Distributions to IRAs Selected by Plan Fiduciaries (Posted September 15, 2001) Technical Tip 20: The following question and answer are from the DOL Q&A Session at the 2000 ASPPA Annual Conference: The IRS has recently issued guidance permitting direct rollovers to IRAs for benefits of less than $5,000 (that is, "forced" distributions) where the participants do not make distribution elections. I have heard that the DOL may take the position that in making such distributions, the plan's fiduciaries have an obligation under ERISA to determine if such distribution is prudent, including deciding on the investment of the money in the IRA if the participant cannot be located or if the participant does not make an investment decision. Is that right? DOL Response: Footnote 1 to Rev. Rul. 2000-36, the referenced IRS guidance on direct rollovers of forced distributions provides: "The Department of Labor ('the DOL') has advised Treasury and the Service that, under Title I of the Employee Retirement Income Security Act ("ERISA"), in the context of a default direct rollover described in this ruling, where the distribution constitutes the entire benefit rights of the participant, the participant will cease to be a participant covered under the plan within the meaning of 29 CFR section 2510.3-3(d)(2)(ii)(B), and the distributed assets will cease to be plan assets within the meaning of 29 CFR section 2510.3- 101. The DOL also noted that the selection of an IRA trustee, custodian or issuer and IRA investment for purposes of a default direct rollover would constitute a fiduciary act subject to the general fiduciary standards and prohibited transaction provisions of ERISA. In addition, plan provisions governing the default direct rollover of distributions, including the participant’s ability to affirmatively opt out of the arrangement, must be described in the plan’s summary plan description furnished to participants and beneficiaries." MODERATORS COMMENT: There are several issues in making the decision to "force" a distribution into a rollover IRA. Even if the plan document requires that result, the plan fiduciaries must determine if it is prudent, that is, under 404(a)(1)(D) the fiduciaries should follow the terms of the plan documents unless it would be a violation of Title I of ERISA. That raises the question of whether it is "solely in the interests of the participants and beneficiaries" to roll the money into an IRA and to invest it in a particular manner. Part of the difficulty in finding an appropriate investment in this situation is that the plan fiduciaries likely will not--or cannot--monitor and change the investment in the future. As a result, prudence would likely require that the fiduciaries select an investment in the IRA that would be appropriate for many years to come. ERISA requires that the investments be selected "with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use"--the so-called "prudent expert rule." Caveat: The answer was drafted by Fred Reish and Brad Huss, the program moderators, based on their understandings of discussions with four senior officials of the Pension and Welfare Benefits Administration (PWBA) of the U.S. DOL. As a result, it does not represent a formal or binding position statement by the PWBA. View all Tips © 2012 Reish Luftman Reicher & Cohen, a Professional Corporation Important notice: Answers are provided as general guidance on the subjects covered in the question and are not provided as legal advice to the questioner's situation. Any legal issues should be reviewed by your legal counsel to apply the law to the particular facts of your situation.