When employees leave a company with a defined contribution retirement plan such as a 401(k), the majority rollover plan benefits to other tax-qualified accounts themselves. A significant number neglect to do so, however, allowing assets to remain in the plan after employment ends. The Economic Growth and Tax Reconciliation Act of 2001 (EGTRRA) amended the IRS code to allow plan sponsors to establish Rollover IRAs for missing and non-responsive plan participants with balances less than $5000.
On 28 September 2004, the U.S. Department of Labor published guidelines establishing safe harbor provisions for rollover distributions that would satisfy the plan sponsor’s fiduciary responsibilities to participants under ERISA. The plan sponsor must provide information about the automatic rollover process in the Summary Plan Description (SPD) or Summary of Material Modification (SMM) given participants. They must enter into a written rollover agreement with an IRA provider stipulating the amount of the initial investment, as well as services to be provided, fees and expenses.
The rollover IRA must be established at a state or federally regulated financial institution, such as a bank or credit union, trust or insurance company. The IRA must be rolled over to an investment vehicle that preserves principal, minimizes risk and provides a reasonable rate of return while maintaining liquidity; such as an interest bearing savings account, certificate of deposit or money market fund. Fees and expenses cannot exceed those normally charged by the provider for comparable IRAs.