58018 Federal Register / Vol. 69, No. 187 / Tuesday, September 28, 2004 / Rules and Regulations 

1Code 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 

into the plan.

2See Code section 402(f)(2)(A).

3See Code section 402(f)(2)(B).

4Code section 402(f)(1).

5Pub. L. 107–16, June 7, 2001, 115 Stat. 38.

6Section 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).

7Section 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)(11) of the Code) does not exceed $5,000.’’ 

The staff of Treasury and 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. The 

Department notes that the safe harbor contained 

herein applies only to employee benefit pension 

plans covered under title I of ERISA. See infra note 

20.

8Conforming amendments to Code sections 

401(a)(31) and 401(f)(1) were also made by section 

657 of EGTRRA.

9 69 FR 9846, as corrected at 69 FR 11043. http:/

/www.dol.gov/ebsa/regs/fedreg/notices/

2004004552.htm.

DEPARTMENT OF LABOR

Employee Benefits Security 

Administration 

29 CFR Part 2550 

RIN 1210–AA92 

Fiduciary Responsibility Under the 

Employee Retirement Income Security 

Act of 1974 Automatic Rollover Safe 

Harbor

AGENCY: Employee Benefits Security 

Administration, Labor.

ACTION: Final rule.

SUMMARY: This document contains a 

final regulation that establishes a safe 

harbor pursuant to which a fiduciary of 

a pension plan subject to Title I of the 

Employee Retirement Income Security 

Act of 1974, as amended (ERISA), will 

be deemed to have satisfied his or her 

fiduciary responsibilities in connection 

with automatic rollovers of certain 

mandatory distributions to individual 

retirement plans. This final regulation 

will affect employee pension benefit 

plans, plan sponsors, administrators and 

fiduciaries, service providers, and plan 

participants and beneficiaries.

DATES: Effective Date: This final 

regulation is effective March 28, 2005. 

Applicability Date: This final 

regulation shall apply to the rollover of 

mandatory distributions made on or 

after March 28, 2005.

FOR FURTHER INFORMATION CONTACT:

Kristen L. Zarenko, Office of 

Regulations and Interpretations, 

Employee Benefits Security 

Administration, Room N–5669, U.S. 

Department of Labor, 200 Constitution 

Avenue, NW., Washington, DC 20210, 

(202) 693–8510. This is not a toll-free 

number.

SUPPLEMENTARY INFORMATION:

A. Background 

Under the Internal Revenue Code of 

1986, as amended (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 $5,000.1 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,2 into an 

eligible retirement plan,3 or they may 

retain the cash-out as a taxable 

distribution. Within a reasonable period 

of time prior to making a mandatory 

distribution, plan administrators are 

required 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.4

As part of the Economic Growth and 

Tax Relief Reconciliation Act of 2001 

(EGTRRA),5 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 6 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,7

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.8

Section 657(c)(2)(A) of EGTRRA 

directed the Department of Labor 

(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. 

Section 657(c)(2)(A) of EGTRRA 

further provides that the Code 

provisions requiring automatic rollovers 

of certain mandatory distributions to 

individual retirement plans will not 

become effective until the Department 

issues safe harbor regulations. 

On March 2, 2004, the Department 

published a notice in the Federal 

Register (69 FR 9900) containing a 

proposed safe harbor regulation for the 

automatic rollover of certain mandatory 

distributions, designated as proposed 

§ 2550.404a–2 of Title 29 (proposal). 

The standards contained in the 

proposal, as explained in the preamble, 

were based in part on comments the 

Department received in response to a 

Request for Information (RFI) published 

on January 7, 2003 in the Federal 

Register (68 FR 991). The Department 

also published a proposed class 

exemption in the March 2, 2004 edition 

of the Federal Register (69 FR 9846) to 

address certain prohibited transactions 

that may result in connection with 

automatic rollovers.9 The Department 

received 45 comment letters in response 

to the proposed safe harbor regulation 

and related class exemption. Copies of 

Federal Register / Vol. 69, No. 187 / Tuesday, September 28, 2004 / Rules and Regulations 58019

10http://www.dol.gov/ebsa/regs/

cmt_autorollover.html (for the proposed safe harbor 

regulation); http://www.dol.gov/ebsa/regs/

cmt_autorolloverexe.html (for the proposed class 

exemption). 11See supra note 1.

these comments are posted on the 

Department’s Website.10

After careful consideration of the 

issues raised by the written comments 

on the proposal, the Department has 

modified the scope of the regulation and 

revised some of the conditions requisite 

to achieving relief under the safe harbor. 

The Department now is publishing in 

this notice, in final form, regulation 

§ 2550.404a–2 of Title 29 (regulation), 

establishing a safe harbor pursuant to 

which a fiduciary will be deemed to 

have satisfied his or her fiduciary 

responsibilities in connection with 

rollovers of certain mandatory 

distributions to individual retirement 

plans. In modifying the regulation, the 

Department has attempted to strike a 

balance between preserving retirement 

assets for participants on whose behalf 

a rollover is made to an individual 

retirement plan and the costs attendant 

to establishing and maintaining such 

plans on behalf of the participants.

Set forth below is an overview of the 

regulation, with a discussion of the 

comments received in response to the 

proposal and changes made in response 

to those comments. 

B. Overview of Final Safe Harbor 

Regulation 

1. Scope 

Like the proposal, paragraph (a)(1) of 

the regulation provides that the safe 

harbor applies to the automatic rollover 

of a mandatory distribution described in 

section 401(a)(31)(B) of the Code, which 

limits such distributions to 

nonforfeitable accrued benefits 

(generally referred to as vested benefits), 

the present value of which is in excess 

of $1,000, but 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 may 

include prior rollover contributions, the 

regulation provides safe harbor coverage 

for the automatic rollover of mandatory 

distributions containing such prior 

rollover contributions. 

Several commenters recommended 

that the safe harbor be expanded to 

include mandatory distribution amounts 

of $1,000 or less, which tax-qualified 

retirement plans are permitted to 

distribute to a separating participant 

without the participant’s consent if the 

present value of the participant’s vested 

accrued benefit does not exceed 

$5,000.11 A number of commenters also 

suggested that the safe harbor extend to 

distributions of amounts greater than 

$5,000 (amounts beyond those 

otherwise permitted under section 

411(a)(11) of the Code).

Taking into account the purpose and 

provisions of the safe harbor regulation, 

the Department is persuaded that 

application of the safe harbor to 

rollovers of mandatory distributions of 

$1,000 or less is appropriate. In this 

regard, the Department believes that the 

availability of the safe harbor for such 

distributions may increase the 

likelihood that such amounts will be 

rolled over to individual retirement 

plans and thereby may promote the 

preservation of retirement assets, 

without compromising the interests of 

the participants on whose behalf such 

rollovers are made. Therefore, paragraph 

(a)(1) of the regulation has been 

modified to provide that the safe harbor 

in § 2550.404a–2 extends to certain 

other mandatory distributions not 

described in section 401(a)(31)(B) of the 

Code. A new paragraph (d) has been 

added to the regulation to address 

mandatory distributions of $1,000 or 

less. With regard to distributions greater 

than $5,000, the Department is not 

prepared to conclude that the 

framework for safe harbor relief, 

specifically the prescribed investment 

products, is appropriate for 

distributions in excess of the amounts 

otherwise subject to the automatic 

rollover requirements of section 

401(a)(31)(B) of the Code. Accordingly, 

no modifications have been made to the 

regulation concerning such amounts. 

Paragraph (b) of the regulation, like 

the proposal, provides that, if the 

conditions of the safe harbor are met, 

fiduciaries will be deemed to have 

satisfied their fiduciary duties under 

section 404(a) of ERISA with respect to 

both the selection of an individual 

retirement plan provider and the 

investment of funds in connection with 

an automatic rollover of a mandatory 

distribution described in section 

401(a)(31)(B) of the Code to an 

individual retirement plan, within the 

meaning of section 7701(a)(37) of the 

Code. 

The regulation continues to make 

clear that the standards set forth in the 

proposed regulation apply solely for 

purposes of determining compliance 

with the safe harbor and that such 

standards are not intended to represent 

the exclusive means by which a 

fiduciary might satisfy his or her duties 

under ERISA with respect to automatic 

rollovers of mandatory distributions 

described in section 401(a)(31)(B) of the 

Code. 

As noted above, section 657(c)(2)(B) 

of EGTRRA provides that the Secretary 

of the Treasury and the Secretary of 

Labor shall consider and may provide 

special relief with respect to the use of 

low-cost individual retirement plans. 

The Department considered the 

provision of such special relief and 

believes that the framework of the safe 

harbor encourages the use of low-cost 

individual retirement plans for purposes 

of rollovers under section 401(a)(31)(B) 

of the Code. The Department 

specifically invited public comment on 

whether, given the conditions of the 

proposal, further relief was necessary in 

this regard. While the Department did 

not receive comments specifically 

addressing the necessity of further relief 

regarding the use of low-cost individual 

retirement plans, a substantial number 

of comments concerned the fee and 

expense limitations, which relate 

directly to the cost of establishing and 

maintaining automatic rollover 

individual retirement plans. As 

discussed below, the regulation has 

been modified to reflect comments 

made concerning fees and expenses 

assessed in connection with distribution 

and maintenance of rolled-over funds 

into an individual retirement plan. 

2. Conditions 

The proposal provided that safe 

harbor relief is dependent on a fiduciary 

satisfying six conditions. These 

conditions related to the amount of 

distributions, the qualifications of 

retirement plan providers, permissible 

investment products, limits on fees and 

expenses, disclosure of information to 

participants and prohibited 

transactions. Except as discussed below, 

this regulation, while structured 

somewhat differently, generally retains 

the conditions of the proposal. Each of 

the conditions is discussed below. 

Amount of Mandatory Distributions 

The first condition, described in 

paragraph (c)(1) of the regulation, 

58020 Federal Register / Vol. 69, No. 187 / Tuesday, September 28, 2004 / Rules and Regulations 

12For example, with respect to individual 

retirement accounts, 26 CFR 1.408–2(b)(2)(i) 

provides that the trustee of an individual retirement 

account must be a bank (as defined in section 

408(n) of the Code and regulations thereunder) or 

another person who demonstrates, in the manner 

described in paragraph (e) of the regulation, to the 

satisfaction of the IRS, that the manner in which the 

trust will be administered will be consistent with 

section 408 of the Code and regulations thereunder. 

With respect to individual retirement annuities, 26 

CFR 1.408–3 describes, among other things, 

requirements that must be met in order to maintain 

the tax-qualified status of such annuity 

arrangements. 13Rev. Rul. 2000–36, 2000–2 C.B. 140.

requires that, for the automatic rollover 

of mandatory distributions, the present 

value of the nonforfeitable accrued 

benefit, as determined under section 

411(a)(11) of the Code, does not exceed 

the maximum amount permitted under 

section 401(a)(31)(B) of the Code. 

Although this condition is generally the 

same as the proposal, paragraph (d) has 

been added to provide safe harbor relief 

for mandatory distributions of $1,000 or 

less that are directly rolled over. 

One commenter requested 

clarification as to whether the amount of 

a participant loan would constitute a 

portion of the present value of the 

nonforfeitable accrued benefit for 

purposes of the safe harbor. This 

question involves an interpretation of 

sections 401(a)(31)(B) and 411(a)(11) of 

the Code and, therefore, is beyond the 

jurisdiction of the Department. 

Accordingly, this question has been 

referred to the Department of the 

Treasury (Treasury) and the Internal 

Revenue Service (IRS) for consideration.

Rollover Distribution to an Individual 

Retirement Plan 

The second condition of the 

regulation, described in paragraph 

(c)(2), requires that the mandatory 

distribution be directed to an individual 

retirement plan within the meaning of 

section 7701(a)(37) of the Code. Section 

7701(a)(37) defines the term ‘‘individual 

retirement plan’’ to mean 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. Accordingly, a bank, 

insurance company, financial 

institution or other provider of an 

individual retirement plan under the 

safe harbor is required to satisfy the 

requirements of the Code and 

regulations issued thereunder.12

The Department is adopting this 

condition without modification. No 

commenters objected to this condition 

or identified any problems in the 

existing Code or regulatory standards for 

individual retirement plans. However, a 

number of commenters did raise 

questions concerning the application of 

this provision. These questions 

included whether fiduciaries can select 

multiple individual retirement plan 

providers at the same time or only use 

one, and whether multiple plans of the 

same employer may designate the same 

provider as the recipient for all 

automatic rollovers. The safe harbor 

regulation establishes neither 

minimums nor maximums in terms of 

the number of individual retirement 

plan providers to a plan or multiple 

plans of an employer. The regulation 

merely requires, without regard to 

whether there are one or more 

individual retirement plan providers, 

that mandatory distributions be directed 

to an individual retirement plan within 

the meaning of section 7701(a)(37) of 

the Code. One commenter requested 

clarification regarding the status of 

brokerage firms that qualify as non-bank 

trustee individual retirement plan 

providers under section 408 of the Code. 

In the Department’s view, any 

individual retirement plan provider 

offering individual retirement plans as 

defined in section 7701(a)(37) of the 

Code is a qualified provider for 

purposes of the safe harbor. 

Agreements With Individual Retirement 

Plan Providers 

Several commenters urged the 

Department to clarify the obligations of 

plan fiduciaries in terms of reliance on 

representations of individual retirement 

plan providers concerning satisfaction 

of the conditions of the safe harbor 

regulation and monitoring compliance 

with the conditions of the regulation 

following the initial selection and 

distribution of funds to the individual 

retirement plan provider. In response to 

these and other issues, the Department 

restructured paragraph (c) to establish 

an explicit requirement for a written 

agreement on which the plan fiduciary 

may rely in making rollover 

distributions under the safe harbor 

regulation. As modified, paragraph 

(c)(3) now provides, as a condition for 

relief under the regulation, that a 

fiduciary enter into a written agreement 

with an individual retirement plan 

provider that specifically addresses, 

among other things, the investment of 

rolled-over funds and the fees and 

expenses attendant to the individual 

retirement plan. The Department 

anticipates that such information would 

be addressed in documents currently 

utilized by individual retirement plan 

providers in the normal course of their 

business and that special documents 

would not have to be prepared for 

purposes of the safe harbor. 

To the extent that the terms and 

conditions of the agreement comport 

with the conditions of the safe harbor 

regulation with respect to rollover 

distributions, the fiduciary will be able 

to evidence compliance with the 

regulation. In this regard, the fiduciary 

can rely on commitments of the 

individual retirement plan provider as 

reflected in the agreement(s) and is not 

required to monitor the provider’s 

compliance with the terms of the 

agreement beyond the point in time 

funds are rolled over in accordance with 

the terms of the agreement. In other 

words, the plan fiduciary’s 

responsibility with respect to mandatory 

rollovers ends at such time as the funds 

are placed with the individual 

retirement plan provider pursuant to an 

agreement that satisfies the conditions 

of the safe harbor. This position is 

consistent with the Department’s view 

expressed in a footnote to Revenue 

Ruling 2000–36 relating to mandatory 

distributions.13

Inasmuch as the agreement is being 

entered into on behalf of a plan 

participant, the regulation further 

provides, at subparagraph (c)(3)(v), that 

the terms of the agreement are 

enforceable by the participant on whose 

behalf the fiduciary makes an automatic 

rollover to an individual retirement 

plan. Such a provision is consistent 

with the view that the obligations of the 

plan fiduciary end, and the rights of the 

former participant as the account holder 

begin, with the distribution of funds to 

the individual retirement plan provider.

Investment Products 

Paragraph (c)(3)(i), (ii) and (iii) 

address the types of investments that are 

permitted under the safe harbor. While, 

as discussed below, a number of 

commenters suggested expanding the 

types of investments that would be 

permitted under the regulation, the 

Department has concluded that the 

limited approach of the proposal is 

more appropriate for safe harbor relief. 

This regulation, therefore, provides that 

the agreement entered into by the plan 

fiduciary must provide, with respect to 

investment of individual retirement 

plan funds, that (i) the rolled-over funds 

shall be invested in an investment 

product designed to preserve principal 

and provide a reasonable rate of return, 

whether or not such return is 

guaranteed, consistent with liquidity; 

(ii) for purposes of (i), the investment 

product selected for the rolled-over 

funds 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; and (iii) the investment product 

selected for the rolled-over funds shall 

Federal Register / Vol. 69, No. 187 / Tuesday, September 28, 2004 / Rules and Regulations 58021

14Regarding money market mutual funds, 

prospectuses for such funds generally state that ‘‘an 

investment in the [money market mutual] Fund is 

not insured or guaranteed by the Federal Deposit 

Insurance Corporation or any other government 

agency. Although the Fund seeks to preserve the 

value of your [the investor’s] investment at $1.00 

per share, it is possible to lose money by investing 

in the Fund.’’

be offered by a State or federally 

regulated financial institution, which 

shall be: 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. 

As with the proposal, the standards in 

subparagraphs (c)(3)(i)-(iii) reflect the 

Department’s view that, given the nature 

and amount of automatic rollovers, 

investments under the safe harbor 

should be designed to minimize risk, 

preserve assets for retirement and 

maintain liquidity. Such safe harbor 

investment products would typically 

include money market funds 

maintained by registered investment 

companies,14 and interest-bearing 

savings accounts and certificates of 

deposit of a bank or a similar financial 

institution. In addition, safe harbor 

investment products would include 

‘‘stable value products’’ issued by a 

regulated financial institution that are 

fully benefit-responsive to the 

individual retirement plan account 

holder. Such stable value products 

provide a liquidity guarantee of 

principal by a financially responsible 

third party 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 

on the account holder’s access to the 

assets of the individual retirement plan.

Several commenters endorsed the 

Department’s view that safe harbor 

investment products should favor the 

retention of income and principal over 

growth. However, some commenters 

suggested expanding the types of 

permissible investment products. They 

suggested that the safe harbor should 

include investment products identical 

or similar to those in which the 

participant had directed his or her 

investments prior to the mandatory 

distribution. Some commenters 

recommended that the default 

investment options selected by 

fiduciaries for account balances under 

the plan for which participants fail to 

provide investment direction should be 

included as permissible safe harbor 

investments. Other commenters urged 

the inclusion of balanced or diversified 

funds, because the necessarily low 

returns on the approved safe harbor 

investments, would not help retirement 

savings grow over time. 

The Department continues to believe 

that an investment strategy adopted by 

a participant while in a defined 

contribution plan or a default 

investment chosen by a plan fiduciary at 

a particular point in time would not 

necessarily continue to be appropriate 

for the separating participant in the 

context of an automatic rollover, 

particularly given the relatively small 

account balances typically covered by 

the safe harbor. Further, the Department 

believes that, consistent with Congress’

intent to preserve retirement assets for 

participants, the investment products in 

which mandatory distributions can be 

invested under the safe harbor should 

be limited to investment products that 

are consistent with this goal of 

preservation. In the Department’s view, 

this would be limited to the class of 

investment products designed to 

preserve principal and provide a 

reasonable rate of return, whether or not 

such return is guaranteed, consistent 

with liquidity. For these reasons, the 

Department retained the proposal’s 

standards without modification in 

subparagraphs (c)(3)(i) and (ii) of the 

regulation. 

One commenter requested 

clarification that the investment of 

rolled-over funds in safe harbor 

investment products offered by Puerto 

Rican financial institutions would 

satisfy the safe harbor’s requirement. 

The Department believes that as long as 

the Puerto Rican financial institution 

offering the investment product meets 

the regulation’s definition of ‘‘regulated 

financial institution’’, the investment of 

rolled-over funds in investment 

products offered by such Puerto Rican 

financial institution would not be 

precluded.

Several commenters appeared to 

confuse the terms ‘‘regulated financial 

institutions’’ and ‘‘individual retirement 

plan providers’’. These terms are 

defined for separate and distinct 

purposes by the regulation. An 

individual retirement plan provider is 

an entity that offers individual 

retirement plans to which a mandatory 

distribution must be transferred, while a 

regulated financial institution is an 

entity that offers the types of investment 

products in which a mandatory 

distribution must be invested. While it 

is conceivable that one entity may meet 

both definitions, it is equally plausible 

that two entities will be involved. For 

example, a plan fiduciary may select a 

bank that qualifies as an individual 

retirement plan provider to receive a 

mandatory distribution and may also 

select certificates of deposit as a safe 

harbor investment that are offered by 

this same entity as a regulated financial 

institution. On the other hand, a plan 

fiduciary may select a financial 

institution that qualifies as an 

individual retirement plan provider to 

receive a mandatory distribution and 

may then select a safe harbor investment 

made available by this institution to its 

customers, such as a money market 

mutual fund, which is actually offered 

by a different entity, an investment 

company registered under the 

Investment Company Act of 1940, 

which qualifies as a regulated financial 

institution. 

Fees and Expenses 

Subparagraph (c)(3)(iv) of the 

regulation addresses the extent to which 

fees and expenses can be assessed 

against an individual retirement plan, 

including investments of such plan (e.g.,

establishment charges, maintenance 

fees, investment expenses, termination 

costs and surrender charges). Under the 

proposal, fees and expenses could not 

exceed amounts charged by the 

individual retirement plan provider for 

comparable individual retirement plans 

established for rollover distributions 

other than automatic rollovers. The 

proposal further provided that fees and 

expenses, other than those attributable 

to establishment of the individual 

retirement plan, could be charged only 

against the income earned by the 

individual retirement plan. 

Most commenters objected to the 

provision limiting fees and expenses to 

income earned by the individual 

retirement plan. They argued, among 

other things, that the income to be 

generated by the investments permitted 

by the safe harbor against which 

expenses may be assessed would be 

very limited, while the costs attendant 

to maintaining such individual 

retirement plans would tend to be 

higher than individual retirement plans 

with respect to which the account 

holder contributes and maintains 

contact with the institution. Such 

constraints, it was argued, would limit 

the number of individual retirement 

plan providers available for rollover 

distributions in accordance with the 

safe harbor regulation. These 

commenters further argued that the 

comparability standard of the proposal 

provides adequate protection to 

58022 Federal Register / Vol. 69, No. 187 / Tuesday, September 28, 2004 / Rules and Regulations 

15The Department notes that individual 

retirement plan providers are subject to section 

4975 of the Code including the requirement that the 

fees and expenses may not exceed reasonable 

compensation within the meaning of section 

4975(d)(2) of the Code.

16This condition is consistent with the 

Department’s statement in a footnote to Revenue 

Ruling 2000–36, 2000–2 C.B. 140 requiring that 

plan provisions governing the default direct 

rollover of distributions, including the participant’s 

ability to affirmatively opt out of the arrangement, 

must be described in the plan’s SPD furnished to 

participants. 17Section 657(a) of EGTRRA added a notice 

requirement to section 401(a)(31)(B)(i) of the Code 

requiring the plan administrator to notify a 

participant in writing, either separately or as part 

of the required Code section 402(f) notice, that the 

participant may transfer the distribution to another 

individual retirement plan. See supra note 8. 18Pub. L. 107–56, October 26, 2001, 115 Stat. 272.

individual retirement plan account 

holders in both the setting of fees and 

expenses and services provided, given 

the competitive nature of the individual 

retirement plan marketplace generally.15

After careful consideration, the 

Department is persuaded that a 

comparability standard, without further 

limit, is sufficient to protect individual 

retirement plans from being assessed 

unreasonable fees, while avoiding the 

imposition of financial disincentives for 

individual retirement plan providers to 

offer plans for mandatory rollover 

distributions under the safe harbor. The 

Department has modified the regulation 

accordingly in subparagraph (c)(3)(iv). 

Notice to Participants 

The fourth condition for safe harbor 

relief, described in paragraph (c)(4) of 

the regulation, requires, like the 

proposal, that, prior to an automatic 

rollover, participants must be furnished 

a summary plan description (SPD) or 

summary of material modifications 

(SMM) that includes an explanation of 

the nature of the investment product in 

which the mandatory distribution will 

be invested, and an explanation of how 

fees and expenses attendant to the 

individual retirement plan will be 

allocated (i.e., the extent to which 

expenses will be borne by the account 

holder alone or shared with the 

distributing plan or plan sponsor). In 

addition, the disclosure must identify a 

plan contact for further information 

concerning the plan’s procedures, 

individual retirement plan providers, 

and the fees and expenses attendant to 

the individual retirement plan. For 

purposes of this condition, the plan 

contact can be identified by reference to 

a person, position or office, along with 

an address and phone number of the 

contact. It is anticipated that the 

contact, in response to requests from 

separated participants on whose behalf 

distributions have been made to an 

individual retirement plan, would be 

able to identify the individual 

retirement plan provider to whom a 

distribution was made for the particular 

participant. 

Several commenters supported the 

disclosure provision as proposed, and 

others requested clarification on issues 

such as the timing of SPD or SMM 

revisions and the provision of electronic 

notice. Some commenters requested that 

the Department broaden the proposed 

disclosure condition to require that 

separating participants be notified of 

automatic rollover procedures at the 

time a distribution is made in order to 

provide more timely information. One 

commenter recommended this approach 

as a permitted alternative to SPD or 

SMM disclosure, while another 

advocated for this approach in lieu of 

the SPD or SMM disclosure. Another 

commenter asserted that, in addition to 

SPD or SMM disclosure, a plan sponsor 

should be required to provide an 

individualized notice to separating 

participants before any rollover 

distribution is made, including all of the 

information required to be contained in 

the SPD or SMM, the participant’s 

benefit amount, and generic tax 

information on direct transfers, 

rollovers, and distributions. 

The Department continues to believe 

that information concerning automatic 

rollover procedures must be included in 

a plan’s SPD or SMM.16 The Department 

also believes that the SPD or SMM that 

is provided to participants before 

mandatory distributions are made, in 

conjunction with the notice required 

under Code section 402(f) that is 

provided on an individual basis within 

a specified period before a mandatory 

distribution is made, as well as the 

notice expressly added by EGTRRA 

under the Code,17 ensure that 

participants and beneficiaries will be 

provided, and have access to, sufficient 

information about automatic rollovers. 

The Department is not persuaded that 

the benefits to participants that might be 

obtained by additional disclosures will, 

given the existing required disclosures, 

outweigh the costs and burdens 

attendant to such disclosure.

Prohibited Transactions

The fifth condition, described in 

paragraph (c)(5) of the regulation, 

conditions safe harbor relief on the plan 

fiduciary not engaging in prohibited 

transactions in connection with the 

selection of an individual retirement 

plan provider or investment products, 

unless such actions are covered by a 

statutory or administrative exemption 

issued under section 408(a) of ERISA; 

for example, a plan fiduciary that 

received consideration from a financial 

institution in exchange for selecting that 

financial institution as the individual 

plan provider would have engaged in a 

prohibited transaction under ERISA 

section 406 that is not covered by either 

the statutory service provider exemption 

under ERISA section 408(b)(2) or an 

administrative exemption. This 

condition remains unchanged from the 

proposal, in part, because commenters 

did not request any changes. 

As noted in ‘‘Background’’ above, the 

Department also published a proposed 

class exemption in the Federal Register

that was intended to deal with 

prohibited transactions resulting from 

an individual retirement plan provider’s 

selection of itself as the provider of an 

individual retirement plan and/or issuer 

of an initial investment held by such 

plan in connection with mandatory 

distributions from the provider’s own 

pension plan. The Department received 

four comment letters that specifically 

addressed the proposed class 

exemption’s conditions; these 

comments are discussed in the final 

class exemption, referenced below. 

Simultaneously with publication of 

the regulation, the Department is 

publishing a final class exemption in 

today’s Federal Register. Specifically, 

the exemption permits a bank or other 

financial institution to (1) select itself or 

an affiliate as the individual retirement 

plan provider to receive automatic 

rollovers from its own plan, (2) select its 

own funds or investment products for 

automatic rollovers from its own plan 

and (3) receive fees therefor. In the 

absence of this exemption, a bank or 

other financial institution would be 

required to direct automatic rollovers 

from its own plan for its own employees 

to a competitor as the individual 

retirement plan provider. 

C. Miscellaneous Issues 

In response to the Department’s 

proposal, a number of commenters 

identified possible impediments that 

fiduciaries, banks and other financial 

institutions might encounter in 

connection with automatic rollovers. 

These commenters requested 

clarification on a number of issues, 

including perceived conflicts with state 

laws on signature requirements and 

escheat, Code and regulatory 

requirements, requirements under the 

USA PATRIOT Act,18 section 404(c)(3) 

of ERISA, missing participant issues, 

and beneficiary designations under the 

distributing employee benefit plan. 

Issues raised by commenters concerning 

the possible application of state laws 

Federal Register / Vol. 69, No. 187 / Tuesday, September 28, 2004 / Rules and Regulations 58023

19The term ‘‘other Federal functional regulators’’

refers to the other agencies responsible for 

administration and regulations under the Act.

20 It is the Department’s understanding that this 

interpretation applies to a broad spectrum of 

employee benefit plans including those covered by 

title I of ERISA and those established under Code 

provisions.

21See FAQs: Final CIP Rule at: http://

www.occ.treas.gov/10.pdf; http://www.fincen.gov/

finalciprule.pdf; http://www.fdic.gov/news/news/

financial/2004/FIL0404a.html.

including signature and escheat 

requirements are beyond the scope of 

the regulation.

Code Requirements 

In response to the RFI and the 

proposal, some commenters raised 

concerns with regard to Code 

requirements that may conflict with the 

establishment of individual retirement 

plans for purposes of automatic 

rollovers of mandatory distributions 

under section 401(a)(31)(B) of the Code. 

For example, one commenter raised 

issues concerning the application of the 

safe harbor to employer-sponsored plans 

in Puerto Rico, not all of which are 

governed by the Code. These Code 

issues are beyond the Department’s 

jurisdiction and have been referred to 

Treasury and IRS for consideration. The 

Department has been informed that the 

staffs of Treasury and IRS are reviewing 

the current rules and regulations 

affecting distributions covered by the 

regulation and that guidance addressing 

the application of these rules to the 

automatic rollover of mandatory 

distributions is anticipated prior to the 

effective date of this regulation. 

USA PATRIOT Act 

A few commenters continued to 

express concern over the application of 

the customer identification and 

verification (CIP) procedures of the USA 

PATRIOT Act (the Act). These 

commenters’ concerns mirrored those 

previously expressed in response to the 

Department’s RFI. Generally, the 

perceived difficulties concern situations 

where a fiduciary is required to make an 

automatic rollover to an individual 

retirement plan, but the participant 

cannot be located or is otherwise not 

communicating with the plan 

concerning the distribution of plan 

benefits. If the CIP provisions of the Act 

were construed to require active 

participant involvement at the time an 

individual retirement plan is 

established on his or her behalf, 

fiduciaries would be unable to comply 

with the automatic rollover 

requirements of the Code and utilize 

this safe harbor. 

In response to these concerns, the 

Department reiterates that it has been 

advised by Treasury staff, along with 

staff of other Federal functional 

regulators,19 that they interpret the CIP 

requirements of section 326 of the Act 

and implementing regulations to require 

that banks and other financial 

institutions implement their CIP 

compliance program with respect to an 

account, including an individual 

retirement plan established by an 

employee benefit plan in the name of a 

former participant (or beneficiary) of 

such plan, only at the time the former 

participant or beneficiary first contacts 

such institution to assert ownership or 

exercise control over the account. CIP 

compliance will not be required at the 

time an employee benefit plan 

establishes an account and transfers the 

funds to a bank or other financial 

institution for purposes of a distribution 

of benefits from the plan to a separated 

employee.20 In January 2004, Treasury 

staff, along with staff of the other 

Federal functional regulators, issued 

guidance on this matter in the form of 

a question and answer, published in a 

set of ‘‘FAQs: Final CIP Rule,’’ on the 

regulators’’ Web sites.21

ERISA Section 404(c)(3) 

Several commenters requested that 

the Department clarify the relationship 

between ERISA section 404(c)(3), as 

added by EGTRRA section 657(c) and 

the safe harbor relief provided in the 

regulation under ERISA section 404(a). 

ERISA section 404(c)(3) provides that, 

in the case of a pension plan that makes 

a transfer to an individual retirement 

account or annuity under Code section 

401(a)(31)(B), the participant will be 

treated as exercising control over the 

assets of the individual retirement 

account or annuity upon (A) the earlier 

of (i) a rollover of all or a portion of the 

account or annuity to another account 

or annuity or (ii) one year after the 

transfer is made; or (B) a transfer that is 

made in a manner consistent with 

guidance provided by the Secretary. 

The Department confirms that this 

regulation is the guidance referred to in 

ERISA section 404(c)(3)(B). 

Consequently, a fiduciary’s rollover of a 

mandatory distribution to an individual 

retirement plan under this regulation 

will be treated as ‘‘a transfer that is 

made in a manner consistent with 

guidance provided by the Secretary’’

under ERISA section 404(c)(3)(B). 

Immediately following such rollover, 

the Department will view the 

participant as exercising control over 

the assets of the individual retirement 

plan for purposes of ERISA section 

404(c)(3). 

Missing Participants 

Some commenters requested that the 

Department provide additional guidance 

in the regulation to plan fiduciaries of 

terminated defined contribution plans 

concerning missing participants. For 

example, one commenter suggested 

expanding the safe harbor beyond the 

automatic rollover context to handle 

missing participant issues. Although the 

Department is aware of the problems 

faced by plan fiduciaries in handling 

missing participants’ accounts, the 

Department believes that these issues 

are beyond the scope of this safe harbor 

initiative on mandatory rollover 

distributions. 

Beneficiary Designations

One commenter questioned whether 

an existing beneficiary designation 

under the distributing plan, whether 

made by a participant or a default 

designation under the terms of the plan, 

would transfer to the individual 

retirement plan into which the 

participant’s benefit is rolled over. As 

stated above, in the Department’s view, 

the rollover distribution of the entire 

pension plan benefit to which a 

participant is entitled into an individual 

retirement plan ends his or her status as 

a plan participant, and the distributed 

assets cease to be plan assets under Title 

I of ERISA. As a corollary to this view, 

a beneficiary designation under the 

distributing plan would cease to control 

the distribution of the rolled-over funds 

upon the death of the individual 

retirement plan account holder. Further, 

nothing in the regulation precludes an 

individual retirement plan provider 

from applying its own default 

beneficiary provisions under the terms 

of the individual retirement plan until 

an individual retirement plan account 

holder makes an affirmative designation 

under the terms of the individual 

retirement plan. 

D. Effective Date 

Section 657(c)(2)(A) of EGTRRA 

provides that the requirements of 

section 401(a)(31)(B) of the Code 

requiring automatic rollovers of 

mandatory distributions to individual 

retirement plans do not become 

effective until the Department 

prescribes a final regulation. Inasmuch 

as it appears clear that Congress did not 

intend fiduciaries to be subject to the 

automatic rollover requirements under 

the Code in the absence of a safe harbor, 

the Department as well as Treasury and 

IRS believe that the effective date of the 

Code’s rollover requirement must be 

determined by reference to the effective 

date of this regulation, which is the 

58024 Federal Register / Vol. 69, No. 187 / Tuesday, September 28, 2004 / Rules and Regulations 

22The Department notes, however, that the 

related final class exemption published today in the 

Federal Register cannot be relied upon for 

prohibited transaction relief prior to the effective 

date of the regulation.

point in time when plan fiduciaries may 

first avail themselves of the relief 

provided by the safe harbor. In this 

regard, the Department proposed to 

make the regulation effective 6 months 

after the date of its publication in the 

Federal Register in order to afford plan 

fiduciaries adequate time to amend their 

plans, distribute required disclosures 

and identify institutions and products 

that would afford relief under the final 

safe harbor regulation. 

A few commenters suggested that the 

effective date of the regulation should 

be delayed for one year following its 

publication to provide sufficient time 

for fiduciaries to comply with the 

conditions of the safe harbor and 

individual retirement plan providers to 

develop individual retirement plans for 

the automatic rollover market. Other 

commenters requested a one year delay 

based on the many outstanding issues 

that require clarification from Treasury 

and IRS. 

After careful consideration of the 

comments, the Department, in 

consultation with the staffs of Treasury 

and IRS, has concluded that delaying 

the effective date for 6 months following 

publication in the Federal Register will 

provide most plans adequate time to 

implement processes necessary to take 

advantage of the safe harbor relief 

provided by the regulation. In 

particular, the Department notes that the 

regulation will not require the 

comprehensive systems changes 

required under the proposal’s earnings 

limitation on fees and expenses. 

Accordingly, paragraph (e) of the 

regulation provides that the regulation 

shall be effective and shall apply to any 

rollover of a mandatory distribution 

made on or after the date 6 months 

following publication in the Federal 

Register. 

The Department notes that fiduciaries 

may rely in good faith on the regulation 

for purposes of satisfying their fiduciary 

responsibilities under section 404(a) of 

ERISA with regard to the selection of an 

institution to receive a rollover of a 

mandatory distribution and the initial 

investment choice for the rolled-over 

funds made before the effective date of 

this regulation.22

E. Regulatory Impact Analysis 

Summary 

This regulation establishes conditions 

under which a fiduciary will be deemed 

to satisfy the fiduciary obligations under 

section 404(a) of ERISA in connection 

with the automatic rollover of a 

mandatory distribution of between 

$1,001 and $5,000, as described in 

amended Code section 401(a)(31)(B), 

and certain other distributions 

described in section 411(a)(11) of the 

Code and not described in section 

401(a)(31)(B). The savings arising from 

this safe harbor will substantially 

outweigh its costs. Benefits will accrue 

to fiduciaries through greater certainty 

and reduced exposure to risk, and to 

former plan participants through 

regulatory standards concerning 

individual retirement plan providers, 

investment products, preservation of 

principal, rates of return, liquidity, fees 

and expenses, and disclosure. The safe 

harbor will help preserve the principal 

amounts of automatic rollovers of 

mandatory distributions by ensuring 

that the various fees and expenses 

applicable to the individual retirement 

plans established for mandatory 

distributions are not larger than those 

charged by the provider to individual 

retirement plans established for reasons 

other than the receipt of a rollover 

distribution subject to Code section 

401(a)(31)(B). It is assumed, for 

purposes of cost estimates presented 

here, that all fees, to the extent that they 

meet the condition related to 

comparability, will be charged to the 

individual retirement plan. 

Individual retirement plan 

establishment and maintenance fees for 

participants are estimated, at the upper 

bound at $21.6 million, $7.2 million of 

which are costs associated with changes 

to the regulation. Automatic rollovers of 

mandatory distributions may give rise to 

other costs as well, such as investment 

expenses, termination charges, and 

surrender charges. The magnitude of 

some of those expenses will relate to the 

actual investment products selected. 

The range of possible costs that relate to 

investment products is considered too 

broad to support meaningful estimates. 

The EGTRRA amendment will 

generate one-time administrative 

compliance costs to plans of an 

estimated $139 million. Cost to plans 

associated with modifying a summary 

plan description or summary of material 

modifications to satisfy the safe harbor 

conditions are estimated at $13 million. 

Annually, on aggregate, the EGTRRA 

amendment and the regulation are 

expected to affect 361,000 former 

participants, preserving retirement 

savings of an estimated $270 million 

and creating tax savings of 

approximately $77 million. The 

guidance provided by the regulation 

will result in a savings of administrative 

compliance costs for plans of about $92 

million by lessening the time required 

to select an individual retirement plan 

provider, investment product, and fee 

structure that are consistent with the 

provisions of Code section 401(a)(31)(B) 

and ERISA section 404(a) with respect 

to automatic rollovers of mandatory 

distributions. Finally, a small number of 

defined benefit plans will benefit 

annually from reduced premiums to the 

Pension Benefit Guaranty Corporation 

(PBGC) of approximately $202,200.

Further discussion of costs and 

benefits of the EGTRRA amendment and 

the regulation, and the data and 

assumptions underlying these estimates, 

will be found below. 

Executive Order 12866 Statement 

Under Executive Order 12866, the 

Department must determine whether a 

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) of the 

Executive Order, a ‘‘significant 

regulatory action’’ is 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. OMB has determined that this 

action is significant under section 3(f)(4) 

because it raises novel legal or policy 

issues arising from the President’s 

priorities. Accordingly, the Department 

has undertaken an analysis of the costs 

and benefits of the regulation. OMB has 

reviewed this regulatory action. 

1. Costs of the EGTRRA Amendment 

and the Regulation 

The Census Bureau’s 1996 Survey of 

Program Participation (SIPP), Wave 7 

Pension Benefits Module collected 

information as to the number, uses, and 

values of lump sum distributions from 

private pension plans in 1997. The 

survey responses show whether a 

distribution was mandatory or 

voluntary, and whether the amount 

involved was ‘‘Rolled over into another 

Federal Register / Vol. 69, No. 187 / Tuesday, September 28, 2004 / Rules and Regulations 58025

plan, an IRA, or an individual 

retirement annuity’’ (‘‘rolled over’’). The 

number of lump sum distributions that 

are less than $5,000 and that were 

characterized as mandatory and put to 

other specific uses enumerated in the 

survey instrument (‘‘lump sums’’) has 

been used for the purpose of this 

analysis to approximate the number of 

participants in plans with mandatory 

distribution provisions that might fail to 

make an affirmative election. The 

number of automatic rollovers of 

mandatory distributions that will occur 

because of the Code amendment and the 

regulation may be smaller than the 

number of lump sums because some of 

these participants may have made an 

affirmative election. It seems reasonable 

to assume that distributions rolled over 

would have involved an affirmative 

election, and that the number of 

participants making affirmative 

elections will be largely unchanged. The 

number of mandatory lump sum 

distributions of $1,001 to $5,000, 

approximately 143,000 distributions, is 

assumed to represent an upper bound of 

the number of participants potentially 

affected by the automatic rollover 

provisions of Code section 401(a)(31)(B). 

The cost of automatic rollovers has 

been adjusted to account for additional 

costs associated with rollovers of 

mandatory distributions of $1,000 or 

less by eligible plans. Specifically, new 

section 2550.404a–2(d) of the regulation 

permits plans with a mandatory 

distribution provision that includes 

individual retirement accounts valued 

at $1,000 or less, as described in section 

411(a)(11) of the Code, to roll over the 

accounts into an individual retirement 

plan. Unlike the mandatory rollover 

provisions of EGTRRA, the decision to 

roll over smaller accounts under new 

paragraph (d) of the regulation is a 

voluntary one. The Department has 

conservatively assumed, for purposes of 

this analysis, that all eligible plans will 

take advantage of the option to roll over 

smaller accounts and has analyzed the 

costs and benefits of the regulation 

separately from those of the 

amendment. Using data from SIPP, 

Wave 7 Pension Benefits Module, the 

Department estimates that 

approximately 85,000 participants 

might fail to make an affirmative 

election for a mandatory distribution of 

$1,000 or less. The total number of 

participants that might fail to make an 

affirmative election to roll over a 

mandatory distribution is 228,000 

participants. 

Finally, during 1997, the account 

balances with present values of accrued 

benefits (‘‘accounts’’) of between $1 and 

$5,000 of an additional 133,000 

participants were left in plans for 

reasons that are not known. Although 

there is some uncertainty with respect 

to this assumption, this number has 

been used here as a proxy for a number 

of participants that did not receive 

mandatory distributions because they 

were passive or non-responsive. 

In the aggregate, the amount of 

automatic rollovers of mandatory 

distributions to individual retirement 

plans for 361,000 participants is 

approximately $722 million per year, or 

an average of $2,000 per participant. 

Only $456 million of this total 

represents retirement savings that 

would not otherwise have been 

preserved, given that the $266 million 

was already maintained in retirement 

plans for the 133,000 former 

participants that were unavailable or 

unresponsive. 

Costs and fees will be incurred by 

pension plans in connection with 

automatic rollovers and the investments 

for individual retirement plans. 

After the effective date of the 

amendment, plans that currently 

mandate immediate distributions for 

amounts not to exceed $5,000 will, 

absent an affirmative election of a 

different alternative, make direct 

transfers of these distributions to an 

individual retirement plan. To 

implement this change, fiduciaries and 

their professional service providers will 

need to review the new requirements 

and select individual retirement plan 

providers and investment products. The 

amount of time required for this activity 

will vary, but based on 680,000 

retirement plans and an assumed hourly 

rate of $68, the aggregate cost of each 

hour is over $46 million. An effort 

involving an average of 3 hours would 

result in an aggregate one-time cost of 

$139 million. For this estimate we have 

conservatively assumed that all plans 

provide for such mandatory 

distributions and will need to take 

action to implement procedures for 

automatic rollovers to individual 

retirement plans. The proportion of 

pension plans that provide for such 

mandatory distributions is not known, 

but is believed, based on anecdotal 

evidence, to be very high. This total cost 

may be lessened to the extent that fewer 

plans will need to address the automatic 

rollover requirement, or that the 

assistance of service providers to 

multiple plans results in greater 

efficiency.

Finally, plans will incur costs in 

connection with the final safe harbor to 

modify summary plan descriptions 

(SPD) or provide a summary of material 

modifications (SMM). This cost is 

estimated to be about $13 million. Two 

commenters suggested that the cost of 

disclosing information about a plan’s 

automatic rollover provisions in an SPD 

or SMM was higher than the 

Department had estimated. The 

Department’s estimate includes the 

costs of a one-time modification to the 

SPD or preparation of an SMM, and 

mailing and materials. The estimate also 

takes into consideration the fact that 

plan administrators report making 

routine distributions of revised SPDs or 

SMMs on a regular basis. The 

Department believes that many plans 

will make the required disclosure along 

with disclosures made for other reasons. 

This is expected to have the effect of 

reducing distribution costs that would 

otherwise be associated with the 

disclosure requirement for the safe 

harbor. As such, the Department 

continues to believe that its original 

estimate of $13 million is appropriate. 

The amount of some mandatory 

distributions subject to the automatic 

rollover requirements of section 

401(a)(31)(B) of the Code may be more 

than $5,000. This can occur where the 

present value of the nonforfeitable 

accrued benefits immediately 

distributable includes additional funds 

attributable to prior rollover 

contributions (and the earnings 

thereon). 

A large majority of 401(k) plan 

participants are in plans that accept 

rollover contributions, according to the 

Bureau of Labor Statistics. There is 

some evidence, however, that rollovers 

into qualified plans are infrequent, 

which suggests that the number of 

participants whose accounts include 

amounts attributable to prior rollover 

contributions may be small. The number 

of such participants that will eventually 

become the owners of an automatic 

rollover individual retirement plan will 

be further limited by a number of 

factors, on which no data are available. 

Some plans will not mandate 

distribution of accounts that include 

prior rollover contributions and 

therefore exceed $5,000. Some accounts 

of participants with prior rollover 

contributions will accumulate more 

than $5,000 of additional contributions, 

thereby becoming ineligible for 

mandatory distributions. Some 

participants whose accounts do not 

accumulate more than $5,000 will 

affirmatively direct, upon leaving 

employment, the disposition of their 

accounts. Compared with other 

participants, those with prior rollover 

contributions may be more likely to 

accumulate more than $5,000 from new 

contributions and more likely to 

affirmatively direct the disposition of 

their accounts. 

58026 Federal Register / Vol. 69, No. 187 / Tuesday, September 28, 2004 / Rules and Regulations 

The Department did not attempt to 

estimate the number or dollar amount of 

mandatory distributions eligible for 

relief under the final safe harbor 

regulation that may exceed $5,000. 

Adequate data to support such estimates 

are not currently available. The 

Department believes it is probable that 

the number of mandatory distributions 

containing prior rollover contributions 

that will be subject to the automatic 

rollover requirement of section 

401(a)(31)(B) of the Code will be small 

but the number of plans affected and the 

dollar amount of some of these 

mandatory distributions might be large. 

The establishment and maintenance 

of individual retirement plans for 

automatic rollovers of mandatory 

distributions will generate costs to 

participants whose accounts have been 

rolled over. At the time of the proposal, 

it was assumed that, in the absence of 

guidance, most fees would be charged 

against individual retirement plans. 

Based on a range of typical 

establishment fees for comparable 

individual retirement plans, $0 to $10 

per account, the annual establishment 

fees for rollovers arising from the 

regulation each year are estimated to 

range from a negligible amount to $3.6 

million, with a mid point of $1.8 

million per year. Annual maintenance 

fees, which typically range from $7 to 

$50, are estimated to range from $2.5 

million to $18 million, with a mid-point 

estimate of $10.3 million for individual 

retirement plans established in the first 

year. A comparison of the upper bounds 

for maintenance fees yields an 

additional $6 million increase in fees for 

participants, also attributable to the 

additional 120,000 rollovers newly 

included in the regulation. Assuming 

that individual retirement plans would 

continue to be established at a constant 

rate of 361,000 plans per year and that 

no account holders assume control of 

their plans, at the midpoint, 

maintenance fees would continue to 

grow at a rate of $10.3 million annually. 

Although establishment and 

maintenance fees are relatively 

predictable based on comparable 

individual retirement plans available in 

the marketplace, the types of investment 

products available and the actual 

choices that may be made by fiduciaries 

are considered to be too variable to 

support a meaningful estimate of 

investment fees, termination charges, 

and surrender fees. However, with this 

interpretive guidance, fiduciaries and 

the regulated financial institutions will 

have increased certainty regarding costs, 

fees, and charges for individual 

retirement plans. 

The total one-time cost to plans for 

the amendment to the Code is $139 

million. The upper bounds of ranges for 

establishment and maintenance costs 

under the regulation are estimated at 

$21.6 million. 

2. Benefits of the EGTRRA and the 

Regulation 

The regulation will benefit fiduciaries 

by affording them greater assurance of 

compliance and reduced exposure to 

risk. Specificity as to the types of 

entities that may receive the rollovers, 

the investment choices, and the 

limitations on fees will lessen the time 

required to comply with the EGTRRA 

amendment. The substantive conditions 

of the safe harbor will benefit former 

participants by directing their 

retirement savings to individual 

retirement plans, providers, regulated 

financial institutions, and investment 

products that minimize risk and offer 

preservation of principal and liquidity. 

Certain regulated financial institutions 

will receive additional deposits having 

earnings potential. 

Plans will benefit from administrative 

cost savings for those 133,000 accounts 

that previously remained in pension 

plans because participants were passive 

or non-responsive but are assumed to be 

rolled over under the amendment to the 

Code and the regulation. Ordinary 

administrative costs that typically range 

from $45 to $150 per participant will be 

saved when accounts are rolled over, 

reducing plan expenses under the 

amendment to the Code and the 

regulation by about $6 million to $20 

million, or at a mid point, $13 million 

per year, $3.5 million of which is 

attributable to the regulation only. The 

cost savings realized in each year will 

continue to accumulate through the 

future years that the accounts would 

otherwise have remained in the pension 

plan. 

The benefits of greater certainty for 

fiduciaries and protection of 

participants cannot be specifically 

quantified. By providing a safe harbor 

for plan fiduciaries that choose to roll 

over accounts, the Department has 

increased certainty concerning 

compliance with ERISA section 404(a) 

for fiduciaries that designate institutions 

and investment funds for rolled over 

accounts and expanded the opportunity 

for retirement savings for plan 

participants. 

The regulation is, however, expected 

to reduce one-time startup 

administrative compliance costs to 

plans by as much as $92 million by 

narrowing the range of individual 

retirement plan providers and 

investment products fiduciaries might 

otherwise consider, assuming a savings 

of 2 of the 3 hours that compliance 

would otherwise require. 

At the time of the proposal, the 

Department estimated that the EGTRRA 

amendment would provide 143,000 

former participants with preserved 

retirement savings of about $415 million 

and immediate tax savings of about 

$112 million on an annual basis. (The 

additional 98,000 former participants 

who did not receive mandatory 

distributions because they were passive 

or non-responsive were not counted for 

purposes of estimates of preserved 

retirement savings and tax savings 

because their accounts were not 

distributed.) These estimates were 

considerably higher than those included 

in the Joint Committee on Taxation’s 

(JCT) May 26, 2001 estimates of the 

budget effects for this provision of 

EGTRRA, which projected a revenue 

loss of about $30 million per year. This 

revenue loss implied an aggregate 

preservation of retirement savings of 

about $83 million per year. Because the 

reasons for this difference were 

unknown, the Department interpreted 

the JCT estimates and its own estimates 

as the endpoints of ranges, and 

presented the midpoints as estimates of 

ordinary income tax and penalty 

savings, and preserved retirement 

savings. These midpoints amounted to 

$71 million and $249 million, 

respectively.

The Department estimates that 

paragraph (d) of the regulation will 

provide an additional 85,000 former 

plan participants with tax savings and 

preserved retirement savings, such that 

the aggregate estimate of tax savings of 

the amendment and the regulation is 

$123 million, and the aggregate estimate 

of preserved retirement savings is $456 

million. Because the regulation includes 

the provision for mandatory 

distributions of $1,000 or less, the JCT 

estimates and Department’s estimates 

for these values are no longer exactly 

comparable. However, in spite of the 

substantial differences in the two sets of 

estimates, the Department has 

continued to present midpoints between 

the two to illustrate the potential 

benefits of tax savings and preserved 

retirement savings. The benefits, 

expressed as midpoints, amount to $77 

million in tax savings, and $270 million 

in preserved retirement savings. These 

savings for former participants and 

distributions of amounts previously 

retained in plans also represent 

increased deposits to regulated financial 

institutions. 

For the estimated 8 percent of these 

accounts that were in defined benefit 

plans, a savings of approximately 

Federal Register / Vol. 69, No. 187 / Tuesday, September 28, 2004 / Rules and Regulations 58027

$202,000 would be realized from 

reduced funding risk and corresponding 

premium payments to the PBGC. This 

includes an additional $53,200 that 

arises from the change to the regulation 

with respect to mandatory distributions 

of $1,000 or less. 

Paperwork Reduction Act 

This Notice of Final Rulemaking is 

not subject to the requirements of the 

Paperwork Reduction Act of 1995 (44 

U.S.C. 3501 et seq.) because it does not 

contain a ‘‘collection of information’’ as 

defined in 44 U.S.C. 3502(3). It is 

expected that this final rule will result 

in a modification of retirement plan 

Summary Plan Descriptions, an 

information collection request approved 

separately under OMB control number 

1210–0039. However, this modification 

is not considered to be substantive or 

material in the context of that 

information collection request as a 

whole. In addition, the methodology for 

calculating burden under the Paperwork 

Reduction Act for the Summary Plan 

Description takes into account a steady 

rate of change in Summary Plan 

Descriptions that is estimated to 

accommodate the change that would be 

made by this final rulemaking. 

The Department has clarified section 

(c)(3) of the regulation by inserting that 

the agreement between a fiduciary and 

an individual retirement plan provider 

that provides for the distribution of 

rolled over funds must be in writing. 

The agreement, as previously stated in 

the proposal, must include a description 

of the rollover investment product, fees, 

and participants’ rights. The Department 

understands that it is customary 

business practice for agreements related 

to the establishment of individual 

retirement plans to be set forth in 

writing and that no new burden is 

created by this requirement. As a result, 

the Department has not made a 

submission for OMB approval in 

connection with the regulation. 

Regulatory Flexibility Act 

The Regulatory Flexibility Act (5 

U.S.C. 601 et seq.) (RFA) imposes 

certain requirements with respect to 

Federal rules that are subject to the 

notice and comment requirements of 

section 553(b) of the Administrative 

Procedure Act (5 U.S.C. 551 et seq.) and 

which are likely to have a significant 

economic impact on a substantial 

number of small entities. Unless an 

agency determines that a final rule is 

not likely to have a significant economic 

impact on a substantial number of small 

entities, section 604 of the RFA requires 

that the agency present a final 

regulatory flexibility analysis at the time 

of the publication of the notice of final 

rulemaking describing the impact of the 

rule on small entities. Small entities 

include small businesses, organizations 

and governmental jurisdictions. 

For purposes of analysis under the 

RFA, the Employee Benefits Security 

Administration (EBSA) proposes to 

continue to consider a small entity to be 

an employee benefit plan with fewer 

than 100 participants. The basis of this 

definition is found in section 104(a)(2) 

of ERISA, which permits the Secretary 

of Labor to prescribe simplified annual 

reports for pension plans that cover 

fewer than 100 participants. Under 

section 104(a)(3), the Secretary may also 

provide for exemptions or simplified 

annual reporting and disclosure for 

welfare benefit plans. Pursuant to the 

authority of section 104(a)(3), the 

Department has previously issued at 29 

CFR 2520.104–20, 2520.104–21, 

2520.104–41, 2520.104–46 and 

2520.104b–10 certain simplified 

reporting provisions and limited 

exemptions from reporting and 

disclosure requirements for small plans, 

including unfunded or insured welfare 

plans covering fewer than 100 

participants and which satisfy certain 

other requirements. 

Further, while some large employers 

may have small plans, in general, small 

employers maintain most small plans. 

Thus, EBSA believes that assessing the 

impact of this proposed rule on small 

plans is an appropriate substitute for 

evaluating the effect on small entities. 

The definition of small entity 

considered appropriate for this purpose 

differs, however, from a definition of 

small business which is based on size 

standards promulgated by the Small 

Business Administration (SBA) (13 CFR 

121.201) pursuant to the Small Business 

Act (15 U.S.C. 631 et seq.). EBSA 

therefore requested comments on the 

appropriateness of the size standard 

used in evaluating the impact of the 

proposal on small entities, but received 

none. 

EBSA has determined that this rule 

will not have a significant economic 

impact on a substantial number of small 

entities. In support of this 

determination, and in an effort to 

provide a sound basis for this 

conclusion, EBSA has prepared the 

following final regulatory flexibility 

analysis. 

Section 657(c)(2)(A) of EGTRRA 

directed the Department to issue 

regulations providing safe harbors under 

which a plan administrator’s 

designation of an institution to receive 

automatic rollovers of mandatory 

distributions pursuant to section 

401(a)(31)(B) of the Code and the initial 

investment choice for the rolled-over 

funds would be deemed to satisfy the 

fiduciary responsibility provisions of 

section 404(a) of ERISA. This EGTRRA 

provision further provided that the Code 

provisions requiring automatic rollovers 

of certain mandatory distributions to 

individual retirement plans would not 

become effective until the Department 

issued safe harbor regulations. Before 

issuing a proposed regulation, the 

Department requested comments on the 

potential design of the safe harbor. 

The conditions set forth in this 

regulation are intended to satisfy the 

EGTRRA requirement that the 

Department prescribe regulations 

providing for safe harbors, while 

meeting the objectives of offering greater 

certainty to fiduciaries concerning their 

compliance with the requirements of 

ERISA section 404(a), and of preserving 

assets of former plan participants for 

retirement income purposes. In 

describing the financial institutions, 

investment products, and fee 

arrangements that fall within the safe 

harbor, the Department has attempted to 

strike a balance between the interests of 

fiduciaries, individual retirement plan 

providers, and the investment goal of 

preserving principal. 

The regulation will impact small 

plans that include provisions for the 

mandatory distribution of accounts with 

a value not greater than $5,000. It has 

been assumed for the purposes of this 

analysis that all plans include such 

provisions, although some may not. On 

this basis, it is expected that the 

proposal will affect 611,800 small plans. 

The proportion of the total of 361,000 

participants estimated to be affected 

annually by the amendment to Code 

section 401(a)(31)(B) and paragraph (d) 

of the regulation that are in small plans 

is not known. Similarly, there are no 

available data on the number of 

participants that will separate from 

employment with account balances of 

more than $5,000 (because of prior 

rollover contributions) that may be, 

depending on the provisions of the 

distributing plans, automatically rolled 

over under EGTRRA. It is assumed that 

all 611,800 small plans will need to 

address compliance with the Code 

amendment and will choose to comply 

with new § 2550.404a–2(d). 

As described above, the costs and 

benefits of the Code amendment and 

safe harbor proposal are distinguishable, 

and have been estimated separately. As 

also noted, the regulation is expected to 

substantially reduce the cost of 

compliance with the Code amendment. 

The initial cost of the Code amendment 

for small plans is expected to be about 

$124 million. The one-time savings from 

58028 Federal Register / Vol. 69, No. 187 / Tuesday, September 28, 2004 / Rules and Regulations 

the final regulation is estimated at about 

$83 million for small plans compared 

with $9 million for large plans, due to 

the significantly larger number of small 

plans. The condition of the safe harbor 

requiring disclosure of specific 

information in a summary plan 

description or summary of material 

modification is expected to result in 

costs to small plans of about $11 

million. Preparation of this information 

is in most cases accomplished by 

professionals that provide services to 

employee benefit plans. Where 

fiduciaries prepare these materials 

themselves, it is assumed that persons at 

the professional level of budget analysts 

or financial managers will complete the 

necessary work. 

The benefits of greater certainty 

afforded fiduciaries by the safe harbor 

are substantial but cannot be 

specifically quantified. 

Prior to publication of this regulation, 

the Department published an RFI 

requesting comments and suggestions 

from the general public on developing 

guidelines to assist fiduciaries in 

selecting institutions and investment 

products for individual retirement 

plans. The Department specifically 

requested in the RFI that commenters, 

‘‘address the anticipated annual impact 

of any proposals on small businesses 

and small plans (plans with fewer than 

100 participants).’’ The Department 

received three comments that pertained 

specifically to small plans, the first of 

which cautioned that plan sponsors 

would be deterred from sponsoring 

plans with a mandatory distribution 

provision by placement of any 

additional burdens on them. Another 

comment indicated that, because of 

technological improvements, the burden 

on small plans would be manageable. 

Finally, a third commenter noted that 

annual costs would not be any higher 

for small plans. The Department 

received no specific comments on the 

impact of the proposal on small plans. 

To the Department’s knowledge, there 

are no Federal regulations that might 

duplicate, overlap, or conflict with the 

regulation for safe harbors under section 

404(a) of ERISA.

Congressional Review Act 

The notice of final rulemaking being 

issued here is subject to the provisions 

of the Congressional Review Act 

provisions of the Small Business 

Regulatory Enforcement Fairness Act of 

1996 (5 U.S.C. 801 et seq.) and has been 

transmitted to the Congress and the 

Comptroller General for review. 

Unfunded Mandates Reform Act 

Pursuant to provisions of the 

Unfunded Mandates Reform Act of 1995 

(Pub. L. 104–4), this rule does not 

include any Federal mandate that may 

result in expenditures by State, local, or 

tribal governments, or the private sector, 

which may impose an annual burden of 

$100 or more. 

Federalism Statement 

Executive Order 13132 (August 4, 

1999) outlines fundamental principles 

of federalism and requires the 

adherence to specific criteria by Federal 

agencies in the process of their 

formulation and implementation of 

policies that have substantial direct 

effects on the States, the relationship 

between the national government and 

the States, or on the distribution of 

power and responsibilities among the 

various levels of government. This final 

rule would not have federalism 

implications because it has no 

substantial direct effect on the States, on 

the relationship between the national 

government and the States, or on the 

distribution of power and 

responsibilities among the various 

levels of government. Section 514 of 

ERISA provides, with certain exceptions 

specifically enumerated that are not 

pertinent here, that the provisions of 

Titles I and IV of ERISA supersede any 

and all laws of the States as they relate 

to any employee benefit plan covered 

under ERISA. The requirements 

implemented in this final rule do not 

alter the fundamental provisions of the 

statute with respect to employee benefit 

plans, and as such would have no 

implications for the States or the 

relationship or distribution of power 

between the national government and 

the States.

List of Subjects in 29 CFR Part 2550 

Employee benefit plans, Employee 

Retirement Income Security Act, 

Employee stock ownership plans, 

Exemptions, Fiduciaries, Investments, 

Investments foreign, Party in interest, 

Pensions, Pension and Welfare Benefit 

Programs Office, Prohibited 

transactions, Real estate, Securities, 

Surety bonds, Trusts and Trustees.

■ For the reasons set forth in the 

preamble, the Department amends 

subchapter F, part 2550 of Title 29 of the 

Code of Federal Regulations as follows:

Subchapter F—Fiduciary Responsibility 

Under the Employee Retirement Income 

Security Act of 1974

PART 2550—RULES AND 

REGULATIONS FOR FIDUCIARY 

RESPONSIBILITY

■ 1. The authority citation for part 2550 

is revised to read as follows:

Authority: 29 U.S.C. 1135; and Secretary of 

Labor’s Order No. 1–2003, 68 FR 5374 (Feb. 

3, 2003). Sec. 2550.401b–1 also issued under 

sec. 102, Reorganization Plan No. 4 of 1978, 

43 FR 47713, 3 CFR, 1978 Comp. p. 332, 

effective Dec. 31, 1978, E.O. 12108, 44 FR 

1065, 3 CFR, 1978 Comp. p. 275. Sec. 

2550.401c–1 also issued under 29 U.S.C. 

1101. Sec. 2550.404c–1 also issued under 29 

U.S.C. 1104. Sec. 2550.407c–3 also issued 

under 29 U.S.C. 1107. Sec. 2550.404a–2 also 

issued under 26 U.S.C. 401 note (sec. 657, 

Pub. L. 107–16, 115 Stat. 38). Sec. 

2550.408b–1 also issued under 29 U.S.C. 

1108(b)(1) and sec. 102, Reorganization Plan 

No. 4 of 1978, 43 FR 47713, 3 CFR, 1978 

Comp. p. 332, effective Dec. 31, 1978, E.O. 

12108, 44 FR 1065, 3 CFR, 1978 Comp. p. 

275. Sec. 2550.412–1 also issued under 29 

U.S.C. 1112.

■ 2. The following new section is added 

to part 2550 to read as follows:

§ 2550.404a–2 Safe harbor for automatic 

rollovers to individual retirement plans. 

(a) In general. (1) Pursuant to section 

657(c) of the Economic Growth and Tax 

Relief Reconciliation Act of 2001, Public 

Law 107–16, June 7, 2001, 115 Stat. 38, 

this section provides a safe harbor under 

which a fiduciary of an employee 

pension benefit plan subject to Title I of 

the Employee Retirement Income 

Security Act of 1974, as amended (the 

Act), 29 U.S.C. 1001 et seq., will be 

deemed to have satisfied his or her 

fiduciary duties under section 404(a) of 

the Act in connection with an automatic 

rollover of a mandatory distribution 

described in section 401(a)(31)(B) of the 

Internal Revenue Code of 1986, as 

amended (the Code). This section also 

provides a safe harbor for certain other 

mandatory distributions not described 

in section 401(a)(31)(B) of the Code. 

(2) The standards set forth in this 

section apply solely for purposes of 

determining whether a fiduciary meets 

the requirements of this safe harbor. 

Such standards are not intended to be 

the exclusive means by which a 

fiduciary might satisfy his or her 

responsibilities under the Act with 

respect to rollovers of mandatory 

distributions described in paragraphs (c) 

and (d) of this section. 

(b) Safe harbor. A fiduciary that meets 

the conditions of paragraph (c) or 

paragraph (d) of this section is deemed 

to have satisfied his or her duties under 

section 404(a) of the Act with respect to 

Federal Register / Vol. 69, No. 187 / Tuesday, September 28, 2004 / Rules and Regulations 58029

both the selection of an individual 

retirement plan provider and the 

investment of funds in connection with 

the rollover of mandatory distributions 

described in those paragraphs to an 

individual retirement plan, within the 

meaning of section 7701(a)(37) of the 

Code. 

(c) Conditions. With respect to an 

automatic rollover of a mandatory 

distribution described in section 

401(a)(31)(B) of the Code, a fiduciary 

shall qualify for the safe harbor 

described in paragraph (b) of this 

section if: 

(1) 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;

(2) The mandatory distribution is to 

an individual retirement plan within the 

meaning of section 7701(a)(37) of the 

Code; 

(3) In connection with the distribution 

of rolled-over funds to an individual 

retirement plan, the fiduciary enters 

into a written agreement with an 

individual retirement plan provider that 

provides: 

(i) The rolled-over funds shall be 

invested in an investment product 

designed to preserve principal and 

provide a reasonable rate of return, 

whether or not such return is 

guaranteed, consistent with liquidity; 

(ii) For purposes of paragraph (c)(3)(i) 

of this section, the investment product 

selected for the rolled-over funds 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; 

(iii) The investment product selected 

for the rolled-over funds shall be offered 

by a state or federally regulated 

financial institution, which shall be: 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; 

(iv) All fees and expenses attendant to 

an individual retirement plan, including 

investments 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 rollover distribution 

subject to the provisions of section 

401(a)(31)(B) of the Code; and 

(v) The participant on whose behalf 

the fiduciary makes an automatic 

rollover shall have the right to enforce 

the terms of the contractual agreement 

establishing the individual retirement 

plan, with regard to his or her rolledover funds, against the individual 

retirement plan provider. 

(4) Participants have been furnished a 

summary plan description, or a 

summary of material modifications, that 

describes the plan’s automatic rollover 

provisions effectuating the requirements 

of section 401(a)(31)(B) of the Code, 

including an explanation that the 

mandatory distribution will be invested 

in an investment product designed to 

preserve principal and provide a 

reasonable rate of return and liquidity, 

a statement indicating how fees and 

expenses attendant to the individual 

retirement plan will be allocated (i.e.,

the extent to which expenses will be 

borne by the account holder alone or 

shared with the distributing plan or 

plan sponsor), and the name, address 

and phone number of a plan contact (to 

the extent not otherwise provided in the 

summary plan description or summary 

of material modifications) for further 

information concerning the plan’s 

automatic rollover provisions, the 

individual retirement plan provider and 

the fees and expenses attendant to the 

individual retirement plan; and 

(5) Both the fiduciary’s selection of an 

individual retirement plan and the 

investment of funds would not result in 

a prohibited transaction under section 

406 of the Act, unless such actions are 

exempted from the prohibited 

transaction provisions by a prohibited 

transaction exemption issued pursuant 

to section 408(a) of the Act. 

(d) Mandatory distributions of $1,000 

or less. A fiduciary shall qualify for the 

protection afforded by the safe harbor 

described in paragraph (b) of this 

section with respect to 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 and the fiduciary makes 

a rollover distribution of such amount 

into an individual retirement plan on 

behalf of such participant in accordance 

with the conditions described in 

paragraph (c) of this section, without 

regard to the fact that such rollover is 

not described in section 401(a)(31)(B) of 

the Code. 

(e) Effective date. This section shall be 

effective and shall apply to any rollover 

of a mandatory distribution made on or 

after March 28, 2005.

Signed at Washington, DC, this 20th day of 

September, 2004. 

Ann L. Combs, 

Assistant Secretary, Employee Benefits 

Security Administration.

[FR Doc. 04–21591 Filed 9–27–04; 8:45 am] 

BILLING CODE 4150–29–P