The Employee Benefits Security Administration has released the final version of a “safe harbor” regulation that could create more than $11 million in business for retirement plan advisors.[@@]

The rule, Fiduciary Responsibility Under the Employee Retirement Income Security Act of 1974 Automatic Rollover Safe Harbor, affects workers who are leaving their employers and have $5,000 or less in vested assets.

Some plans require the departing workers who have those small accounts to cash out immediately.

Section 657(a) of the Economic Growth and Tax Relief Reconciliation Act of 2001 lets employers or other plan fiduciaries roll the “mandatory distributions” into individual retirement accounts automatically when the departing employees fail to provide any other instructions.

EBSA officials estimate in an analysis of the regulation published today in the Federal Register that the EGTRRA provision, which added a new Section 401(a)(31)(B)(i) to the Internal Revenue Code, will help save 85,000 departing workers about $123 million in income taxes per year and help those workers preserve $456 million in retirement savings.

The EBSA regulation analysis, signed by Ann Combs, an assistant secretary, also suggests that the new regulation could help benefit plan lawyers and accountants, by requiring 611,800 small plans to spend about $11 million to change their plan documents to comply with the new safe harbor rules.

The final regulation requires fiduciaries to roll mandatory distributions into safe investments with reasonable fees.

Safe investments include products that are easy to cash in and provide a reasonable rate of return, Combs writes. She lists products such as interest-bearing savings accounts, bank certificates of deposit and stable value products as suitable investments for the automatic rollovers.

After the EBSA published the original version of the mandatory distribution regulation, in March, some of the 45 members of the public who submitted comment letters recommended that the regulation let fiduciaries roll assets into balanced funds or into a mix of investment options similar to what workers had in their retirement plans.

The Labor 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 separting participant in the context of an automatic rollover, particularly given the relatively small account balances typically covered by the safe harbor,” Combs writes.

Other points from the analysis of the new regulation:

- Combs says EBSA gave up on a proposal to limit account fees and expenses to income earned by the IRA. Financial services companies argued that expenses for small IRAs with hard-to-reach owners would be high. EBSA responded by letting providers charge fees similar to those applied to comparable IRAs.

- The financial institutions that provide the IRAs don’t have to worry about complying with USA PATRIOT Act customer identification rules until the IRA owners make contact.

- If a plan fiduciary rolls assets into IRAs through a transaction that complies with the safe harbor rules, the plan fiduciary can escape from fiduciary responsibility for the assets once the transaction is completed.

In related news, EBSA has completed a class exemption that lets financial institutions such as banks or investment companies roll mandatory distributions into their own proprietary IRAs and charge fees for those IRAs.

EBSA created the class exemption to give financial institutions relief from an ERISA provision that normally prevents plan fiduciaries from selling services to their own plans. The class exemption draws on the new mandatory distribution fiduciary safe harbor regulation. One difference is that financial institutions that use the class exemption must limit fees to charges taken from the IRA income.

Removing that limitation “would increase the potential for self-dealing,” according to an analysis of the class exemption signed by Ivan Strasfeld, an EBSA official.

The mandatory distribution regulation is on the Web at http://a257.g.akamaitech.net/7/257/2422/06jun20041800/edocket.access.gpo.gov/2004/pdf/04-21591.pdf

The class exemption is on the Web at http://a257.g.akamaitech.net/7/257/2422/06jun20041800/edocket.access.gpo.gov/2004/pdf/04-21592.pdf