The Department of Labor (DOL) has issued a proposed rule addressing “auto portability,” a mechanism intended to automatically reconnect defined contribution (DC) plan participants with accounts they may have inadvertently left behind or forgotten about after leaving an employer.
America’s highly mobile workforce drives millions of job changes each year. Rolling balances between plans is a source of friction for participants and may lead to premature distributions, referred to as “leakage,” which can impact the retirement prospects of millions of Americans. The Government Accountability Office reported that between 2005 and 2015, 25 million DC plan participants separated from an employer and left at least one account behind, while millions left two or more accounts behind.
From the plan sponsor’s perspective, retaining small account balances in the DC plan creates risk. The plan sponsor maintains fiduciary exposure for those accounts and must act prudently and in the best interest of those participants. The plan sponsor is also responsible for providing annual fee disclosures and quarterly statements to former employees, which becomes an issue as participants go missing over time. Additionally, small account balances adversely impact the administrative costs for the plan.
Current regulations allow plan sponsors to “auto cash-out” small dollar balances of terminated employees following a reasonable period, assuming the participant did not make an affirmative election. This is another form of leakage. Balances less than $1,000 may be paid out directly to the participant, provided there is adequate notice. Balances less than $5,000 can also be cashed out, but they must be rolled over to an individual retirement account (IRA).
Auto portability as described in the proposed rule is the regular, standardized, and automatic movement of a terminated participant’s small account balance (less than $5,000) from a former employer’s retirement plan to an IRA, which may later be directed into an active account at a new employer’s DC plan.
The proposed rule weighs in on a specific program offered by Retirement Clearinghouse (RCH). The mechanisms for auto-portability are still in their infancy, but the basic structure as outlined in the proposed rule requires that plan sponsors use a specific cash-out IRA.
- The service provider would monitor data from recordkeepers participating in this program to identify if the participant had joined a new plan.
- The participant would have an opportunity to decline the roll-in, but otherwise the small-dollar IRA would be rolled into the new plan.
A version of RCH’s auto-portability program was implemented with one plan sponsor in July 2017—a hospital services company employing close to 300,000 workers. RCH reports it was able to identify 4,000 DC plan participants with this employer who had a cash-out IRA with RCH. All of these participants were invited to transfer their IRA balances into the DC plan at the hospital services company. About 700 consented to the roll-in, 100 declined, and the remainder did not respond.
Auto portability follows plan design innovations from the past decade, including auto enrollment, auto escalation, and auto investment allocation (i.e., target date funds and managed accounts). These solutions seek to overcome behavioral barriers that impede retirement savings. Auto-portability programs intend to consolidate small retirement savings accounts, eliminate duplicative fees, and reduce leakage.
Comments on the proposed exemption are to be submitted by Dec. 24, 2018.
Bottom Line: The proposed rule and further auto-portability guidance would allow plan sponsors to simplify their plan’s administration and fiduciary risk. It is unclear what responsibility the plan sponsor would retain for data security and accurate processing. Auto-portability programs may be limited by recordkeepers’ willingness to share participants’ personally identifiable information with a third party and may also be hindered by administration and transfer fees.
