September 28, 2004
BB 04—98

DOL Finalizes Automatic Rollover Safe Harbor Regulation

On September 28, the Department of Labor's (DOL) Employee Benefits Security Administration (EBSA) released final regulations providing a safe harbor for fiduciaries of tax-qualified pension plans that must execute a mandatory rollover to an individual retirement arrangements (IRA). The final regulations eliminated a provision in the proposed regulations which would have limited fees and expenses to the IRA's earnings.

Under provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), plan administrators are required to transfer mandatory distributions of amounts between $1,000 and $5,000 to an IRA, in the absence of an affirmative election by the plan participant. However, EGTRRA also provided that this mandatory rollover rule would not become effective until the DOL prescribed a regulation supplying a safe harbor to protect plan fiduciaries when they select an institution to provide and select the investments for the IRA.

Under the proposed regulations, issued in March of this year, a retirement plan fiduciary had to meet six requirements in order to receive the protection offered by the safe harbor. One of these requirements related to the fees and expenses which could be assessed against an IRA. Under that rule, fees and expenses (e.g., establishment charges, maintenance fees, investment expenses, termination costs, and surrender charges) had to satisfy two conditions. First, they could not exceed the fees and expenses charged by the provider for comparable IRAs that are not subject to the mandatory rollover rule. Second, and of great concern to plan providers, with the exception of charges assessed for the establishment of the plan, fees and expenses could not exceed the income earned by the IRA. This latter condition elicited a number of comments objecting to such a limitation including a comment letter filed by the Council.

The final regulations remove the limit on fees and expenses to income earned by the IRA. In that regard, the preamble to the final regulation states "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."

Other significant changes or comments in the final regulations include:

  • The safe harbor rule can be applied (on a voluntary basis) to mandatory distributions of $1,000 or less.
  • Fiduciaries must enter into a written agreement with one or more individual retirement plan providers that specifically addresses, among other things, the investment of rolled-over funds and the fees and expenses attendant to the IRA. The terms of the agreement must be enforceable by the participant.

Although some who commented on the proposed regulations requested that the DOL address the issue of missing participants, the DOL declined, indicating that these issues are beyond the scope of these regulations.

The DOL also addressed the beneficiary designation issue raised in the Council's comment letter by indirectly sanctioning the Council's suggested approach. The DOL noted that nothing in the regulation precludes an IRA provider from applying its own default beneficiary provisions under the terms of the arrangement until the IRA holder makes an affirmative designation under the terms of the IRA. The DOL declined to transfer the plan beneficiary designation to the IRA.

The DOL left several questions to be answered by the Internal Revenue Service including whether the amount of a participant loan would constitute a portion of the present value of the benefit for purposes of the safe harbor (also raised in the Council's letter). The safe harbor generally cannot be used for distributions in excess of $5,000 unless the distribution would not exceed $5,000 except for monies attributable to rollovers from previous plans.

The DOL also issued a class exemption in connection with the regulation which will permit employers that are financial institutions or affiliated with financial institutions to act as their own IRA provider for their own plan for purposes of the safe harbor rule. The financial institution can use a proprietary product as the initial investment and can receive fees in connection with the establishment or maintenance of the IRA and the initial investment of the mandatory distribution without violating prohibited transaction rules. However, the class exemption only applies if the fees, other than establishment charges, are limited to the income earned by the IRA (the exemption maintains the fee limitation originally proposed in the regulations).

Both the final regulation and the class exemption will become effective March 28, 2005. However, plans and service providers can rely on the regulation (for selecting the IRA provider and initial investment), but not the class exemption, prior to the effective date. 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.