The following Q&A is geared for plan sponsors who are curious about the auto-portability process and how it might prove beneficial to their plan participants. Auto-portability can prove especially useful in industries with lower wages and high employee turnover, which may include retail, transportation, hospitality, and restaurants, because this can often lead to numerous account balances of $5,000 or less being involuntarily rolled to default IRAs. Note that SECURE 2.0 proposals could increase the involuntary cash-out threshold to $7,000, which could expand the potential market for auto-portability solutions.
1. What is auto-portability?
Auto-portability is a financial technology service that helps consolidate retirement savings accounts for individuals who have changed jobs, and who may have one or more default IRA accounts due to mandatory distribution of low-balance accounts in prior employers’ plans ($5,000 or less), or termination of their employer’s 401(k) plan.
2. How does auto-portability work?
Industry leader Retirement Clearinghouse, LLC (RCH) devised a “locate, match, and transfer” process that coordinates among multiple recordkeeper systems to identify when an individual with a default IRA account has opened a new 401(k) account, and enable a “roll-in” of the IRA to the new employer’s plan. Auto-portability can even be used by a plan to skip the default IRA step, and postpone distribution of small account balances until the former participant has established an account with a new employer’s plan. Participant consent is requested at the time their default IRA account or small employer plan account balance is matched with an account under a new employer plan, and roll-in to the new plan becomes possible, but if consent is not provided within 30 days, a default roll-in transaction occurs.
3. What problems does auto-portability help address?
RCH flagged three main problems addressed by auto-portability, in a Question & Answer handout it prepared on the Portability Services Network. [Sign up to obtain the Q&A here.]
The first is cash out leakage, which is the phenomenon of workers cashing out small retirement account balances when they change jobs. They cite Employee Benefit Research Institute (EBRI) as estimating that of 14.8 million annual job transitions, 41%, or 6 million, will cash out of their retirement savings completely ($92.4 billion), with two-thirds of the cash outs being for reasons other than a financial emergency. (This last detail strongly suggests that cash outs are taking place due to the inconvenience and the time required to process the transfer of a relatively small amount.) The cash out percentage is higher – an estimated 55% – for participants with account balances under $5,000. Research also points to cash out at the point of job transition as disproportionately impacting minority and low-income workers, thus undermining their ability to establish financial security for retirement.
Two other problems that can be addressed by auto-portability are the gradual erosion, through annual account fees and anemic money-market investment returns, of low-balance default IRA accounts, and missing participants. Auto-portability reduces the first problem by moving money out of the low-balance IRA accounts to be consolidated with future savings under employer-sponsored plans. Auto-portability reduces the prevalence of missing participants by tracking contact information established under a new employer’s plan, which is likely to be more accurate than old contact information maintained by prior employers.
4. How does a plan sponsor connect with auto-portability services?
RCH recently established a consortium with major 401(k) recordkeepers Alight, Fidelity and Vanguard, called the Portability Services Network (PSN). PSN is expected to be up and running in the first quarter of 2023. So if your plan uses one of those recordkeepers, auto-portability may be on offer to you in the new year. The consortium is open to other recordkeepers joining as well. Although RCH is currently the only direct provider of auto-portability services it is likely that there will be other providers offering these services in the future. Finally, it is also possible for a plan to work directly with RCH, without going through its recordkeeper relationship, but this may be feasible only for fairly large plans.
5. What do auto-portability services cost, and who pays for them?
If you use the PSN consortium, there is no cost to plan sponsors. Plan participants whose retirement accounts are transferred are charged a one-time transaction fee not exceeding $30. Fees are disclosed in plan documentation, which will need to be amended to incorporate auto-portability language. Other fees and disclosures apply if your plan contracts directly with RCH for auto-portability services. The entry of other auto-portability service providers into the market to compete with RCH will hopefully result in lower transaction costs over time.
6. Will my company have fiduciary liability in relation to auto-portability services?
Yes, with respect to choosing to use auto-portability services and electing to work either directly with RCH or a similar vendor, or with the PSN consortium. Specifically, you would be responsible for ensuring that the auto-portability service is a necessary service, a reasonable arrangement, and that it charges no more than reasonable compensation for the services provided. You would need to monitor the arrangement and periodically ensure that your plan’s continued participation in the auto-portability program is consistent with ERISA’s standards. However, your company will not have fiduciary liability with respect to the decision to transfer a default IRA or small balance account into your plan (roll-in). In the absence of written consent from the account holder, fiduciary liability for that decision lies with RCH. Your plan will have fiduciary responsibility with respect to determining whether the roll-in to your plan is consistent with plan terms, and in allocating the rolled-in assets to investments under your plan (unless a QDIA is in effect, or subject to ERISA Section 404(a) if the participant has made investment elections under the new plan). The Department of Labor addressed these issues in Advisory Opinion 2018-01A, dated November 5, 2018.
7. What else should I be aware of, on the auto-portability front?
The Advancing Auto-Portability Act of 2022 is a bipartisan Senate bill sponsored by Senators Tim Scot (R-SC) and Sherrod Brown (D-OH) that would provide a $500 tax credit to employers who adopt auto-portability services, to help pay for the costs of implementation. Representatives of the Department of Labor have also indicated that the Department is concerned about retirement account portability and cash-out leakage and recognize that auto-portability can helps preserve retirement security for many workers. Thus, the problems that auto-portability is trying to address are apparent to members of Congress as well as to key personnel at the DOL, and plan sponsors should anticipate increased access to auto-portability in the future.
The above information is a brief summary of legal developments that is provided for general guidance only and does not create an attorney-client relationship between the author and the reader. Readers are encouraged to seek individualized legal advice in regard to any particular factual situation. © 2022 Christine P. Roberts, all rights reserved.
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