In an effort to help address the issue of retirement plan leakage, the Department of Labor has approved the Retirement Clearinghouse’s request for relief from ERISA’s prohibited transaction restrictions to receive fees in relation to its pioneering auto-portability program.
The DOL’s Employee Benefits Security Administration on July 30 granted a five-year exemption permitting the Retirement Clearinghouse (RCH) to receive certain fees in connection with the transfer under the firm’s RCH Program of an individual’s default IRA or eligible mandatory distribution account (EMDA) assets to the individual’s new plan account without the individual’s affirmative consent.
Among other things, the RCH Program seeks to help eliminate duplicative fees and reduce retirement savings leakage by providing individuals who are changing jobs with a way to transfer retirement assets from their prior employers’ plans to their new employers’ plans. The program also helps identify when an individual with a default IRA or EMDA has opened a new plan account with his or her current employer. To do all of this, the program features “locate and match” technology that coordinates among multiple recordkeeper systems.
Participating plan sponsors can designate RCH or a participating recordkeeper to be the plan’s default IRA provider for automatic rollovers of mandatory distributions and for distributions from terminated DC plans. Then assets will be transferred from an EMDA to an RCH default IRA and then to a new plan account, or from a non-RCH default IRA to an RCH default IRA and then to a new plan account, after the individual has given consent or failed to respond to specified notifications within a certain time period.
Relief under the exemption is solely available for the payment by a default IRA of a transfer fee and a communication fee to RCH in connection with the transfer of $5,000 or less, with a limited exception, to a new plan account.
2018 Advisory Opinion
In response to RCH’s request, the DOL issued an advisory opinion (AO) in November 2018 clarifying that neither the plan sponsor of the former employer nor the new employer would be considered a fiduciary in connection with a decision to transfer the individual’s default IRA into the new employer’s plan, nor would have any involvement or responsibility for the decision by individuals in that program to transfer those IRA assets into the plan of a new employer.
The AO further explains, however, that the decision by a plan sponsor/fiduciary to participate in the RCH Program is a fiduciary decision, and one that must be prudent and solely in the interest of plan participants and beneficiaries.
How big of an effect will the program have? EBRI research from 2017 shows that system-wide adoption of auto-portability for all retirement balances could increase private-sector savings by nearly $2 trillion, and preventing leakage from smaller accounts alone would save $1.5 trillion.
Retirement Clearinghouse President and CEO Spencer Williams also previously stated that approximately 37% of job-changers cash out of their retirement accounts because they need the money, while the remaining 63% do so because it is “the easiest path available,” despite the early withdrawal penalty and taxes.