The U.S. Department of Labor (DOL) is advancing a proposal that would enable 401(k) plan sponsors to automatically transfer account balances up to $5,000 of former participants who have left the company. The amounts would be transferred to the 401(k) plan of an employee’s new employer. Assets transferred using this “auto portability” approach would make an intermediate pit stop in an IRA before landing in the former employee’s new employer’s plan. Here’s what you need to know.
Proposed Exemption
The DOL took two simultaneous actions with this proposal:
First, it asked the public comment on this concept as a prelude to new regulations.
Under the DOL proposal, a participant’s consent to auto portability wouldn’t be required, similar to the current rules for mandatory cash-outs to IRAs. However, participants would have to be notified before a transfer is executed, and they would also be allowed to veto the rollovers and keep their account assets in their former employee’s plans, assuming they exceed the current $1,000 non-discretionary rollover threshold.
Second, the DOL gave provisional approval of a request by a specific large rollover service provider (Retirement Clearinghouse) to implement an auto-portability program on behalf of plan sponsors and participants.
Retirement Clearinghouse receives a fee when it facilitates a rollover. Because Retirement Clearinghouse acts in a fiduciary capacity, it ordinarily would be barred under ERISA “prohibited transactions” rules from receiving a fee from a “party in interest”. The DOL proposal provides Retirement Clearinghouse an exemption from that prohibition when processing auto-portability rollovers.
Reducing Leakage
There are three goals of the DOL’s proposed auto-portability program:
- Improve asset allocations by consolidating small retirement savings accounts.
- Eliminate duplication fees, and
- Reduce leakage of retirement savings from the tax-deferred saving system.
Proponents of the proposal believe this approach could keep billions of dollars in retirement plans that would otherwise wind up being spent prematurely. Nearly a third of small 401(k) balances that are transferred to IRAs upon an employee’s job change are cashed out within seven years, according to Retirement Clearinghouse.
Bonus for Employers
In addition to preserving employees’ retirement savings, auto portability would also benefit employers. How? Under the proposal, your plan’s aggregated plan assets would increase every time you hire a new employee who’s eligible for auto portability (and who doesn’t opt out of this privilege).
Instead of funds staying with former employers, in an employee’s IRA or cashed out, more money is expected to be rolled over to the employee’s new 401(k) plan. A plan with higher aggregate asset value is generally more attractive to plan service providers, possibly lowering some service fees on a per-account basis.
Raising the Limit
During the public comment period – which ends on December 24 – the DOL welcome innovative ideas on asset portability. Retirement Clearinghouse has already suggested increasing the $5,000 auto-portability rollover limit.
“Pre-supposing a future change from the current $5,000 limit to perhaps $15,000, auto-portability can be readily adapted to larger account balances, “fits nearly into the framework of the many ‘auto innovations’, such as auto enrollment and auto investment allocation [in the form of target date funds] that have proven successful in enhancing the retirement savings prospects of million of Americans. ”
Wait and See
Your financial and legal advisers are atop the latest developments in auto portability. Contact us for more information and to assess whether auto portability could be a viable option for your plan in the future.