Automatic Portability Transaction Regulations, 29 CFR 2550, 89 Fed. Reg. 5624 (Jan. 29, 2024)
The DOL has released proposed regulations on automatic portability programs. These programs are designed to help employees who change jobs consolidate their automatic rollover distributions by automatically transferring their default IRAs from their former plans to the plans of their current employers. The proposed regulations would implement a prohibited transaction exemption granted under the SECURE 2.0 Act for automatic portability transactions and chiefly addresses rules for retirement plan service providers that charge a direct fee to plan sponsors in lieu of imposing a fee on a default IRA owner. However, several rules would apply to plans that engage the services of automatic portability providers (both transfer-out plans that initiate automatic distributions and transfer-in plans that receive distributions from default IRAs), as follows:
- Service providers would have to provide administrators of plans involved in automatic portability programs with a description of the program, including fees and expenses. Administrators could use the description to fulfill their ERISA disclosure obligations to participants via an SPD or SMM, as relevant. [EBIA Comment: Plan sponsors should review these descriptions to ensure that they are ERISA-compliant.]
- Transfer-in plans would have to designate a plan official to monitor inbound transfers and ensure proper investment of amounts received on behalf of participants. Amounts received would be deemed to be invested properly if invested according to the participant’s current investment election under the plan or, if no election is made or permitted, in the plan’s qualified default investment alternative or in another investment selected by the plan’s fiduciary. [EBIA Comment: The proposed regulations place the burden on the service provider to ensure that these conditions are met to qualify for an exemption. However, plan fiduciaries should keep in mind that the decision whether to participate in the program is subject to ERISA’s general fiduciary standards.]
- A plan fiduciary involved in an automatic portability transaction would have to provide advance, written approval of the fees and compensation to be received, directly or indirectly, by the automatic portability provider (including its affiliates) for services provided in connection with the transaction.
- Automatic portability providers would be required to maintain a website with (1) a list of recordkeepers with respect to which the provider conducts automatic portability transactions (and the number of plans and participants covered by each recordkeeper) and (2) a description of all automatic portability transaction fees paid to the provider. These disclosures will help plan sponsors to independently assess an automatic portability arrangement’s overall costs before engaging an automatic portability transaction service. [EBIA Comment: The disclosures should help plan fiduciaries to assess the fees’ reasonableness.]
- Automatic portability providers would have to acknowledge their fiduciary status in writing upon being engaged by a plan fiduciary. Thus, plan sponsors should ensure this acknowledgement is included in service provider contracts.
As noted in the preamble, the final version of the regulations would be effective 60 days after publication in the Federal Register and would have prospective applicability.
EBIA Comment: The DOL believes that automatic portability programs will be a desirable feature for plan sponsors and participants. Compliance with the proposed regulations should allow plan fiduciaries to consider participation in these programs without concern about potential fiduciary liability. However, offering these programs is not required—plan sponsors will need to determine whether the burden of these programs outweighs their benefits. Note that the threshold for automatic distributions is $7,000 beginning in 2024. 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.E (“ERISA Fiduciary Duties”), XXIV.M (“Exemptions to Prohibited Transactions”), XXIV.N (“Fiduciary-Level Service Provider Fee Disclosures”), XXV.D (“Selecting the Plan’s Investment Funds”), and XXVI.J (“Fiduciary Protection for Qualified Default Investment Alternative (QDIA)”).
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