applicable to a particular transaction
only if the transaction satisfies the conditions specified in the
exemption.
Exemption
Accordingly, the following exemption is granted 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 part 2570, subpart B
(55 FR 32836, 32847, 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 a Mandatory
Distribution, (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 initial investment of the
Mandatory Distribution in an investment product in which the plan
fiduciary or an affiliate
[[Page 57969]]
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 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 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 established for reasons other than the
receipt of a Mandatory Distribution made pursuant to 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 established for reasons other than the receipt of a
Mandatory Distribution made pursuant to 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 reasons other
than the receipt of a Mandatory Distribution made pursuant to 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 required to be rolled over 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
Mandatory Distribution 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 shall seek to maintain, over the term of the
investment, the dollar value that is 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 liquidity guarantee by a financially
responsible third party of principal and previously accrued interest
for
[[Page 57970]]
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 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 guaranty 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.
(i) The term ``Mandatory Distribution'' means the automatic
rollover of a mandatory distribution described in section 401(a)(31)(B)
of the Code, or a mandatory distribution of one thousand dollars
($1,000) or less described in section 411(a)(11) of the Code provided
there is no affirmative distribution election by the participant.
Signed at Washington, DC, this 20th day of September, 2004.
Ivan L. Strasfeld,
Director, Office of Exemption Determinations, Employee Benefits
Security Administration, U.S. Department of Labor.
[FR Doc. 04-21592 Filed 9-27-04; 8:45 am]
BILLING CODE 4510-29-P
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