Detailing the DOL’s Auto-Portability Proposal

Service providers would be permitted to charge a reasonable fee to transfer the assets of individual retirement account holders to a new employer-sponsored plan under a proposal published Friday by the Department of Labor.

Below, PLANADVISER delves into the details of the proposed rule, which will be up for a 60-day public comment period once filed in the Federal Register.

No Affirmative Consent Needed

When a worker leaves an employer, if the worker’s retirement account balance was less than $7,000, the sponsor may distribute that sum to a default IRA. The balance in that default IRA may then be transferred to the worker’s new retirement plan, assuming they have one. A service provider may make this default IRA-to-plan rollover without the participant’s affirmative consent “after such individual has been given advance notice of the transfer and has not affirmatively opted out of such transfer.”

The DOL notes in its proposal that this process increases “the risk of funds becoming lost or difficult to locate.” The proposal adds that “automatic portability transactions are intended to benefit participants and IRA owners that are unresponsive or missing” by consolidating their retirement assets into their current plan.

Under current rules, service providers offering this transfer service, called auto-portability, could not assess a fee directly to the IRA owner. The provider would either have to provide the service for free, charge the new plan sponsor or simply not provide the service.

This is because when the provider moves assets on behalf of the participant without their affirmative consent, the provider acts on its own discretion, making it a fiduciary, according to the DOL’s former guidelines. In order to charge a fee from retirement assets for fiduciary acts, the provider must have a Prohibited Transaction Exemption from DOL. The proposal would provide a blanket exemption for the noted circumstances.

Direct Fee Now OK

The DOL’s proposal also notes that “a direct fee to be paid by a plan sponsor,” instead of a fee assessed to the IRA owner, would still be permitted.

The new plan would not be required by the proposal to accept the new funds from the IRA if the new plan’s plan documents do not permit such a transfer. However, the ability of the service provider to charge the fee to the IRA owner could make plans more likely to permit it, since it would not cost the plan anything.

The proposal, if passed, would codify Section 120 of the SECURE 2.0 Act of 2022.

SECURE 2.0 provided for the auto-portability measure and required service providers to observe certain requirements. Those requirements were listed in the DOL’s proposal and include, among other requirements:

• The service provider must accept its status as a fiduciary;
• It may only assess reasonable fees;
• It must disclose those fees to other fiduciaries involved in the transfer;
• It must aim to maintain the participant’s investment selections;
• It may not use participant data for any purpose apart from executing the rollover; and
• It must ensure that the participant’s contact information is accurate.

The DOL itself also provided for additional requirements for service providers in the process, including a prohibition on contract language that limits the “automatic portability provider’s liability in the event that the automatic portability transaction results in an improper roll-in to the transfer-in plan.”