DOL’s auto-portability proposal raises issues for participating employers 

May 23, 2024

 

Proposed Department of Labor (DOL) regulations would implement a new statutory prohibited transaction exemption (PTE) for automatic portability arrangements under the SECURE 2.0 Act of 2022 (Div. T of Pub. L. No. 117-328). Auto-portability transactions involve automatically transferring amounts held in an employee’s individual retirement arrangement (IRA) after a small benefit cashout from a prior employer’s retirement plan to an active account under a plan sponsored by the employee’s current employer. The PTE allows auto-portability providers to get paid for facilitating these transactions. This article provides a high-level overview of auto-portability transactions and highlights elements of the proposal most relevant for sponsors already (or considering) participating in these arrangements.

Auto-portability arrangements are meant to help employees stay connected to their retirement savings when they change jobs. When an employee terminates employment with a retirement plan account balance of $7,000 or less, the plan can automatically transfer the account to a default IRA if the employee doesn’t object. But because employees aren’t involved in this process, they can easily lose track of their balance, particularly if they paid insufficient attention to plan communications about the transfer.

An auto-portability provider can transfer the default IRA to the employee’s account under the current employer’s defined contribution plan if that plan accepts rollovers. (Amounts may not be automatically transferred to defined benefit plans.) For these arrangements to work, auto-portability providers need access to employee information held by plan recordkeepers and the financial institutions maintaining the default IRAs. In some cases, the auto-portability provider is also the financial institution holding the IRA assets; in other cases, the provider is a third party.

Once an auto-portability provider has access to both sets of records, it must run queries at least monthly to determine if any default IRA owner is an active participant in  an employer-sponsored plan. When the provider finds matching records, it can initiate the transfer process. Sixty to 90 days before transferring the savings, the auto-portability provider must send a notice to the employee that not only describes the transaction and associated fees, but also explains that the transfer will take place unless the employee affirmatively opts out. If the employee doesn’t respond, the provider can transfer the IRA assets to the current employer’s plan. The provider must also send the employee a post-transaction notice within three business days after completing the transaction.

When an auto-portability provider transfers assets from a default IRA to an employer-sponsored plan without the employee’s affirmative consent, the provider exercises fiduciary discretion for purposes of the Internal Revenue Code’s (IRC’s) prohibited transaction rules for IRAs. Absent a PTE, the auto-portability provider couldn’t receive compensation from the IRA for this service. SECURE 2.0 provides a PTE allowing the auto-portability provider to charge IRAs and plan sponsors reasonable compensation for these transfers. The PTE requires the auto-portability provider to satisfy certain conditions, including acknowledging fiduciary status in writing and sending required notices to employees.

Before SECURE 2.0, no PTE was broadly available for these transactions. In 2019, DOL granted the first individual PTE for an auto-portability arrangement to Retirement Clearinghouse (RCH). That individual PTE — set to expire on July 31 — has been available only to RCH for its auto-portability services. SECURE 2.0’s new statutory PTE (modeled on RCH’s individual exemption) is available to any auto-portability provider that satisfies the PTE’s conditions.

SECURE 2.0’s new statutory PTE is effective for auto-portability transactions occurring on or after Dec. 29, 2023. DOL’s proposal focuses mostly on how auto-portability providers can satisfy SECURE 2.0’s conditions for relying on the PTE. However, the proposal also highlights several considerations for employers that participate in these arrangements.

Decision to participate in auto-portability arrangement is a fiduciary act. In an advisory opinion issued to RCH with its individual PTE, DOL explained that a plan sponsor exercises fiduciary discretion and is subject to ERISA’s general fiduciary standards when selecting and monitoring an auto-portability provider. This also applies to sponsors that choose to have their plans participate in auto-portability arrangements under SECURE 2.0’s statutory PTE.

Sponsors would need to designate a plan official to monitor transfers. The proposal would require auto-portability providers to ensure that participating sponsors appoint a plan official as a fiduciary responsible for monitoring transfers into the plan and confirming amounts received are invested properly. Amounts would need to be invested according to the participant’s current investment election under the plan, or if none, in the plan’s qualified default investment alternative or another investment selected by a plan fiduciary.

Update to summary plan description (SPD) required. Sponsors participating in an auto-portability arrangement will need to include language about the arrangement in their SPDs. The proposal would require auto-portability providers to give plan administrators a description of services and fees for this purpose. DOL is considering whether the final rule should set forth specific content requirements for a model notice.

The proposal contemplates that the rule would apply prospectively and take effect 60 days after the final version is published in Federal Register. However, since auto-portability providers are already relying on the PTE, DOL is considering whether to delay the applicability date so providers and employers have sufficient time to make any necessary changes to arrangements already in place. Until then, auto-portability providers and plan fiduciaries are expected to comply with the statutory requirements of the PTE using a good-faith reasonable interpretation of the law.

• Proposed regulation (Federal Register, Jan. 29, 2024)
• News release (DOL, Jan. 18, 2024)
• Div. T of Pub. L. No. 117-328, the SECURE 2.0 Act of 2022 (Congress, Dec. 29, 2022)

• User’s guide to SECURE 2.0 (regularly updated)
• Defined contribution auto-portability program is first to gain DOL approval (Aug. 12, 2019)