Pension & Benefits News DOL grants five-year exemption for auto portability of retirement account assets
Tuesday, August 27, 2019

DOL grants five-year exemption for auto portability of retirement account assets

By Pension and Benefits Editorial Staff

The Department of Labor’s Employee Benefits Security Administration (EBSA) has granted a five-year exemption for Retirement Clearinghouse, LLC (RCH) that concerns the consolidation of small retirement savings accounts in 401(k) plans and individual retirement accounts (IRAs) when workers change jobs. The exemption permits RCH to receive certain fees in connection with the transfer under the RCH program, of an individual’s default IRA or eligible mandatory distribution account assets to the individual’s new plan account, without the individual’s affirmative consent, provided that certain conditions are satisfied.

Employees leaving their current employment often have small account balances in the company’s 401(k) plan, and either take a distribution of their retirement savings or move the account into an IRA. The same thing often occurs with small retirement accounts when a company terminates its 401(k) plan.

Proposed exemption. In November 2018, the Department of Labor (DOL) issued a proposed exemption in connection with RCH’s auto-portability program (see Pension Plan Guide Newsletter No. 2167, November 27, 2018) and an advisory opinion addressing a request from RCH regarding the status of certain parties as “fiduciaries” as a result of actions undertaken as part of RCH’s proposed auto portability program.

ERISA and the Code prohibit a plan or IRA fiduciary from using its discretion to cause the plan or IRA to pay the fiduciary a fee. The DOL notes that it has authority, however, to grant exemptions that are protective of and in the interests of plan participants and IRA owners. RCH has developed its auto portability program that is designed to help employees who may have multiple job changes over their careers consolidate small accounts held in prior employers’ individual account plans and rollover IRAs into their new employers’ individual accounts or 401(k) plans. Specifically, the RCH program services are designed to facilitate: (a) automatic rollovers into default IRAs from accounts in plans of individuals’ former employers that are eligible for mandatory distribution; (b) automatic rollovers into default IRAs of account balances from terminated defined contribution plans; and (c) automatic roll-in, or transfer, of funds in these default IRAs to individual account plans maintained by the IRA owners’ new employer when the IRA owners change jobs.

Under the RCH program, participating plan sponsors designate RCH or a participating recordkeeper to be the plan’s default IRA provider for the automatic rollovers. The plans also agree to adopt plan amendments and resolutions necessary to carry out transfers under the RCH program and to make disclosures to plan participants and beneficiaries about the RCH program. The plans further agree that RCH and the participating recordkeeper may use plan data to facilitate the RCH program. All fees received by RCH in connection with the RCH program are disclosed to, and approved by, the independent plan fiduciary in the agreements. One of the fees received by RCH is a distribution/roll-in fee (i.e., a transfer fee) paid if a default IRA is terminated and the IRA account balance is rolled into a new employer plan with the assistance of RCH.

RCH had requested an exemption for the receipt of the transfer fee in connection with the transfer under the RCH program of an individual’s assets to the individual’s new plan account, without the individual’s affirmative consent. According to the DOL, absent affirmative consent of the IRA owner/participant, RCH acts as a fiduciary within the meaning of Code Sec. 4975(e)(3) in deciding to transfer the individual’s RCH default IRA to the individual’s new employer plan. Similarly, absent affirmative consent of the IRA owner/participant, in situations where a default IRA maintained by a third-party recordkeeper is transferred to an RCH default IRA acting as a conduit to facilitate the transfer to a new employer’s plan, RCH acts as a fiduciary within the meaning of Code Sec. 4975(e)(3) in directing the transfer of the individual’s default IRA to the RCH default IRA and subsequently to the new employer’s plan. Thus, RCH’s receipt of the transfer fee in connection with transferring assets from a default IRA to an individual’s new plan account, without the individual’s affirmative consent, violates Code Secs. 4975(c)(1)(D) and Code Secs. 4975(c)(1)(E), absent an exemption.

The DOL had tentatively determined that the proposed exemption was in the interest of affected participants, was protective of the rights of the affected plan participants and beneficiaries, and was administratively feasible. Among other things, the DOL noted that all terms of the RCH program, including those governing the transfers, had to be clearly defined, reviewed, and contractually agreed to by the independent fiduciaries of the distributing and receiving plans. Also, an independent auditor would annually review the RCH program, and submit a written report to the Department regarding the level of RCH’s compliance with the notification, fee, and distribution requirements of this exemption. In addition, the exemption would be subject to renewal after a five-year period, at which time, RCH would be expected to submit a new application providing the information necessary to assess the success of the program, as well as any shortcomings.

Auto portability. RCH’s auto portability program seeks to improve asset allocations by consolidating small retirement savings accounts, eliminate duplicative fees for small retirement savings accounts, and reduce leakage of retirement savings from the tax-deferred retirement saving system. Employees will be told that their 401(k) savings will be moved to tax-favored IRAs when they leave a job or if the plan is terminated, and that the employee’s savings in the IRA then would be automatically transferred to the plan of the new employer when the employee finds a new job.

Exemption. The RCH program features “locate and match” technology that coordinates between multiple recordkeeper systems. The RCH program identifies when an individual with a default IRA (or eligible mandatory distribution account) has opened a new plan account with his or her current employer. The RCH program facilitates the transfer of those default IRA (or eligible mandatory distribution account) assets to the new plan account, following the individual’s failure to respond to two letters stating that the assets will be transferred if he or she fails to respond within the later of: sixty days of the first letter; or thirty days of the second letter. According to the DOL, relief under this exemption is solely available for the payment by a default IRA of a transfer fee and a communication fee to RCH in connection with the transfer of $5,000 or less (with a limited exception) from the default IRA to a new plan account, pursuant to either a default IRA model transfer or a conduit model transfer.

SOURCE: DOL\EBSA Prohibited Transaction Exemption 2019-02, 84 FR 37337.

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