Proposed Rule Facilitates Retirement Plan Rollovers When Workers Change Jobs

The U.S. Department of Labor (DOL) recently released a proposed rule that would allow vendors to charge fees related to processing automatic portability transactions for retirement plans.

The proposed rule was published in the Federal Register on Jan. 29. Public comments are due by March 29.

When an employee leaves a job with a retirement plan with savings totaling $7,000 or less, the plan can automatically roll the money into a Safe Harbor individual retirement account (IRA), if the plan document allows it and the employee does not take action after receiving required notices. Auto-portability transactions involve automatically transferring a worker’s retirement savings from a Safe Harbor IRA to a retirement plan sponsored by their new employer.

The proposed rule would implement provisions of the federal SECURE 2.0 Act that allow automatic portability providers to receive reasonable fees in connection with executing automatic portability transactions through a new exemption in the Internal Revenue Code.  

The exemption criteria cover these areas:

• Vendors must provide a notice to individuals on whose behalf the default IRA is established in advance of the pre-transaction notice. They must fully disclose fees.
• Vendors must acknowledge their fiduciary status with respect to the IRA. Disclosures must be written in a culturally and linguistically appropriate manner, so they are not misleading.
• Vendors can’t use contract provisions to limit their liability if an automatic portability transaction results in an improper transfer.
• Vendors must ensure that participant and beneficiary data is current, accurate and secure.
• Vendors can’t use data related to automatic portability transactions for any purpose other than to execute those transactions or locate missing participants. They can’t market or sell data relating to the IRA or to plan participants.
• Vendors must retain for at least six years records sufficient to demonstrate legal compliance.
• Vendors must conduct an annual audit and maintain a website with a list of fees and participating record keepers.

Greater Savings

The proposed rule could lead to more retirement savings for individuals, according to Craig Copeland, director of wealth benefits research for the Employee Benefits Research Institute in Washington, D.C.

“If they can track it to a new employer, those dollars can be built up,” he said. “It’s easier to keep track of the money if it’s in one plan.”

In addition, if the money is automatically rolled over into a new employer’s plan, that may prevent the employee from cashing it out, he noted.

For employers, the first step would be to determine whether their retirement plan currently allows automatic portability transactions, or what steps they would need to take to make that feature available in their plan. It’s a relatively new feature in the retirement savings industry.

“There’s a very limited number of plans that did this,” Copeland said.

Overall, there are an estimated 635,000 defined contribution retirement plans in the U.S., covering an estimated 86.6 million participants with account balances totaling $9.3 trillion in assets, according to the DOL.

About 94 percent of employers offered a traditional 401(k) or similar plan in 2023, while 71 percent offered a Roth 401(k) or similar plan, and 16 percent offered traditional defined benefit pensions, according to SHRM’s Employee Benefits Survey.

“With the proliferation of these accounts, there is a particular need for this type of automatic portability solution to help ensure participants remain connected to their retirement savings when they change jobs,” the DOL stated in the proposed rule.