DOL Guidance on Auto Portability
On November 7, 2018, the Department of Labor (“DOL”) issued a news release inviting public comment on a proposed exemption related to the consolidation of small retirement savings accounts in 401(k) plans and IRAs when workers change jobs. The DOL indicated that the goals of an auto portability program are to improve asset allocations by consolidating small retirement savings accounts, do away with duplicative fees for small retirement savings accounts and curb the leakage of savings from the tax-deferred retirement saving system. Under an auto portability program, 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 would then be automatically transferred to the 401(k) plan or other individual account plan of the new employer when the employee finds a new job. However, because the prohibited transaction provisions of ERISA and the Internal Revenue Code prohibit a plan fiduciary from using its discretion to cause the plan or IRA to pay the fiduciary a fee, implementation of this type of program would require a prohibited transaction exemption.
On November 5, 2018,just prior to issuing the news release, the DOL issued an advisory opinion to Retirement Clearinghouse, LLC (“RCH”) – Advisory Opinion 2018-01A – with respect to the status of certain parties as ERISA fiduciaries as a result of certain actions undertaken with respect to its RCH Auto Portability Program. The Opinion letter did not address any fiduciary issues relating to decisions on the investment of assets rolled into a new employer’s plan, including application of the QDIA regulation. The Advisory Opinion also did not address the prohibited transaction implications of RCH receiving additional fees as a result of exercising fiduciary discretion related to the transfers involved in the RCH Program, with respect to which RCH was requesting an individual prohibited transaction exemption.
Concerning the ERISA implications of a plan sponsor for electing to participate in the RCH Program, the DOL indicated that choosing to have a plan participant in the RCH Program is a fiduciary decision. The decision must, therefore, be prudent and solely in the interest of plan participants and beneficiaries. The relevant plan fiduciaries must also determine that the RCH Program is a necessary service, a reasonable arrangement, and that the compensation paid to RCH is reasonable. The responsible plan fiduciaries must also monitor the arrangement and ensure that the plan’s continued participation is consistent with ERISA’s standards. As a concrete illustration of this requirement, the DOL indicated that to the extent the RCH Program is more costly than a default IRA program without the portability services, the adopting plan fiduciaries should consider whether the number of successful matches and account consolidation transfers to new employers through the use of the RCH Program merit the additional expense of being part of the Program.
The DOL further concluded that neither the plan sponsor of the former employer nor the new employer would be acting as a fiduciary in connection with a decision to transfer the individual’s default IRA into the new employer’s plan. With respect to the fiduciaries of the former employer’s plan, although they were fiduciaries in deciding to transfer accounts to the default IRA and participating in the RCH Program, they would have no involvement or responsibility for the decision in individual cases to transfer IRA assets into a new employer plan. With respect to the fiduciaries of the new employer’s plan, although they would be responsible for determining whether the roll-in of assets from the default IRA is consistent with plan terms and for accepting the roll-in and allocating the assets to investment alternatives in the new plan, these actions do not cause the fiduciaries of the new employer’s plan to exercise fiduciary authority in connection with RCH’s separate decision to rollover the IRA assets into the new employer plan. These conclusions by the DOL are consistent with the general proposition under ERISA that fiduciary status is not an “all or nothing” proposition.
The DOL also addressed the fiduciary status of RCH for transferring default IRA funds to the plan of the new employer. Under the RCH Program, a participant is notified and his affirmative consent to the transfer of assets into the new employer’s plan is requested. However, in the absence of affirmative consent, RCH will direct the transfer of assets from the default IRA into the new employer’s plan. The DOL concluded that in the absence of affirmative consent, RCH would be acting as a fiduciary in directing the transfer of funds. The DOL explained that although in other contexts a recipient’s failure to respond to a communication involving a plan sponsor, trustee, or other named fiduciary may be treated as consent, a service provider deciding to transfer an individual’s plan or IRA account generally cannot avoid fiduciary responsibility for exercising authority or control over IRA or plan assets through a negative consent process with individual participants or beneficiaries.