Pension & Benefits News DOL issues proposed exemption for auto portability of retirement account assets
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Monday, November 26, 2018

DOL issues proposed 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 issued a proposed individual exemption involving 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 Department of Labor (DOL) said that it is looking for innovation in the area of retirement asset portability, invites comments on the proposed exemption, and encourages additional proposals.

EBSA has also released 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.

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.

Auto portability. RCH’s auto portability program would seek 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 would 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 401(k) plan of the new employer when the employee finds a new job.

Proposed exemption.  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 an auto portability program (the RCH 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 an individual account plan maintained by the IRA owners’ new employer when the IRA owner changes 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 has 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 (E), absent an exemption.

The DOL has tentatively determined that the proposed exemption is in the interest of affected participants, is protective of the rights of the affected plan participants and beneficiaries, and is administratively feasible. Among other things, the DOL notes that all terms of the RCH Program including those governing the transfers must be clearly defined, reviewed, and contractually agreed to by the independent fiduciaries of the distributing and receiving plans. Also, an independent auditor will 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 will be subject to renewal after a five-year period, at which time, RCH will be expected to submit a new application providing the information necessary to assess the success of the program, as well as any shortcomings.

The DOL would like input from the public, including any data or factors that it should consider as part of the exemption, including protective conditions for participants and beneficiaries. All written comments and requests for a hearing on the proposed exemption should be sent by December 24, 2018.

Fiduciary status of plan sponsors and RCH.  EBSA has also issued an advisory opinion concerning RCH’s auto portability program in which RCH requests the DOL’s opinion on the status of certain parties as “fiduciaries” under ERISA and the Code because of actions undertaken as part of the RCH program.

Plan sponsors’ fiduciary status. The DOL observes that when plan sponsors or other responsible fiduciaries choose to have a plan participate in the RCH Program, they are acting in a fiduciary capacity, and would be subject to the general fiduciary standards and prohibited transaction provisions of ERISA in selecting and monitoring the RCH Program. Among other things, plan fiduciaries considering the RCH Program are responsible for ensuring that the RCH Program is a necessary service, a reasonable arrangement, and the compensation received is no more than reasonable within the meaning of ERISA Sec. 408(b)(2) and Code Sec. 4975(d)(2). The responsible plan fiduciaries must also monitor the arrangement and periodically ensure that the plan’s continued participation in the RCH Program is consistent with ERISA’s standards. However, the DOL notes that if a person is a fiduciary with respect to certain activities involving the RCH Program, it does not necessarily make that person a fiduciary with respect to all aspects of the RCH Program.

RCH states that once the assets are transferred to the default IRA, the plan sponsor of the former employer’s plan has no discretion or authority over the decisions of the IRA owner or RCH related to any future transfer of the default IRA assets. RCH also represents that before RCH transfers default IRA funds to a new employer’s plan, the new employer’s plan must adopt the RCH Program under which it will acknowledge that the transfer of IRA funds is consistent with the plan’s terms and that it will accept the roll-in. Before the roll-in, RCH will notify the participant and seek affirmative consent to the transfer. But, if the participant does not affirmatively consent after receiving the notice, RCH will assume responsibility to direct the roll-in from the default IRA or RCH IRA acting as a conduit into the individual’s current employer plan.

The DOL has determined that, based on RCH’s representations, the plan sponsors of the former and new plans would not be acting as a fiduciary with respect to the decision to transfer the individual’s default IRA into the new employer’s plan. Once a plan fiduciary properly distributes the entire benefit to which a plan participant is entitled, the distribution ends the individual’s status as a participant covered under the plan within the meaning of ERISA Reg. Sec. 2510.3-3(d)(2)(ii)(B), and the distributed assets are no longer plan assets under ERISA. Furthermore, although the fiduciaries of the new employer plan would be responsible for determining whether the roll-in is consistent with their plan’s terms and in accepting the roll-in (including allocating the assets to investment alternatives in the new plan), those actions do not cause the fiduciaries of the new employer’s plan to exercise fiduciary authority in connection with RCH’s separate decision to roll the IRA assets into the new employer plan.

RCH’s fiduciary status. The DOL states that, 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. The individual’s failure to respond to the RCH Program communications about default transfers does not amount to affirmative consent by the participant/IRA owner to default transfers to the new employer’s plan, and does not relieve RCH from fiduciary status and responsibilities. Unlike ERISA Reg. Secs. 2550.404a-2 and 2550.404a-3 with respect to the default transfer of a participant’s account into an IRA, no similar statutory or regulatory provision provides relief from fiduciary responsibility for “default” transfers of the IRA funds to the new employer’s plan, according to the DOL.

The result is the same 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 without the IRA owner’s/participant’s consent. 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, according to the DOL.

SOURCE: DOL News Release No. 18-1810-NAT, DOL Individual Proposed Exemption No. D-11938, 83 FR 55741, ERISA Advisory Opinion 2018-01A.

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