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DOL Guidance Addresses Fiduciary Status and Fees Under Program Facilitating Portability of Automatic Rollovers

· 5 minute read

· 5 minute read

DOL Advisory Opinion 2018-01A (Nov. 5, 2018); Notice of Proposed Exemption Involving Retirement Clearinghouse, LLC (RCH or the Applicant)—Located in Charlotte, North Carolina, 83 Fed. Reg. 55741 (Nov. 7, 2018)


Proposed Exemption

The DOL has issued guidance regarding a program designed to help employees who change jobs consolidate their automatic rollover distributions by automatically transferring their default IRAs into the plans of their current employers. The program would apply to mandatory distributions of up to $5,000 that are subject to the direct rollover requirements of Code § 401(a)(31), and to automatic rollovers of distributions from terminated defined contribution plans. Under the program, such distributions would be transferred from the distributing plan to default IRAs, where they would be held until the individual IRA owner provided additional instructions or the program provider discovered that the individual had an active account in the plan of a current employer. To match default IRA owners with the accounts of their current employers, the program provider would periodically search the records of cooperating plan recordkeepers. In the event of a match, the IRA assets would be transferred automatically into the current employer’s plan if the individual did not elect otherwise and the current employer’s plan consented.

The program provider asked the DOL for two forms of guidance: first, an advisory opinion clarifying the fiduciary status of the parties involved; and second, a prohibited transaction exemption (PTE) that would allow the provider to receive a fee for transferring a default IRA’s assets into the plan of the IRA owner’s current employer without the owner’s affirmative consent. Here are highlights:

  • Advisory Opinion: Fiduciary Status of Plan Fiduciaries and Program Provider. The DOL explains that plan fiduciaries would be responsible for evaluating the program’s package of services and service providers. To participate, those fiduciaries would need to conclude that the program—including its automatic transfer feature—was appropriate and helpful to carrying out the plan’s purpose and provided for no more than reasonable compensation. Among other things, that evaluation would need to consider whether any increase in cost resulting from program participation would be justified by the program’s matching and automatic transfer features. After implementation, the program would have to be monitored and periodically evaluated. Neither the fiduciaries of the distributing plan nor the fiduciaries of the plan receiving the transfer, however, would be responsible for the decision to transfer funds from a default IRA to the plan of the IRA owner’s current employer. That responsibility would fall exclusively on the program provider absent instructions from the IRA owner. An IRA owner’s failure to respond to notice of a proposed transfer would not be treated as affirmative consent and, thus, would not relieve the provider of fiduciary status.
  • PTE: Transfer and Communication Fees. Because the fee for transferring the default IRA assets into the plan of the IRA owner’s current employer would result from the provider’s decision to make the transfer, the provider requested an exemption from the prohibited transaction rules that prohibit self-dealing by fiduciaries and the use of plan assets to benefit disqualified persons. The PTE proposed by the DOL would grant that exemption, but only for a five-year period and subject to numerous conditions. Among other things, all program fees would have to be disclosed to and approved by a fiduciary for the plan making the distribution to the default IRA. Detailed notices would have to be given to individuals eligible for mandatory distributions and to those for whom a default IRA was established by the program provider. After the program provider matched a default IRA owner to an account in the plan of a current employer, at least one, and, in some cases, two “consent letters” would have to be sent giving the IRA account owner the opportunity to accept or decline the transfer. The provider would need to perform searches at least monthly, submit to an extensive annual audit of the program for compliance with the PTE’s requirements, and agree not to limit the ability of others to provide similar locate-and-match services. Written comments on the proposed PTE are requested by December 24, 2018.

EBIA Comment: The DOL’s advisory opinion should allow plan fiduciaries to consider participation in the program without concern about potential fiduciary liability for the decision to roll assets out of default IRAs and into successor employers’ plans. However, fiduciaries of distributing plans will remain fully responsible for their decision to participate in the program and thus will need to carefully consider its cost and features compared to other default IRA options. As the benefits of the program may depend significantly on the provider’s success in enlisting plans and recordkeepers willing to share data about plan participation, this cost-benefit analysis may be especially difficult, particularly for early adopters. For more information, see EBIA’s 401(k) Plans manual at Sections XIII.E.2 (“Automatic Rollover to IRA If Participant Does Not Respond to Rollover Notice”), XXIV.B (“Who Is an ERISA Fiduciary?”), and XXIV.M (“Exemptions to Prohibited Transactions”).

Contribution Editors: EBIA Staff.

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