The U.S. Department of Labor (DOL) took steps toward allowing automatic small-balance 401(k) plan transfers to a new employer’s plan in a job change by proposing to exempt a vendor’s auto-portability program from some prohibited-transaction restrictions.

The vendor requesting the DOL approval, Retirement Clearinghouse (RCH), helps employees consolidate smaller retirement accounts left behind at past companies or sitting in individual retirement accounts (IRAs) into their current employer’s 401(k) plan. Fees for locating, matching, and rolling in former accounts are deducted from the participant’s Account balance. Accounts eligible for an automatic transfer to a new employer’s plan—unless a participant opts out of this choice—must contain $5,000 or less. Rollovers of larger accounts to a new plan require employee approval.

RCH’s objective is to improve overall asset allocation, eliminate duplicative fees for participants, and reduce cashouts from tax-deferred retirement savings, according to the DOL’s notice of proposed exemption, published November 7 (83 Fed. Reg. 55741).

Under such 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 new 401(k) or other individual account plan of the new employer when the accountholder starts another job.

ERISA Transaction Prohibitions

The Employee Retirement Income Security Act (ERISA) prohibits a fiduciary from causing a plan to engage in a transaction if he or she knows or should know that the transaction constitutes a direct or indirect transfer to, or use by or for the benefit of, a party in interest of any plan assets.

The federal tax code also bans a plan fiduciary from dealing with the assets of the plan in its own interest or for its own account. Without a DOL exemption, RCH would violate this prohibition by receiving a fee for transferring assets from a default IRA to an individual’s new plan account without the individual’s affirmative consent, because the DOL considers RCH the fiduciary for these transactions rather than the distributing or receiving plan sponsors.

The DOL proposal is aimed at reducing plan “leakage,” in which employees cash out their smaller retirement plan balances in a job change, often due to confusion or lack of education about the steps required to roll over retirement savings into a new employer’s plan.

Other vendors could compete with RCH to offer this type of automatic rollover service if they agree to the terms set in the DOL notice.

In its related advisory opinion to RCH, the DOL outlined its understanding of the company’s services and procedures for working with plan recordkeepers to transfer participants’ smaller balances automatically to a new employer plan.

“Based on these representations, it is the view of the Department that 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,” the DOL concluded in Advisory Opinion 2018-01A, issued November 5.

“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” and the distributed assets “are no longer plan assets under ERISA,” the opinion said.

The DOL noted that this advisory opinion did not address the prohibited-transaction implications of RCH’s receiving additional fees for exercising fiduciary discretion in the transfers described. Instead, this aspect of approval for RCH’s auto-portability program was the subject of the proposed exemption notice published in the Federal Register.

Public Comment Period

The agency is accepting public comments on the proposed exemption for RCH’s auto-portability program until December 7.

RCH is constructing a system to share data on 401(k) participants with recordkeepers to find a departing employee’s new plan and facilitate the transfer. The platform has been in development for years by the North Carolina-based company.

RCH plans to charge a maximum one-time fee of $59 for each transfer. For accounts with $590 or less, the charge will be 10 percent of the balance, and the service is free for accounts with $50 or less. There also is a 20-percent reduction in the fee charged to a plan when the annual volume of roll-in transactions exceeds 1 million transactions per year, meaning the benefits of scale are passed on to participants in the form of reduced fees, according to the DOL notice.

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