DOL Proposes Exemption for Retirement Plan Auto-Portability Solution

The agency is inviting public comment on the proposed exemption and encourages additional proposals.

The Department of Labor (DOL) has issued a notice of a proposed exemption from certain prohibited transaction restrictions of the Employee Retirement Income Security Act (ERISA) to Retirement Clearinghouse (RCH) for use of its auto-portability solution.

RCH has developed an Auto-Portability Program that is designed to help employees who may have multiple job changes over their careers consolidate small accounts held in prior employers’ individual account plans and rollover IRAs into their new employers’ individual accounts or 401(k) plans. The notice says the objective of the RCH program is to improve overall asset allocation, eliminate duplicative fees for small retirement saving accounts, and reduce leakage of retirement savings from the tax-deferred retirement saving system. RCH uses a ‘‘locate, match, and transfer’’ technology that performs periodic queries of cooperating recordkeepers’ systems to ascertain if the IRA owner has become a participant in an individual account plan through re-employment.

The DOL says Section 4975(c)(1)(D) of the Internal Revenue Code prohibits a fiduciary from causing a plan to engage in a transaction, if he or she knows or should know that the transaction constitutes a direct or indirect transfer to, or use by or for the benefit of, a party in interest of any assets of a plan. Section 4975(c)(1)(E) of the Code prohibits a fiduciary with respect to a plan from dealing with the assets of the plan in its own interest or for its own account. Without an exemption, RCH’s receipt of an additional fee in connection with transferring assets from a default IRA to an individual’s new plan account, without the individual’s affirmative consent, violates these Code sections.

However, the DOL says it has tentatively determined that the proposed exemption is protective of affected plan participants. “The RCH program, service providers, and associated fees are fully disclosed and approved by independent plan fiduciaries. All fees and compensation associated with the program are fully subject to the protections of section 408(b)(2) of ERISA and section 4975(d)(2) of the Code. In addition, RCH represents that it has no financial incentives that would lead a reasonable person to believe that it is steering accounts to custodians, service providers, or investment providers based on its own financial interests, as opposed to the interests of the plan participants and IRA owners,” the notice says.

Results from the firm’s product use by one plan sponsor found that upon consolidation, workers’ median plan account balance increased by 46% and the combined future value of their preserved savings was more than $3 million at normal retirement age.

The DOL is inviting public comment on the proposed exemption. “The Department welcomes innovation in the area of retirement asset portability, and encourages additional proposals,” it said in a press release.

Last year, in a letter to DOL Secretary R. Alexander Acosta, U.S. Senator Tim Scott, R-South Carolina, and other lawmakers requested that the DOL issue an advisory opinion or other appropriate guidance regarding application of ERISA to auto-portability of retirement savings.