DOL Eases Automatic Transfer of Left-Behind 401(k) Dollars to New Plans

A new twist on auto-portability helps preserve employees' retirement savings

Stephen Miller, CEBS By Stephen Miller, CEBS August 7, 2019
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New guidance from the Department of Labor (DOL) should make it easier for employers to transfer former employees' small-balance 401(k) funds to their new employer's 401(k) plan, as long as the employees do not opt out of the transfer. The exemption removes a requirement that 401(k) participants consent to having a balance of $5,000 or less rolled into their new employer's plan.

Currently, employers, as 401(k) plan sponsors, can automatically roll over a former employee's 401(k) balance of up to $5,000 to a safe harbor individual retirement account (IRA). The new guidance, however, allows employers to participate in an automatic portability program that goes a step further and ultimately transfers small-balance 401(k) funds to an ex-employee's new 401(k) plan.

The DOL published Prohibited Transaction Exemption (PTE) 2019-02 in the July 31 Federal Register. The exemption was requested by Retirement Clearinghouse (RCH), a Charlotte, N.C.-based provider of portability services for plan sponsors. While the exemption is limited to services provided by RCH, the guidance provides a framework for auto-portability that could eventually be extended to other service providers, benefit specialists said.

Right now, "the PTE is not a class exemption that is generally applicable" to other vendors, said Mike Barry, a senior consultant with October Three, a retirement plan advisory firm. However, "employers are broadly interested in a utility that will solve their small-account and missing-participant issues. If the RCH model can deliver that solution, it could become an industry standard." 

About 12.5 million U.S. workers with defined contribution plans change jobs each year, and approximately 5 million of them have retirement accounts with less than $5,000, according to RCH. Cash-outs of small accounts could be cut by two-thirds under a scenario where auto-portability is broadly adopted, the firm's auto-portability simulation shows.

"Using auto-portability, plan sponsors and employees in industries with high labor turnover, like retail, can especially benefit," said Amy Ouellette, director of retirement services at 401(k) advisory firm Betterment for Business. "The idea is that small balances forced out of plans can be automatically pushed to the employee's next available 401(k) plan, more easily consolidating their retirement assets, compared to today where they may cash-out because it's easy, or have scattered small-balance IRAs."

How Auto-Portability Works

The RCH approach to auto-portability, already used by the firm in pilot programs, works as follows:

  • Based on agreements between RCH, participating employer plans and participating third-party record keepers, former employees' 401(k) balances, if less than $5,000, are automatically rolled over to a default IRA of a participating record keeper, unless the plan participant elects otherwise.
  • RCH uses data-matching searches to determine whether the former employee, now the default IRA owner, is participating in another employer plan that accepts rollovers. If the default IRA owner does not object, the IRA balance is automatically rolled over to the new employer's plan.
  • RCH will transfer default IRA assets to the new plan account if the IRA owner fails to respond to two letters stating that the assets will be transferred if he or she does not reply within 60 days of the first letter or 30 days of the second letter.

"Defined contribution plan sponsors and their record keepers are swamped with the administrative burdens of small accounts from separated participants, such as excess record-keeping fees, missing participants and uncashed distribution checks—all of which have exploded since the advent of auto enrollment,"  RCH president and CEO J. Spencer Williams said. 

Auto-portability addresses these small-account issues, he added, and can "significantly reduce the incidence of stranded accounts, lost/missing participants and uncashed checks."

[SHRM members-only toolkit: Designing and Administering Defined Contribution Retirement Plans]

Auto-Portability 'Guardrails'

PTE 2019-02 and an advisory opinion on auto-portability that the DOL issued in November 2018 provide 401(k) plan sponsors with "guardrails they need to safely adopt auto-portability," Williams said. For instance, under the DOL's guidance, the following must occur:

  • Before authorizing a plan's participation in the RCH program, a plan fiduciary who is independent of RCH must review the terms of the program and determine whether the plan's participation in the program is prudent.
  • Direct or indirect fees that RCH and related parties, including participating record keepers, receive in connection with the program must be approved by the responsible plan fiduciary of the old employer plan.

Others May Follow

"The prohibited transaction exemption is granted for five years, allowing RCH to receive certain fees for transfers of assets," Ouellette pointed out. "The success of the RCH program will be dependent on sponsor adoption and record-keeper participation," she noted, since RCH will use record keepers' data to determine where employees have moved.

Ouellette expects to see other vendors consider this framework or similar services, given that "there are multiple [firms] in the market today that similarly offer participant location services, default IRAs and uncashed check support." Like RCH, other players in this space would "need to 'connect the dots' between records they get from default IRA rollovers [forced out from plans] and how to connect with record keepers to forward assets to the next plan," she said.

RCH, Ouellette added, "has been forward thinking by building their technology. I'm interested to see how data-sharing capabilities and program success will spur others to follow suit."

Fewer Missing-Participant Problems

Jan Jacobson, senior counsel for retirement policy at the American Benefits Council, an employers' group, wrote in a comment letter to the DOL that allowing plan sponsors to automatically transfer former employees' small 401(k) balances to a new employer's plan is "an excellent first step in helping ensure that retirement plan assets follow the terminating employee to their new employer and/or reunite lost benefits with the participant."

This approach, she added, could significantly lessen the problems plan sponsors face in trying to locate missing 401(k) plan participants who left a company years earlier, leaving their small account balances behind.

As noted above, a 401(k) or similar defined contribution plan may elect to force out the small-balance accounts of participants who have separated from employment. "While mandatory distributions in excess of $1,000 (and not in excess of $5,000) generally must be distributed to an IRA, balances of $1,000 and under may generally be 'cashed out,' " Barry wrote in a recent commentary.

The DOL's guidance allows plan sponsors to use the RCH program as a default rollover IRA provider. "As we understand it, RCH will accept distributions to an IRA with respect to participants for which the sponsor no longer has a good address," Barry noted, however "these individuals generally cannot participate in the portability features of the RCH program” since their location isn't known. 

Nevertheless, "where a sponsor does not have a good address for a participant with a $1,000-or-under balance, or the check sent to the participant remains uncashed for a long period of time, distribution to the RCH IRA program may provide a viable alternative distribution strategy," Barry said.


Related SHRM Articles:

EBSA Missing Participant Investigations Triggered by Failure to Take Distributions, SHRM Online, June 2019

New SEC Best-Interest Regulation Affects Retirement Plan Rollovers, SHRM Online, June 2019

Retirement Plans Are Leaking Money. Here’s Why Employers Should Care, SHRM Online, October 2017


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