March 2, 2004
BB 04—24

DOL Proposes Safe Harbors for Automatic Rollovers

On March 1, the Department of Labor (DOL) issued a proposed rule dictating how employers and financial institutions can implement the requirement that mandatory cashouts between $1,000 and $5,000 are to be automatically rolled over into an IRA (absent an affirmative election from the plan participant). The proposed regulation would protect plan fiduciaries by providing a safe harbor when the fiduciary selects an institution to provide the IRA and the investments for the IRA, if the plan fiduciary meets six conditions described below.

In order to be covered by the safe harbor, the fiduciary must satisfy the following conditions:

  • Amount of Mandatory Distributions — The safe harbor is limited to distributions between $1,000 and $5,000, e.g., the safe harbor does not apply to bigger or smaller distributions.
  • Qualifications for an Individual Retirement Account — Any IRA offered by an approved trustee, custodian, or insurance company can qualify for the safe harbor, i.e., the plan sponsor does not have to evaluate the financial stability, etc. of institution providing the IRA.
  • Permissible Investment Products — Investments must be with a state or federally regulated financial institution (bank, credit union, insurance company, or mutual fund) and the investment product must be designed to preserve principal and provide a reasonable rate of return (i.e., product must be designed to minimize risk, preserve assets and maintain liquidity). Safe harbor investment products would typically include money market funds, savings accounts, CDs and stable value products. Substantial restrictions on the account holder's access to assets would not be permitted. Also, tracking the investments that the individual had previously made in the plan would not be permitted under the safe harbor.
  • Permissible Fees and Expenses — Fees and expenses (e.g., establishment charges, maintenance fees, investment expenses, termination costs and surrender charges) must meet two conditions — (1) they must be consistent with the fees and expenses charged in the marketplace, and (2) they cannot exceed the fees and expenses charged by the provider to comparable IRAs for rollovers that are not subject to the mandatory rollover rule. If the institution does not charge fees for the establishment of IRAs other than mandatory rollover IRAs, the institution would not be able to assess an establishment charge. In addition, with the exception of charges assessed for the establishment of the IRA, fees and expenses may only be charged against the income earned by the IRA.
  • Required Disclosures to Participants — Specific information regarding the automatic rollover must be provided to the plan participant in the summary plan description or summary of material modifications.
  • Prohibited Transactions — Plan fiduciary could not engage in any prohibited transaction in connection with the selection of the IRA provider or investment.

This automatic rollover requirement, which was added to the Internal Revenue Code as part of the Economic Growth and Reconciliation Act of 2001 (EGTRRA), is expected to be effective six months after the final safe harbor regulations are published in the Federal Register. The DOL limited the comment period to 30 days so that the final regulations can be issued by Congress' target of June 2004.

The DOL also released a proposed class exemption on March 1 that would allow certain plan sponsors to use their own services and products in connection with rollovers from their own retirement plans. For more information, contact Jan Jacobson, Council director, retirement policy, at (202) 289-6700.

Banking Committee Hears Testimony on Hard 4 p.m. Close

On March 2, the Senate Committee on Banking, Housing and Urban Affairs held the latest in a series of hearings focusing on the mutual fund industry, focusing for the first time on the Security and Exchange Commission's (SEC) hard 4:00 p.m. (Eastern Time) close proposal. Committee Chairman Richard Shelby (R-AL) stated in his opening remarks that the hard 4 p.m. proposal was particularly unfair to 401(k) investors, and his questions focused on how to use technology to ensure that the practice of late trading is eliminated while allowing for exceptions to the proposed hard 4 p.m. close rule. He emphasized that an unalterable audit trail was imperative.

The Committee received testimony from two panels of witnesses. The first panel focused on mutual fund governance issues, and the second panel focused exclusively on the SEC's hard 4 p.m. proposal.

Each of the first panel witnesses addressed the various proposals that would require an independent chair and a minimum number of independent directors. The witnesses were in general agreement on these issues, agreeing that each mutual fund should have the freedom to choose whether to have an independent chair and emphasizing that such a decision should not be mandated by legislation. Most of the witnesses also agreed that the definition of "independent" should be tightened and clarified. All of the witnesses agreed that either a two-thirds or 75 percent independent director requirement was a good idea.

In the second panel, the witnesses applauded the SEC's efforts to eliminate the practice of late trading. However, there was general agreement that the hard 4:00 rule would disproportionately impact retirement plan participants. As a result, the majority of witnesses emphatically supported an intermediary exception to a hard 4:00 p.m. close. Witnesses noted that much of the technology needed to produce a verifiable audit trail was already available, and that the remainder should be available in the near future.

Witness testimony is available on the Banking Committee's hearing Web page. Further hearings on this issue are still likely. For more information, contact Jan Jacobson, Council director, retirement policy, at (202) 289-6700.


The American Benefits Council is the national trade association for companies concerned about federal legislation and regulations affecting all aspects of the employee benefits system. The Council's members represent the entire spectrum of the private employee benefits community and either sponsor directly or administer retirement and health plans covering more than 100 million Americans.