Auto Portability Programs: Fiduciary Responsibilities Under New DOL Guidelines

Plan sponsors and employers face an issue with the portability of employees’ retirement plans. When the employee leaves, but doesn’t take their retirement fund, the plan often transfers the funds to an IRA. After five years, the company administering the retirement account automatically sends the IRA funds to the retirement account sponsored by the employee’s new employer, if it can be found.  Such auto portability programs raise concerns about the fiduciary status of plan sponsors and others acting on behalf of the plan.

Background – The Request

Retirement Clearinghouse, LLC (“RCH”) requested an opinion regarding its Auto Portability Program. Specifically, RCH was concerned about whether certain parties involved in the program were considered fiduciaries under ERISA and Section 4975(e)(3) of the Internal Revenue Code (Code).

The auto portability program provides a way to transfer prior employee’s IRAs into their new employer’s 401(k) plans without gaining their expressed consent.

The DOL’s Response

According to an advisory opinion letter issued by the Department of Labor (DOL), plan sponsors or other fiduciaries dealing with the plan typically are subject to the usual fiduciary standards and transaction prohibitions of ERISA when choosing and managing the RCH program. Fiduciaries must:

  • Always act in the best interests of the plan participants and beneficiaries.
  • Have one purpose: to provide benefits and defray administration expenses.
  • Comply with all documents and instruments consistent with ERISA, Titles I and IV.
  • Ensure the RCH program is necessary and reasonable.
  • Ensure that compensation is reasonable according to ERISA section 408(b)(2) and Code section 4975(d)(2).
  • Evaluate the RCH program’s services and service providers.
  • Determine that services are appropriate and helpful to the continuation of the plan.
  • Monitor the arrangement, ensuring that the plan’s participation in the RCH program complies with ERISA.

The Effect on Fiduciary Status

After thoroughly describing the fiduciaries duties, the DOL letter states:

“Based on these representations [RCH’s], it is the view of the Department that the plan sponsors of the former and new plans would not be acting as a fiduciary with respect to the decision to transfer the individual’s default IRA into the new employer’s plan.”

In fact, once the assets are passed to the new plan, “the distributed assets are no longer plan assets under ERISA.”

However, RCH does act as a fiduciary when making the decision to transfer the participant’s RCH IRA to the new employer’s plan absent the participant’s consent. The accountholder’s failure to respond to RCH letters about making a default transfer does not mean RCH is no longer a fiduciary.

Thinking of an Auto Portability Program in Your Retirement Plan?

Consult with a benefits attorney before making any changes to or adding to your company’s benefit plans.

At Hall Benefits Law, we work extensively with clients to ensure they design strategically-designed, legally-compliant health plans that accommodate their unique employee population and meet their goals. Please call 678-439-6236 to discuss your concerns with an experienced attorney. Our website contains more information about our firm, a Contact Form, and free resources for your review. From our home office in Georgia, we assist clients throughout the United States.

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Hall Benefits Law, LLC

HBL offers employers comprehensive legal guidance on benefits in mergers and acquisitions, Employee Stock Ownership Plans (ESOPs), executive compensation, health and welfare benefits, healthcare reform, and retirement plans. We counsel a wide spectrum of clients including small, mid-sized, and large companies, 401(k) investment advisors, health insurance brokers, accountants, attorneys, and HR consultants, just to name a few. HBL is passionate about advising clients, and we are dedicated to our mission: to provide comprehensive, personalized, and practical ERISA and benefits legal solutions that exceed client expectations.
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