The DOL has issued proposed rules (in the Federal Register of March 2, 2004) authorizing the automatic rollover of involuntary cash-out amounts between $1,000 and $5,000. A plan sponsor may exclude rollover amounts. The DOL proposal contains six safe harbor requirements that will permit a plan sponsor to rollover the distributable amount directly to an IRA on behalf of a missing or non-responding participant. The proposal will become effective 6 months after regulations are issued in final form.
Safe harbor relief is dependent on the fiduciary satisfying the following six conditions:
Distribution Amount Range (Section (c)(1) of the Prop. Regs.)
Cash-out distributions must be within the dollar range of $1,000 and $5,000. The amounts considered are the present value of the vested accrued benefit.
The dollar amount is to be determined as of the date of distribution. Thus, for example, if the participant terminates employment with $5,600, but the value declines to $4,700, the sponsor may cash-out the participant. Code Section 411(a)(11), 401(a)(31)(B)(i).
Rollover Must Be to an IRA (Section (c)(2) of the Prop. Regs.)
The amount must be rolled into an Individual Retirement Account as described in 408(a) or 408(b), i.e. a traditional IRA Account or a traditional IRA Annuity. The IRA must have a bank or an IRS approved non-bank Custodian/Trustee/Issuer.
Investments permitted (Section (c)(3) of the Prop. Regs.)
The DOL's goal is to preserve the principal while providing a reasonable rate of return and taking into account charges on the IRA. The investment goal is to maintain the stable dollar value of the amount invested and to minimize risk in order to preserve the assets for retirement while maintaining liquidity . The regulations provide the examples of a money market mutual fund, a stable value fund and Certificates of Deposit.
The Regulation further clarifies for this condition to be met, the investment product must be offered by “regulated financial institution” which is defined in the Regulation as: |
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an FDIC insured account in a Bank or savings association; |
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an insured Credit Union account; |
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an insurance company whose products are protected by a state guarantee association; or |
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a Mutual Fund registered under the Investment Act of 1940 such as a Money Market Mutual Fund. |
IRA Fee Limits (Section (c)(4) of the Prop. Regs.)
The challenge faced by the DOL was one of striking a balance between the fees and expenses of the marketplace environment with the need to preserve the participant's principal for retirement use. The Proposed Regulations provide the following examples of fees and expenses:
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establishment charges, |
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maintenance fees, |
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investment expenses, |
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termination costs, and |
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surrender charges. |
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The proposed regulations state that expenses charged to an automatic rollover IRA may not exceed the following limits: |
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The fees and expenses charged to an automatic rollover IRA may not exceed the fees and expenses charged by the provider for comparable IRAs established as rollovers. This is to protect the low balance, one time deposit, automatic rollovers when compared to high balance rollovers which may have multiple deposits and might otherwise be charged a lesser fee. |
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Fees and expenses may be charged only against the income earned on the automatic rollover and may not invade the initial principal with the exception of a one-time establishment fee. Providers may charge a one-time, small fee to establish the IRA, provided the fee is no more than the fee to establish a rollover IRA that is not an automatic rollover. If there is no fee to establish a rollover IRA, then there can be no fee to establish an automatic rollover. |
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Disclosure Requirements (Section (c)(5) of the Prop. Regs.)
Participant's and beneficiaries must be informed of the automatic rollover procedures and the investment products to be used. The disclosure must include a plan contact and the IRA's fee and expense information. This information is to be provided in an SPD or SMM.
A plan contact may be a person, position or office. In addition, the address and phone number of the contact must be provided. The plan contact must be able to provide information about where the automatic rollover was contributed.
Prohibited Transactions (Section (c)(6) of the Prop. Regs.)
The plan fiduciary may not engage in a prohibited transaction when selecting the IRA provider. However, the DOL has published a proposed class exemption by which: |
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the “regulated financial institution” may select itself, or an affiliate, as the IRA provider, and |
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the “regulated financial institution” may use its own investments for the automatic rollover. |
Other Issues:
Customer Identification and Verification(CIP) requirements of the Patriots Act.
The CIP will be required at the time the participant or beneficiary first contacts the institution. Thus, the automatic rollover may be made without violating the requirement that the CIP be done upon establishment of the account. FAQs on this can be found at page 9904 of Federal Register of March 2, 2004, bottom of right column.
State Law Requirements
The State law requirements for signatures and escheat laws are beyond the scope of this regulation.
