The U.S. Department of Labor (DOL) recently issued proposed regulations on automatic portability programs. These programs help employees who change jobs consolidate their retirement funds by automatically transferring IRAs from their former plans to their new employers’ plans. For 2024, the minimum automatic IRA transfer amount under an automatic portability program is $7,000.
Under the proposed regulations, a transfer under an automatic portability program would qualify as a prohibited transaction exemption from ERISA as granted by the SECURE 2.0 Act. The proposed regulations also address rules for service providers that charge direct fees to plan sponsors instead of IRA owners.
However, the plans involved – both those transferring out the IRA funds (transfer-out plans) and those receiving the transferred IRA funds (transfer-in plans) – must meet certain requirements, as follows:
- Service providers must provide a description and full fee disclosure of an automatic portability program to plan administrators, who should examine the description for compliance with ERISA and use it to fulfill its disclosure requirements under ERISA to plan participants.
- Transfer-in plans must designate a plan official to monitor inbound transactions and ensure that the funds are invested properly on behalf of new plan participants. While the service provider is responsible for meeting the requirements to make the program a prohibited transaction exemption, plan fiduciaries still must meet ERISA’s general fiduciary standards in determining whether to participate in the automatic portability program.
- Plan fiduciaries involved in automatic portability programs must have prior written approval of fees and compensation to be received by the service provider concerning all services related to the transaction, whether directly or indirectly.
- Automatic portability program providers must maintain a website with all recordkeepers for which they conduct automatic portability programs, including the number of plans and participants each recordkeeper covers. This listing also must describe all program transaction fees that the provider receives to help plans gauge the reasonableness of proposed provider fees.
- Automatic portability program providers must acknowledge their fiduciary status in writing, so plan sponsors should require this acknowledgment in their service provider contracts.
Automatic portability programs may be attractive features for employees, but participation remains voluntary for plan sponsors. The proposed regulations address concerns about potential fiduciary liability, but overall administration costs remain unknown.
