Trends and Best Practices for Addressing Automatic Participant Rollovers

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1 Trends and Best Practices for Addressing Automatic Participant Rollovers Saving Plan Sponsors Time and Money While Reconnecting Participants with Their Retirement Savings

2 Introduction November 2015 The average American worker holds 11 jobs by age 44. Participants don t always take their retirement savings with them when they leave this is especially true of participants with smaller balances. With the average American worker holding up to 11 jobs by age 44, and 47% 1 of plans adopting auto-enrollment provisions, it seems likely that the propensity for employees to accumulate multiple small-balance retirement accounts during the course of their careers will continue. If plan sponsors and administrators don t focus on the small balances left behind by terminated employees they have a tendency to build up in plans over time, driving up plan costs and creating administrative burdens and unanticipated risks for plan fiduciaries. In 2001, the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) amended the Internal Revenue Code to require plans with an involuntary cash-out provision to roll accounts valued over $1,000 directly to an IRA unless the participant makes another election (i.e., elects cash or directs a rollover to another plan or IRA). This requirement is often referred to as an automatic rollover. The Department of Labor (DOL) then established a fiduciary safe harbor for the selection of an IRA provider and the investment of funds, providing a very clear process for properly managing these small-balance accounts. This white paper discusses the reasons for and benefits of rolling over mandatory distributions on a regular basis and the regulatory guidance related to these rollovers. It also examines trends and best practices to help plan sponsors, recordkeepers, and advisors in administering automatic participant rollovers. 1 Cerulli Associates, The Cerulli Report : Evolution of the Retirement Investor 2013, November

3 About DST DST Systems, Inc. ( DST ) is a global provider of technology-based service solutions that enable clients to grow their business and provide exceptional customer experiences. We help them process, communicate and safeguard critical customer information needed to manage life s most important business. Built on a strong heritage of industry experience, technological expertise and service excellence, we help our clients connect to their customers to help them save, protect and grow their assets, plan for retirement and live a healthy lifestyle. In addition to technology-based solutions, we also provide integrated print and electronic statement and billing solutions, and our data centers provide technology infrastructure support for companies around the globe. Automatic Rollover Services Launched in 2005, DST s Automatic Rollover Program is used by over 40 financial institutions and over 30,000 participating plan sponsors to manage the rollover of small-balance accounts for nonresponsive, terminated participants. Since the inception of our program, we have processed over $1.3 billion in automatic rollovers on behalf of our clients. DST utilizes our rollover servicing platform to automate the exchange of participant data between plans, administrators, and selected IRA providers. We streamline the exchange of participant data and fully support all program servicing options, providing: Choice of six IRA options Electronic enrollment and paperless transaction processing. Participant notification campaigns Participant search campaigns Automatic IRA openings within 24 hours Plan sponsor enrollment, notification, and contractual processes Reconciled reports on fund activity The DST program is designed to address Department of Labor safe harbor provisions relating to mandatory plan distributions. A program overview is found on page 24. Contact Us To learn more about our automatic rollover services, please call us at and press Option 2 to speak with a Relationship Manager or send us an at sales@wealthmsi.com. 3

4 Table of Contents I. Mandatory Distributions & Requirements 5 The Challenge 5 The Solution: Automatic Rollovers 6 Safe Harbor Requirements for Active Plans 7 Safe Harbor Requirements for Terminating Plans 9 Benefits of Automatic Rollovers 10 II. Program Servicing Options & Considerations 11 Checklist of Servicing Options 11 Selecting an IRA Provider 11 Participant Search Services 13 Participant Notifications 14 Providing a Choice of IRA Options 15 Plan Sponsor Adoption & Enrollment Communications 15 DB De-Risking & Pension Plan Cash-outs 16 Summary Conclusion 16 Appendix A: Safe Harbor Guidelines for Automatic Rollovers 17 Appendix B: Safe Harbor Guidelines for Terminating Plans 19 Appendix C: Sample 402(f) Notification Language 23 II. DST s Automatic Rollover Program 24 4

5 I. Mandatory Distributions & Requirements The Challenge When participants with small balances $5,000 2 or less terminate employment they don t always take their savings with them when they go. Plan sponsors may not focus on these small-balance accounts of terminated employees and so they accumulate within the plan. Over time, these participants may become hard to reach as their addresses and personal circumstances change, making it difficult for plan sponsors to effectively communicate with them about their accounts, plan updates, and provisions. These small accounts can drive up plan costs and create administrative burdens and unanticipated risks for plans as fiduciaries in the following ways: Plan Costs Recordkeepers tend to base their fees on either the number of accounts a plan has or the average account balance in the plan. Retaining the small accounts of terminated participants can add to costs by increasing per account charges or lowering the average plan account balance, for all participants or for plan sponsors if they pay plan recordkeeping fees directly. Administrative Burdens Regulation 29 CFR a-5 requires that a plan provide certain disclosures to all participants who have an account balance in the plan which of course includes terminated former participants with small account balances. This may magnify administrative responsibilities for plan sponsors, service providers and recordkeepers in terms of mailing annual and quarterly disclosures to terminated participants and making sure these participants maintain access to and control over their accounts. Additionally, the plan sponsor and plan recordkeeper need to keep track of these former employees and possibly engage in searches for missing participants, which can further increase administrative tasks and costs. Fiduciary Responsibilities The plan sponsor or plan committee still has a fiduciary responsibility for the accounts of terminated former participants and is required to act prudently and in the best interests of these former participants. While the liability may be minimal for these smaller accounts, the plan sponsor still must act in the best interests of these terminated participants. Thankfully there is a solution to address these issues: using the automatic rollover rules under Section 401(a)(31) of the Internal Revenue Code ( Code ) and ERISA to facilitate the automatic rollover process. 2 The $5,000 limit applies to the vested balance in the participant s account or lump-sum value of the benefit and does not include amounts rolled over from another qualified plan or IRA. See Internal Revenue Code 401(a)(31). 5

6 The Solution Automatic Rollovers Normally, when an account is distributed on behalf of a participant, it is initiated at the request of the participant and the Code requires the participant s consent prior to processing the distribution. Section 411(a)(11) of the Internal Revenue Code of 1986 (the Code) permits tax-qualified retirement plans to distribute account balances of $5,000 or less without the consent of the affected plan participant. In 2001, the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) amended the Internal Revenue Code to require plans with an involuntary cash-out provision to roll accounts valued over $1,000 directly to an IRA unless the participant makes another election (i.e., elects cash or directs a rollover to another plan or IRA). This requirement is often referred to as an automatic rollover. The Department of Labor (DOL) then published final regulations in which established a fiduciary safe harbor for the selection of an IRA provider and the investment of funds within the IRA in connection with the automatic rollover of mandatory distributions. The DOL regulations provide a very clear process for properly managing these small-balance accounts. If these conditions are satisfied, a retirement plan fiduciary will be deemed to have satisfied their fiduciary duties. Defining a Plan s Automatic Rollover Provisions If a plan document does not already provide for mandatory distributions up to $5,000, then in order for the plan fiduciaries to fully avail themselves of the safe harbor rollover provision, the plan must first be amended to define the automatic rollover provisions of the plan. Further, participants must be furnished with a Summary Plan Description (SPD), or a Summary of Material Modifications (SMM), that describes the plan s automatic rollover provisions. This explanation must include: An explanation that an automatic rollover will be invested in an investment product designed to preserve principal and provide a reasonable rate of return and liquidity A statement indicating the extent to which fees and expenses relating to the individual retirement plan will be borne by the participant The name, address, and telephone number of the plan contact for further information concerning the plan s automatic rollover provisions, the IRA provider, and fees and expenses relating to the IRA 3 29 C.F.R a-2, 69 F.R (September 28, 2004) 6

7 Accounts of Less Than $1,000 It is important to note that while the automatic rollover of accounts of $1,000 or less is not required, a plan may provide for the direct rollover of these accounts into IRAs as well. From an administration perspective, this may be a more practical solution than cutting checks for balances under $1,000 especially when you consider that these checks may go uncashed as good address information may not be available for terminated participants. So it may be very worthwhile to consider rolling over balances under $1,000 as well especially now when there are multiple IRA providers that will accept balances of less than $1,000. The plan must also notify each terminated participant with a small balance in advance of processing mandatory distributions, as the participant has the right to determine how he or she wants the account distributed; such notification may be included with the required 402(f) notice. Once the participant is notified if no alternative election is made, the plan may process the distribution and roll over the assets into an IRA. Accounts of Less Than $1,000 It is important to note that while the automatic rollover of accounts of $1,000 or less is not required, a plan may provide for the direct rollover of these accounts into IRAs as well. From an administration perspective, this may be a more practical solution than cutting checks for balances under $1,000 especially when you consider that checks may go uncashed as good address information may not be available for these terminated participants. So it may be very worthwhile to consider rolling over balances under $1,000 as well especially now when there are multiple IRA providers that will accept balances of less than $1,000. DST administers multiple automatic rollover programs today and partners with the following six IRA providers, all of whom have no account minimums and will accept balances under $1,000: The Bancorp Bank FPS Trust Company MG Trust Company Bank of America/Merril Lynch Millennium Trust Company Total IRA by Inspira Safe Harbor Requirements for Active Plans To process mandatory distributions, the benefit or balance in a participant s account must be directly rolled over into an IRA if the value is greater than $1,000, but less than $5,000 excluding rollover amounts. The plan sponsor is responsible for the selection of the IRA provider as well as the default investment vehicle under ERISA this is a fiduciary responsibility. Rules of the safe harbor provide a very clear process for properly managing these small-balance accounts. If these straightforward conditions are satisfied, the plan fiduciaries are deemed to have fulfilled their responsibilities with regard to the selection of the IRA and the investments and are protected from subsequent claims from former participants. 7

8 Determining the $5,000 Account Limit Any funds a participant may have rolled over from another qualified retirement plan or IRA and any earnings on those accounts may be excluded when determining the $5,000 account limit. Therefore, it is possible that a participant s aggregate account value could exceed $5,000 and still be considered a small account for purposes of determining automatic rollovers from the plan. To avail themselves of the safe harbor protection, plan fiduciaries need to adhere to the following requirements: 1. Rollover Amount The vested account balance or present value of the nonforfeitable accrued benefit cannot exceed $5,000. However, amounts rolled into the plan from another qualified retirement plan or IRA may be excluded when determining the the $5,000 account limit. 2. IRA Provider The account balance (or lump sum) must be rolled over to an individual retirement plan such as an IRA, with an investment product offered by a state or federally regulated financial institution such as a bank, trust company or savings association, credit union, insurance company, a registered mutual fund company, or other entities authorized by the Internal Revenue Service to act as IRA custodians, the deposits of which are insured by the FDIC. 3. Written Agreement with IRA Provider The plan fiduciary must enter into a written agreement with the IRA provider and the agreement must address the investment of rolled-over funds and the fees and expenses related to the rollover IRA. 4. Preservation of Principal Rolled-over funds must be invested in a product designed to preserve principal, provide a reasonable rate of return, and maintain liquidity. 5. Fees and Expenses Fees and expenses for the IRA, including investment expenses, must not exceed the fees and expenses charged by the IRA provider for comparable IRAs. 6. Participant s Right to Enforce IRA Participant must have the right to enforce the terms of the written agreement in (3) above. 7. No Engagement In Prohibited Transactions The plan fiduciary must not engage in any prohibited transaction in the selection of the IRA provider or the investment products, e.g., the plan sponsor or trustee cannot receive financial consideration for selecting a particular provider nor engage a related party as custodian. If these conditions are met, the plan fiduciary will satisfy the safe harbor with respect to the selection of the IRA provider and default investment vehicle. Additionally, the plan fiduciary s responsibility with respect to automatic rollovers ends at such time as the funds are placed with the IRA provider pursuant to an agreement that satisfies the conditions of the safe harbor. This safe harbor is described in more detail in Appendix A on page 17. 8

9 Safe Harbor Requirements for Terminating Plans Sample Notice of Plan Termination Please refer to page 22 to review a sample participant notice of plan termination. To process mandatory distributions from a terminated plan, the Employee Benefits Security Administration (EBSA) issued final regulations on April 24, 2006, 4 that created a safe harbor for distributions from terminated individual account plans and provided clear instructions on how to handle distributions for missing or unresponsive participants and beneficiaries. To qualify for the safe harbor and limit the liability of plan fiduciaries, a terminating plan must meet the following safe harbor requirements. Safe Harbor Requirements 1. Individual Account Plan The terminating plan must be an individual account plan maintained in accordance with the requirements of IRC 401(a), 403(a), or 403(b) at the time of the distribution (or, if an abandoned plan, intended to qualify and be maintained in accordance with these requirements). 2. Participant Notification Required The participant or beneficiary on whose behalf the distribution will be made must be furnished notice in accordance with the regulation. The notice must include, among other things, the: Account balance and amount to be distributed Description of the distribution options available under the plan Request that the participant or beneficiary elect a form of distribution Statement explaining that if a form of distribution election is not received within 30 days from receipt of the notice, the plan will distribute the account balance to an IRA The regulation contains a model notice that may be used to satisfy these requirements Mailed to Last Known Address on File The notice should be mailed to the last known address of the participant or beneficiary. If the notice is returned as undeliverable, the plan must take steps to try to locate the participant or beneficiary. If these location efforts are unsuccessful, then the participant or beneficiary is deemed to have been furnished the notice and failed to make an election within 30 days. If the participant or beneficiary fails to elect a form of distribution within 30 days of being furnished the notice, then the fiduciary may distribute the account directly to an IRA. 6 The EBSA amended the regulatory safe harbor in 2007 and indicated that a distribution made on behalf of a missing nonspouse beneficiary would satisfy the safe harbor if directly rolled into an inherited IRA. 4 29CFR a-3 5 See page 22 this document for a sample notice. 6 An individual retirement plan within the meaning of IRS 7701(a)(37). 9

10 The requirements for terminated plans are similar to those for active plans, with the following notable differences: The plan must be an individual account plan (e.g., 401(k), profit sharing, or money purchase plan qualified under 401(a) or 403(b)). It cannot be a defined benefit plan subject to the Pension Benefit Guaranty Corporation ( PBGC ) insurance program. The plan must be terminating or terminated. There is no $5,000 limit; account balances of any amount may be rolled to an IRA (subject to limitations of the IRA, of course). This safe harbor is described in more detail in Appendix B on page 19. Benefits of Automatic Rollovers Implementing an Automatic Rollover Program is a tool to establish safe harbor IRAs for missing or nonresponsive participants that provides plan fiduciaries and administrators with several benefits including the ability to: 1. Reduce Plan Expenses Mandatory distributions help reduce plan expenses where recordkeepers charge fees on the number of accounts or the average account balance. 2. Cost of an Audit Distributing small-balance accounts can reduce the participant count to under 100 eliminating the expense of auditing for some plans. 3. Simplify Participant Disclosures Under 29 CFR a-5, the plan must mail annual and quarterly disclosures to terminated participants so automatic rollovers will reduce the number of participants to whom disclosures need to be provided. 4. Eliminate Need to Track Former Employees Automatic rollovers eliminate the need to keep track of former employees and also reduce the need for missing participant searches. 5. Reduce Fiduciary Responsibility Exposure may be minimal, but plan sponsors are required to act prudently and in the best interests of terminated participants. Mandatory distributions reduce fiduciary responsibility for former employees, and the fiduciaries benefit from the safe harbor that protects them. 10

11 Terminating Plans The benefits and opportunities for terminating plans include: Enables transfer of all missing and nonresponsive participants, regardless of balance Enables plan sponsor to close-out plan Abandoned Plans The benefits and opportunities for abandoned plans include: Transfer of all remaining accounts to facilitate plan closure II. Program Servicing Options & Considerations A truly effective automatic rollover program involves several different services to support a seamless notification and account transfer process for participants, plan sponsors, and recordkeepers. The level of services required can vary by plan and can also depend upon whether the program will be implemented to support a single plan scenario or multiple plans in the instance of a recordkeeper or TPA. For broader program rollouts involving numerous plans, the administration processes and procedures will be important to define up front to create a streamlined service offering that minimizes administrative oversight. The following checklist provides a summary overview of servicing options to consider and evaluate when implementing an automatic rollover program. Checklist of Servicing Options 1. Selecting an IRA Provider Selecting an automatic IRA option to comply with the requirements of the safe harbor should not be difficult because the investments specified by the regulation are readily available from most institutions that offer IRAs especially rollover IRAs. Many providers that actively provide automatic rollover services in support of plan sponsors, TPAs, and recordkeepers also structure their products and fees to comply with the regulation s requirements including incorporating provisions in their IRA agreements specifying the participant s right to enforce the terms of the IRA. As a provider and administrator of automatic rollover programs for plan sponsors and recordkeepers, DST regularly works with IRA providers to address safe harbor requirements. 11

12 The six providers listed below are all DST partners who have implemented services and structured their program offerings to address the safe harbor provisions. The chart below highlights the key offerings of the six providers currently participating in DST s Automatic Rollover Program. DST s Choice of IRA Providers Account Minimum None None None None None None Accepts Lost Participant Balances Default Investment Vehicle Other Participant Investment Options Yes Yes Yes Yes Yes Yes FDIC Insured Money Market Account No alternative investments offered FDIC Insured Money Market Account Yes, stocks, bonds, ETFs, and mutual funds Lincoln Fixed Account Professionally screened mutual funds FDIC Insured Money Market Account Full range of investment vehicles mutual funds, stocks, bonds, etc. FDIC Insured Money Market Account No alternative investments Plan Sponsor Fees None None None None None None Participant Enrollment Fee Participant Account Termination Fee Participant IRA Annual Custodial Fee None None None None $15 None $25 for accounts closed in the first year $20 per distribution $30 per distribution The Total IRA None $20 per distribution $20 $20 $35 $35 $50 $40 Recordkeeper Millennium Trust Company FDIC Insured Money Market Account Stocks, bonds, CDs, open architecture mutual funds, alternative investments $15 In evaluating IRA providers, it is important to consider all related services including: Account Minimum Requirements Providers with no account minimums will accept accounts valued under $1,000, providing plan fiduciaries with a single solution for automatic rollover accounts of all sizes. Accept Lost Participant Balances Providers who accept balances for lost participants will accept the last known address on file for participants when establishing the IRA. Some providers, such as FPS Trust Company, will also initiate a participant search upon establishment of the IRA to help reacquaint participants with their money and ensure that a higher percentage of participants actually receive an IRA Welcome Kit and can make informed decisions about their retirement savings going forward. Plan Sponsor Fees & Participant Enrollment Fees In the marketplace today fees can vary from provider to provider. Most notable are the enrollment and setup fees that may be charged to plan sponsors and participants. Certain providers may charge participant enrollment and setup fees that can be as much as $50 per participant. Such fees can really draw down and erode these small balances over time and can be a very important consideration when selecting an IRA provider for automatic rollovers. 12

13 Stale Dated Checks For retirement plan distribution checks that are not received or acknowledged by the participant, automatic rollovers can be a viable solution. According to the DOL, if an uncashed check is unclaimed by a plan participant, the funds remain plan assets. However, when applicable, these funds can be rolled into an IRA in the name of the participant or his or her beneficiary. There are several industry providers including several of DST s IRA partners who offer defined programs to manage uncashed checks. Recordkeepers and third-party administrators can also be valuable resources for plan fiduciaries in managing automatic rollovers and selecting an automatic rollover provider. Many TPAs and recordkeepers have established programs to support plan fiduciaries and can help to: Identify providers for an automatic rollover solution Review documentation of providers to make sure the items of the DOL safe harbor regulation are addressed Facilitate regular processing and administration of mandatory rollovers on behalf of former participants defining regular processing schedules and periodic reporting 2. Participant Search Services Although not a regulatory requirement for active plans, many plans conduct participant searches in advance of sending out participant notification letters about the automatic rollover provision. This upfront search process ensures that: A higher percentage of participants will actually receive notification letters and be able to make informed election decisions regarding their retirement savings in advance of the mandatory distribution process. IRA providers receive up-to-date address and contact information for participants increasing the likelihood that participants will actually receive their IRA Welcome Kits and ongoing account statements. Service calls from participants to recordkeepers and plan fiduciaries may be reduced as more participants actually receive account notifications and IRA Welcome Kits and are better informed about the status of their retirement accounts. In instances where the small-balance accounts of terminated employees have built up over time, or when plans may be converting to an alternative IRA provider, plan fiduciaries and recordkeepers may want to initiate participant searches first before the participant notification letters are sent out to clean up data and improve the percentage of participants who actually receive the automatic rollover notification letter, take action, and get reacquainted with their money. 13

14 3. Participant Notifications A key regulatory requirement is that plan fiduciaries provide terminated participants with small account balances advance notification about the automatic rollover provision and typically at least a 30-day window to make an alternative investment election regarding their account balance. So in implementing a solution, the plan fiduciary will need to address and establish a protocol for the development and distribution of advance participant notification letters. Participant advance notification letters typically include the following information: Sample 402(f) Notification Language Please refer to page 23 to review sample language that can be used to update a plan s section 402(f) notice for automatic rollovers. Name of participant Plan name Plan fiduciary s name or name of plan recordkeeper IRA Provider s name, phone number and address Date by which an alternative election needs to be received Instructions on how to make an alternative election phone number to call Regulations also require all plans that make automatic rollovers to amend their so-called section 402(f) notice to inform participants and beneficiaries that their mandatory distributions may be distributed in the form of automatic rollovers. Sample 402(f) notification language is provided in Appendix C on page 23. In addition, after participants are notified, and the defined window for making an alternative investment election has expired, the plan fiduciary will need to coordinate with the recordkeeper to identify all nonresponsive participants whose accounts should be automatically rolled over to the designated IRA provider. Many automatic rollover providers, including DST, offer fully integrated participant search and notification services to support recordkeepers and plan fiduciaries. 14

15 4. Providing a Choice of IRA Options Plan fiduciaries have an obligation to review the IRA options available to them, conduct due diligence and make an informed decision relative to fees involved, services provided, and the type of default investment vehicle offered by the IRA provider (FDIC insured, etc.). In certain situations, a single provider solution may not address the needs of all plan sponsors, leading some recordkeepers and TPAs to offer a choice of IRA options. With the intense focus on fee disclosures and rollovers within the industry, many sponsors want to scrutinize the underlying default investment vehicle offered by the IRA provider as well as all aspects of the fee structure to make sure nothing is excessive or out of line. Many recordkeepers and automatic rollover program providers like DST work directly with multiple IRA partners to elicit and compile provider responses to fully support plan fiduciaries in performing their due diligence. DST, for example, performs due diligence reviews on all participating IRA partners and compiles program summaries of each plan option offered. DST also typically works in partnership with plan fiduciaries and recordkeepers, and provides oversight and management of the automatic rollover process to assist IRA providers in ensuring the program operates efficiently. This includes IRA rollover processing, funding, reconciliation of all rollover activity, and the ability to work directly with IRA providers to resolve issues quickly. 5. Plan Sponsor Adoption & Enrollment Communications A key program consideration for both TPAs and recordkeepers when offering an automatic rollover program to plan sponsors, is the ability to manage plan service notifications and enrollments to support program adoption across new and existing plans. These services are especially important in the event of a program conversion, when the default IRA option is changing and plan sponsors need to be notified and informed to adopt new IRA provider service agreements. DST, for example, provides whole-scale solutions in support of both plan sponsor enrollment and conversion programs. The services provided include: and electronic signature campaigns notifying plan sponsors about automatic rollover services, default IRA providers, and the convenience of signing agreements electronically 15

16 Automatic Rollover Portals accessible to plan sponsors, which provide access to all supporting information for review Streamlined enrollment process supports prepopulation of plan data and electronic signature of service agreements online creating a paperless enrollment process for both plan sponsors and recordkeepers Kit mailings 6. DB De-Risking & Pension Plan Cash-outs One of the most critical decisions a plan fiduciary will make when contemplating a pension plan cash-out program is how to communicate benefit changes to participants. It is essential for the plan sponsor to fully explain all options to plan participants and to provide the appropriate tools and services to help participants make informed decisions. Automatic rollover programs can be used in conjunction with these types of strategic campaigns to accommodate mandatory rollovers from tax-qualified defined benefit plans and rollovers resulting from individual account plan terminations. These rollover services can also be an important first step in cleaning up employee data records prior to the launch of a full scale plan cash-out communications program. Summary Conclusion Implementing an Automatic Rollover Program to establish safe harbor IRAs for missing and nonresponsive participants is a tool that provides plan fiduciaries and administrators with several key benefits including the ability to: Reduce plan expenses where recordkeepers charge fees on number of accounts or the average account balance Simplify participant disclosures by reducing the number of terminated participants to whom disclosures need to be provided Reduce fiduciary responsibility for former employees while benefitting from the safe harbor that protects plan fiduciaries DOL regulations provide a helpful safe harbor for fiduciaries in selecting IRA providers and investments for automatic rollovers. In today s marketplace, there are multiple providers that specialize in automatic rollovers and have the necessary agreements and procedures in place to support plan fiduciaries in complying with the safe harbor requirements. 16

17 Appendix A Safe Harbor Guidelines for Automatic Rollovers Mandatory distributions from tax-qualified retirement plans in excess of $1,000 must be transferred directly to an IRA in the absence of alternative elections by plan participants. The purpose of these guidelines is to provide information for retirement plan fiduciaries about certain aspects of this requirement. The Plan Requirement Section 411(a)(11) of the Internal Revenue Code permits tax-qualified retirement plans to distribute account balances or benefits with a value of $5,000 or less without the consent of the affected plan participants. If the value is greater than $1,000, then the account balances or benefits must be directly rolled over from the plan to an IRA if the affected participant does not elect to receive his or her benefit in another form. This requirement is often referred to as an automatic rollover. The DOL Safe Harbor The DOL published final regulations 7 that provide a compliance safe harbor under which a retirement plan fiduciary will be deemed to satisfy the fiduciary duties with respect to the selection of an IRA provider and the investment of funds within the IRA in connection with the automatic rollover of mandatory distributions. The following is a summary of the conditions that must be satisfied in order for a plan fiduciary to take advantage of the safe harbor: (1) Amount of Mandatory Distributions Only mandatory distributions described in Section 411(a)(11) of the Code are covered by the safe harbor. In other words, the present value of the nonforfeitable accrued benefit that is rolled over may not exceed $5,000; however, amounts rolled into the plan from other qualified retirement plans or IRAs need not be included in determining whether the $5,000 threshold has been met. (2) Rollover to an Individual Retirement Plan The automatic rollover must be made to an individual retirement plan within the meaning of Section 7701(a)(37) of the Code. An IRA is one type of individual retirement plan within the meaning of Section 7701(a)(37) C.F.R a-2, 69 F.R (September 28, 2004). 17

18 (3) Written Agreement with IRA Provider The plan must enter into a written agreement with the IRA provider and the agreement must address the investment of rolled-over funds and the fees and expenses related to the rollover IRA, as outlined below. 8 (i) Preservation of Principal The rolled-over funds must be invested in an investment product designed to preserve principal and provide a reasonable rate of return, although the return need not be guaranteed, consistent with liquidity. (ii) Maintenance of Dollar Value of Investment The investment product selected for the rolled-over funds must seek to maintain the dollar value of the amount invested in the product. (iii) Investment Product of Regulated Financial Institution The investment product selected for the rolled-over funds must be offered by a state or federally regulated financial institution (i.e., a bank, credit union, insurance company or registered mutual fund company), the deposits of which are insured by the FDIC. (iv) Fees and Expenses The fees and expenses relating to the IRA may not exceed the fees and expenses charged by the IRA provider for comparable IRAs established for reasons other than receipt of automatic rollover distributions. (v) Participant s Right to Enforce IRA The participant on whose behalf an automatic rollover is made must have the right to enforce the terms of the agreement between the plan and the IRA provider. (4) Summary Plan Description Participants must be furnished with a Summary Plan Description (SPD), or a Summary of Material Modifications (SMM), that describes the plan s automatic rollover provisions. This explanation must include (i) an explanation that an automatic rollover will be invested in an investment product designed to preserve principal and provide a reasonable rate of return and liquidity; (ii) a statement indicating the extent to which fees and expenses relating to the individual retirement plan will be borne by the participant; and (iii) the name, address, and telephone number of the plan contact for further information concerning the plan s automatic rollover provisions, and the name of the IRA provider, and the fees and expenses relating to the IRA. 8 The preamble to the final DOL regulations establishing the safe harbor stated that a 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 and conditions 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. 69 F.R (September 28, 2004). 18

19 (5) Prohibited Transactions To take advantage of the safe harbor, the fiduciary may not engage in a prohibited transaction in connection with the selection of the IRA provider or the investments. 9 The plan fiduciary is responsible for making this determination, because it depends in part on the nature of the financial relationship between the plan sponsor and the plan recordkeeper. Appendix B Safe Harbor Guidelines for Terminating Plans ERISA Reg. Section a-3 provides a fiduciary safe harbor enabling plan fiduciaries of terminated plans to make distributions on behalf of participants or beneficiaries who fail to make an alternative election (regarding the form of their benefit distribution) by rolling the distributions directly to an IRA. If satisfied, the plan fiduciaries will be deemed to meet ERISA s 404(a) prudence requirements with respect to the: Distribution of benefits Selection of a transferee entity Investment of the funds in connection with the transfer The following is an explanation of the safe harbor requirements, including the treatment of nonspouse beneficiaries in plan terminations. Explanation of Safe Harbor Requirements Prior to 2006, fiduciaries of terminating defined contribution plans often relied on Field Assistance Bulletin No of the Employee Benefits Security Administration ( EBSA ) for guidance on a number of plan termination topics including: Fulfilling the fiduciary obligations under ERISA with respect to locating missing participants Distributing account balances when their efforts to locate and communicate with missing participants were unsuccessful 9 The DOL has established a prohibited transaction class exemption that permits banks or other financial institutions that maintain qualified retirement plans to receive automatic rollovers from the plans maintained for the benefit of their own employees, subject to certain specified conditions. 19

20 The EBSA issued final regulations on April 24, 2006, 10 that created a safe harbor for distributions from terminated individual account plans and provided clear instructions on how to handle distributions for missing or unresponsive participants and beneficiaries. To qualify for the safe harbor and limit the liability of plan fiduciaries, a terminating plan must meet the following safe harbor requirements. Safe Harbor Requirements (1) Individual Account Plan The terminating plan must be an individual account plan maintained in accordance with the requirements of IRC 401(a), 403(a) or 403(b) at the time of the distribution (or, if an abandoned plan, intended to qualify and be maintained in accordance with these requirements). (2) Participant Notification Required The participant or beneficiary on whose behalf the distribution will be made must be furnished notice in accordance with the regulation. The notice must include, among other things, the: Account balance and amount to be distributed Description of the distribution options available under the plan Request that the participant or beneficiary elect a form of distribution Statement explaining that if a form of distribution election is not received within 30 days from receipt of the notice, the plan will distribute the account balance to an IRA The regulation contains a model notice that may be used to satisfy these requirements. 11 (3) Mailed to Last Known Address on File The notice should be mailed to the last known address of the participant or beneficiary. If the notice is returned as undeliverable, the plan must take steps to try to locate the participant or beneficiary. If these location efforts are unsuccessful, then the participant or beneficiary is deemed to have been furnished the notice and failed to make an election within 30 days. Failure To Elect a Form of Distribution If the participant or beneficiary fails to elect a form of distribution within 30 days of being furnished the notice, then the fiduciary may distribute the account directly to an IRA. 12 In doing so, the fiduciary must enter into a written agreement with the IRA provider that contains provisions similar to those required for the safe harbor for automatic rollovers provided under ERISA Reg a-2 for de minimus accounts. As part of this agreement: IRA must provide an investment vehicle designed to preserve principal and provide a reasonable rate of return consistent with liquidity CFR a-3 11 See page 22 of this document for a sample notice 12 An individual retirement plan within the meaning of IRS 7701(a) (37) 20

21 IRA provider must be a state or federally regulated financial institution (i.e., a bank insured by the FDIC, a registered investment company, a stateregulated insurance company, or a credit union insured under the FCUA). Fees and expenses of the IRA must not exceed those charged by the provider for similar IRAs. IRA holder must have the right to enforce the terms of the agreement against the plan or the IRA provider. Distribution of Benefits to a Nonspouse Beneficiary When the EBSA published this safe harbor regulation in 2006, a distribution of benefits from an individual account plan to a nonspouse beneficiary was not considered an eligible rollover distribution under the provisions of IRC 402(c) and, therefore, could not be rolled over into an individual retirement plan. As a result, the safe harbor regulation mandated the distribution of benefits on behalf of a missing nonspouse beneficiary to an account that was not an individual retirement plan. Consequently, such distributions were subject to income tax and mandatory tax withholding in the year distributed into the account. This changed, however, when the Pension Protection Act of 2006 ( PPA ) changed the characterization of distributions from tax-exempt plans and trusts to permit such distributions to qualify for eligible rollover distribution treatment. This change meant that the direct rollover of a deceased participant s benefit from an eligible retirement plan to an individual retirement plan established on behalf of a designated nonspouse beneficiary would not trigger immediate income tax consequences and mandatory tax withholding for the nonspouse beneficiary. The EBSA amended the regulatory safe harbor in 2007 to conform to the PPA changes and indicated that a distribution on behalf of a missing nonspouse beneficiary would satisfy the safe harbor if directly rolled into an inherited IRA. As noted above, the requirements of a-3 are similar to those of the safe harbor for automatic rollover of balances of $5,000 or less under IRC 411(a)(11). There are some significant differences, however, most notably: The plan must be an individual account plan (e.g., 401(k), profit sharing or money purchase plan qualified under 401(a) or 403(b)). It cannot be a defined benefit plan subject to the Pension Benefit Guaranty Corporation ( PBGC ) insurance program. The plan must be terminating or terminated. There is no $5,000 limit; account balances of any amount may be rolled to an IRA (subject to limitations of the IRA, of course). 21

22 Sample Notice of Plan Termination [Date of notice] [Name and last known address of plan participant or beneficiary] Re: [Name of plan] Dear [Name of plan participant or beneficiary]: This notice is to inform you that [name of the plan] (the Plan) has been terminated and we are in the process of closure. We have determined that you have an interest in the Plan, either as a plan participant or beneficiary. Your account balance in the Plan on [date] is/was [account balance]. We will be distributing this money as permitted under the terms of the Plan and federal regulations. {If applicable, insert the following sentence: The actual amount of your distribution may be more or less than the amount stated in this notice depending on investment gains or losses and the administrative cost of terminating your plan and distributing your benefits.} Your distribution options under the Plan are {add a description of the Plan s distribution options}. It is very important that you elect one of these forms of distribution and inform us of your election. The process for informing us of this election is {enter a description of the Plan s election process}. If you do not make an election within 30 days from your receipt of this notice, your account balance will be transferred directly to an individual retirement plan (inherited individual retirement plan in the case of a nonspouse beneficiary). {If the name of the provider of the individual retirement plan is known, include the following sentence: The name of the provider of the individual retirement plan is [name, address and phone number of the individual retirement plan provider].} Pursuant to federal law, your money in the individual retirement plan would then be invested in an investment product designed to preserve principal and provide a reasonable rate of return and liquidity. {If fee information is known, include the following sentence: Should your money be transferred into an individual retirement plan, [name of the financial institution] charges the following fees for its services: {add a statement of fees, if any, that will be paid from the participant or beneficiary s individual retirement plan}.} For more information about the termination, your account balance, or distribution options, please contact [name, address, and telephone number of the plan administrator or other appropriate contact person]. Sincerely, [Name of plan administrator or appropriate designee] 22

23 Appendix C Sample 402(f) Notification Language The following language can be used as a sample to update a plan s Section 402(f) notice for automatic rollovers. This language would be used only for distributions subject to distribution as an automatic rollover: Sample 402(f) Notification Language: Your distribution will be transferred directly to an individual retirement account established by [insert name of IRA provider] in your name unless you affirmatively elect to receive the distribution directly or to have it paid directly to an eligible retirement plan, as required by Section 401(a)(31)(B) of the Internal Revenue Code of

24 III. DST s Automatic Rollover Program DST offers a fully automated Automatic Rollover Program for easy management of terminated participant accounts. Designed to address the servicing needs of TPAs, recordkeepers, advisory firms, and plan sponsors, our program greatly simplifies the administration of mandatory rollovers at the plan level. Streamlined Processing Our rollover servicing platform automates the exchange of participant data between plan administrators and selected IRA providers. This streamlined process enables us to: Provide easy access to a choice of IRA providers and options Facilitate the batch processing of distributions Automate IRA account openings within 24 hours Support paperless transaction processing no distribution forms or IRA applications required Provide reconciled reports on all funding activity Maintain regular rollover processing cycles annually, semi-annually, quarterly, or a frequency of your choice Administer plan enrollment and contract processes Missing Participant Services DST can also assist plan sponsors and administrators with participant searches, terminated plan services, and communication services. Working with the plan sponsor, DST can help to resolve compliance issues, administer mailings, search for missing participants, and coordinate with the selected IRA provider to set up rollover IRAs. Addresses Safe Harbor Provisions The DST program is designed to address DOL safe harbor provisions relating to mandatory plan distributions described in Section 411(a)(11) of the Internal Revenue Code. Program materials include program brochures, sample participant rollover notifications, and safe harbor guidelines. 24