The Labor Department wants to know what you think about auto-portability.
In a Nov. 7 request for comments, the Labor Department noted that employees leaving their current place of employment with small account balances in the company's 401(k) plan often either take a distribution of their retirement savings or move the account into an IRA — an outcome it says also frequently occurs with small retirement accounts when a company terminates its 401(k) plan.
In its view, an 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.” In its view employees would be told 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.
In a parallel move, the Labor Department’s Employee Benefit Security Administration has published a notice of proposed exemption via a request from Retirement Clearinghouse (RCH) to grant relief from ERISA’s prohibited transaction restrictions and allow the firm to move forward with its auto-portability program.
According to the Summary of Facts and Representations accompanying the notice, participating plan sponsors would designate RCH or a participating recordkeeper to be the plan’s default IRA provider for automatic rollovers of mandatory distributions and for distributions from terminated DC plans. The plans would 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.
With regard to its request for comments on the proposed exemption, EBSA explains that under ERISA and the Internal Revenue Code, a plan or IRA fiduciary is prohibited from using its discretion to cause the plan or IRA to pay the fiduciary a fee. The agency suggests, however, that it has the authority “to grant exemptions that are protective of and in the interests of plan participants and IRA owners.”
EBSA says it is interested in receiving input on any data or factors the agency should consider as part of the exemption, including protective conditions for participants and beneficiaries. The agency further notes that it welcomes “innovation in the area of retirement asset portability and encourages additional proposals.”
While auto portability was not directly addressed in President Trump’s August 2018 Executive Order, it seems to complement the underlying theme of promoting retirement security and making it easier for individuals to accumulate sufficient retirement savings.
This issue also has been percolating over the past couple of years. In July 2017, 11 GOP senators sent Labor Secretary Alexander Acosta a letter asking the DOL to issue guidance clarifying the application of ERISA to auto portability features to help facilitate the movement of a participant’s retirement account from one employer to another.
The senators specifically requested that DOL issue an Advisory Opinion or other appropriate guidance as soon as possible providing legal clarity to help expedite such transactions. The American Retirement Association supported issuance of the letter.
The letter cites earlier research from EBRI contending that system-wide adoption of auto portability for all retirement balances could increase private-sector savings by nearly $2 trillion (in current dollars), adding that stopping leakage from smaller accounts alone would save $1.5 trillion.
Retirement Clearinghouse President/CEO Spencer Williams has previously stated that approximately 37% of job-changers cash out of their retirement accounts because they needed the money, while the remaining 63% did so because it was “the easiest path available,” despite the early withdrawal penalty and taxes. In 2017 EBRI Research Director Jack VanDerhei applied some auto-portability assumptions to several different scenarios, and found that for individuals aged 25-34 in the lowest income quartile, assuming auto-portability for those with balances over $5,000 (indexed for inflation), it could mean nearly a 25% increase in their aggregate balances at age 65. With the same assumptions, but broadened to include auto-portability for all balances (not just those over $5,000), the increase was just over 35%, All told, over a 10-year time horizon, partial auto-portability would result in an additional $256 billion in retirement savings, and $1.5 trillion over a 40-year period.
The proposed exemption would be subject to renewal after a five-year period, at which point RCH would be expected to submit a new application.
Comments on the proposed exemption are to be submitted by Dec. 24, 2018.