Auto-Portability:  A Guide for Retirement Plan Sponsors

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.

        Photo credit:  Tima Miroshnichenko, Pexels

        IRS Prioritizes Guidance on Student Loan Repayment Contributions

        On September 9, 2021 the Department of the Treasury issued its 2021-2022 Priority Guidance Plan listing guidance projects that are priorities for the Treasury Department and IRS during the twelve months ending June 30, 2022.  Among the Employee Benefits topics is “[g]uidance on student loan payments and qualified retirement plans and §403(b) plans.” This post reviews the state of the law on student loan repayments through retirement plans and briefly discusses what type of guidance might be forthcoming. 

        Current State of the Law

        The current state of guidance on using student loan repayments as a base for employer contributions to a qualified retirement plan or 403(b) plan is limited to a private letter ruling issued in 2018 to Abbott Labs.  In addition, proposed measures are contained in various pieces of federal legislation including the Securing a Strong Retirement Act of 2021, commonly referred to as SECURE 2.0.

        In the private letter ruling (PLR 201833012), discussed in our earlier post, the employer sought approval of an arrangement under which they made a 5% nonelective contribution on behalf of participants who contributed up to 2% of their compensation towards student loan repayments.  Those participants could still make elective deferral contributions under the plan, but would not receive a matching contribution (also equal to 5% of compensation) for the same pay periods in which they participated in the student loan repayment program.  Both the nonelective and matching contributions were made after the end of the plan year and only on behalf of employees who either were employed on the last day of the plan year or had terminated employment due to death or disability.  The nonelective contributions based on student loan repayments also vested at the same rate as regular matching contributions did.

         The PLR addressed whether the nonelective contribution made on behalf of student loan repayments violated the “contingent benefit rule.”  Under that rule, a 401(k) plan is not qualified if the employer makes any other benefit (with the exception of matching contributions) contingent on whether or not an employee makes elective deferrals.  The IRS concluded that the program did not violate the contingent benefit rule because employees in the program could still make elective deferrals, but simply would not receive the regular employer match on those amounts during pay periods in which they received the nonelective contribution based on student loan repayments.

        Only Abbott Labs has reliance on the terms of the PLR, although the PLR may indicate the approach the IRS will take in any new guidance regarding student loan repayments as a basis for retirement plan contributions.  

        Proposed Legislation

        Congress has noticed the impact that student loan repayment obligations has had on employees’ ability to save for retirement.  As mentioned, the most significant bill that would address this issue is the Securing a Strong Retirement Act of 2021, commonly known as SECURE 2.0.  Specifically, Section 109 of the Bill would treat “qualified student loan payments” equal to elective deferral contributions, for purposes of employer matching contributions under a 401(k) plan, a 403(b) plan, a governmental 457(b) plan, or a SIMPLE IRA plan, and would permit separate nondiscrimination testing of employees who receive the matching contribution based on student loan repayments.  “Qualified student loan payments” would be defined to include any indebtedness incurred by the employee in order to pay their own higher education expenses.   Under SECURE 2.0, total student loan repayments that are matched, plus conventional elective deferrals, would be capped at the dollar limit under Internal Revenue Code (“Code”) Section 402(g) ($19,500 in 2021).   

        What Future IRS Guidance Might Hold

        Based on the Abbott Labs PLR and SECURE 2.0, we might hope or anticipate that any future IRS guidance on programs that condition employer retirement plan contributions on participant student loan repayments would include the following:

        • Guidance on how such programs may comply with the contingent benefit rule, including whether it will suffice simply that program participants may continue making elective salary deferrals (while likely foregoing regular matching contributions while student loan repayments are being matched).
        • Guidance on whether such a program, by nature limited to employees with student loans, is a “benefit, right or feature” that must be made available on a nondiscriminatory manner under Code Section 401(a)(4), and if so how it might satisfy applicable requirements.
        • Guidance on whether, and how, employers can confirm that loan repayments are being made, including whether (as SECURE 2.0 would permit), employers may rely on an employee’s certification of repayment status.
        • Guidance on nondiscrimination testing of contributions under a student loan repayment program, including provision for separate testing, as SECURE 2.0 would permit.

        Additionally, plan sponsors would no doubt appreciate guidance on use of outside vendors for student loan repayment programs and how they might interact with conventional retirement plan record keepers and third party administrators.

        Photo credit:  Mohammad Shahhosseini, Unsplash

        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. © 2021 Christine P. Roberts, all rights reserved.