Benefits and Compensation

DOL Auto-Portability Approval May Ease Rollovers, Reduce Missing Participants

With the current focus in the retirement plans community on missing and unresponsive 401(k) plan participants, practitioners have sought additional guidance from the U.S. Department of Labor (DOL) to clarify the meaning of a “reasonable search” for participants by an ongoing plan (see August column). As the community waits, plan fiduciaries are reviewing their current missing-participant procedures and seeking strategies that will satisfy DOL scrutiny in the event of an audit.

DOLAt the same time, current standard procedures such as automatic enrollment and default investments in employer-sponsored 401(k) plans make it very likely that employees changing jobs may be unaware that they are leaving an account balance behind in their former employer’s  plan. But a recent advisory opinion and proposed prohibited transaction exemptions (PTEs) issued by the DOL to an auto-portability plan provider (see November ) may address both these major concerns for plans.

With that development in mind, this column examines how the auto-portability program may provide a workable solution to small-balance transfers and help reduce missing participants.

Will plans be willing to adopt auto-portability? We will also look at a few administrative considerations for those considering enlisting such an option.


The DOL on November 7 issued an advisory opinion on behalf of Retirement Clearinghouse LLC (RHC) regarding its auto-portability program. The program involves two steps: (1) automatic rollover to an individual retirement account (IRA) of mandatory distributions and  balances of $5,000 or less in defined contribution (DC) plans being terminated or at the point at which a participant leaves the company; and (2) the subsequent automatic roll-in from the default IRA to a plan account with the new employer when the IRA owner changes jobs. Although the advisory opinion and proposed PTEs were issued solely to RCH, many in the retirement industry think additional providers of auto-portability platforms will emerge.

The objective of the RCH program is to improve overall asset allocation, eliminate duplicative fees for small retirement savings accounts, and reduce the “leakage” from the tax-deferred retirement savings system that occurs when participants cash out between jobs. Accounts eligible for an automatic transfer to a new employer’s plan—unless a participant opts out of this choice—must contain $5,000 or less. Rollovers of larger accounts to a new plan require employee approval.

The company will deduct a flat $59 fee from the larger participant accounts it transfers; for accounts with $590 or less, the charge will be 10 percent of the balance.


Planning Tip

For plan sponsors that participate, the  summary plan description (SPD) should be amended to include the auto-portability program description for automatic rollover distributions, acceptance of automatic roll-ins, and to include disclosures of  applicable fees.


According to a DOL notice of proposed exemption for RCH, published November 7 (83 Fed. Reg. 55741), participating plans that have a mandatory cash-out provision that requires an automatic rollover of eligible accounts, may designate RCH or another financial institution as the IRA provider.

The RCH program will be most effective when DC plan sponsors and service providers enter into an agreement to adopt auto-portability, which entails information-sharing and responding to periodic queries from the auto-portability program regarding IRA and plan account information.

The program is designed to use electronic records-matching technology to locate and match participant accounts across adopting members’ record-keeping platforms. The technology permits electronic matching between any type of account repository or recordkeeping system for plans and IRAs. When the technology interfaces are established, account records can be matched between IRA accounts held by a service provider and active plan accounts at a financial institution.


Planning Tip

Service providers will need to incorporate provisions in their administrative service agreements with plan sponsor clients to obtain permission to include the sponsor’s plan in the auto-portability program.


Participant Communications

The RCH program seeks to address balances that remain in DC plans when participants move on and fail to provide distribution direction. Applicable law, the plan, and the program all require that understandable communications be provided to participants before a mandatory plan distribution and before any subsequent roll-in occurs. The participant/IRA owner will be given notice of the potential transfer, and have an opportunity to opt out of the default auto-portability process.

In addition to describing the participant’s distribution options and providing a special tax notice with applicable information, the communications must disclose the applicable fees and expenses of the auto-portability program and information on how the default IRA will be invested. For the new employer’s plan, any subsequent roll-ins will be invested according to the participant’s current elections.


Planning Tip

Participating plan sponsors will need to revise their participant communications to comply.


Responsible Parties

In light of the information-sharing and default transactions inherent in RCH’s service, it is helpful to clarify who is acting as the fiduciary during the process. For the first step—automatic rollover from the plan to a default IRA—it’s the distributing plan’s fiduciary, and RCH or another auto-portability provider is the fiduciary for the second step—automatic transfer to the new employer’s plan.

RCH provides recordkeeping and related plan administrative services, and can house a default IRA until it is matched with an account in the participant’s current employer plan. Accounts covered by the RCH program will be provided a welcome letter when the account is established, and annual statements for the default IRA. The letter will include fee disclosures, qualified designated investment alternative (QDIA) information, and details on how to contact and direct RCH to handle funds.

RCH is acting as fiduciary when a match is made and the default IRA is rolled into a new employer’s plan. Absent direction or consent from the IRA owner, RCH is engaging in a transaction that may benefit its interests, which is a prohibited transaction under the Employee Retirement Income Security Act (ERISA) and the federal tax code, hence the request for an exemption from the DOL.

Specifically, RCH requested an exemption for the receipt of applicable fees in connection with the transfers of default IRAs under the program. The DOL issued the proposed PTE, limited to 5 years, to allow a plan fiduciary, whether RCH or another qualified party, to receive payment when it decides to roll a default IRA into a new employer plan and collect the applicable termination fee. Comments on the proposal are due to the DOL by December 24.

Employer Plan Sponsors

One of the first questions is whether plan sponsors will agree to participate in an auto-portability program. While there are fiduciary concerns about related expenses and cybersecurity threats, the benefits of auto-portability translate as reduced costs for plan administration and built-in assistance from the auto-portability provider with locating missing participants determined to have that status after they are moved to the provider’s rolls. By reducing sponsors’ number of small, inactive accounts, the percentage of active accounts will increase and the account balances will grow as auto-portability programs transfer new employees’ savings into their current employer’s plan. In addition, the number of uncashed distribution checks should decline.

Employers with a young workforce or those with high turnover may be particularly interested in an auto-portability program, primarily because it will give unresponsive former employees a vehicle for preserving retirement savings as they make job moves. The program also has a consolidation component that will benefit participants as they accumulate retirement savings throughout their careers.


Planning Tip

Participating plan sponsors should maintain their missing-participant procedures because participants who are considered lost or missing may not participate in the auto-portability program.


Service Providers

Similar to plan sponsors, it is critical that retirement plan service providers agree to participate in auto-portability plans by sharing participant information, which again means data security is an area of concern. The benefits to service providers, which are mostly financial organizations, include increases in assets under management (AUM) and plan account balances, and fewer small accounts.

It is important to note that the Employee Benefit Research Institute (EBRI) reports that auto-portability has been introduced to a majority of the larger plan service providers, and 12 of 13 major recordkeepers have discussed the program with RCH. This seems to be significant progress toward adopting and implementing auto-portability.


Planning Tip

Participating plan sponsors will want to update service provider agreements, where applicable, to incorporate provisions related to the auto-portability program, and with an eye toward data security.


Administrative Considerations

The RCH auto-portability program is focused on small, left-behind balances and balances in terminated DC plans. It is designed to benefit the plan sponsor and participants who abandon their accounts after changing jobs. While the program should be helpful for both, there are a few considerations worth mentioning.

  • Monthly administrative fees, service fees, distribution fees, roll-in fees, and sub-transfer agency fees will eat away at the small account balances that are defaulted to IRAs. Plan sponsors should take this into account when adopting the program.
  • The duty to take reasonable steps to find missing participants remains with the plan fiduciary, and is required as a condition of adopting the RCH program.
  • The procedures adopted by RCH for locating missing participants, as outlined in the auto-portability program PTE notice—using automated checks of National Change of Address records and two separate commercial locator databases, with two searches the first year in the RCH program and once a year after—may become the standard.
Arris Reddick MurphyArris Reddick Murphy is an attorney with experience in the employee benefits and executive compensation practice area, and she is senior counsel with FedEx Corp.’s Tax & Employee Benefits Law group. Before joining FedEx, she held the position of associate with the law firm of Potter Anderson & Corroon, LLP, and worked in-house with The Vanguard Group and the City of Philadelphia as counsel to its Board of Pensions and Retirement. She is contributing editor of The 401(k) Handbook.

Leave a Reply

Your email address will not be published. Required fields are marked *