Proposed Rule2024-01208
Automatic Portability Transaction Regulations
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
January 29, 2024
Issuing agencies
Labor DepartmentEmployee Benefits Security Administration
Abstract
This document contains a proposed rule that would implement the statutory prohibited transaction exemption under section 4975 of the Internal Revenue Code (Code) for certain automatic portability transactions. Section 120 of the SECURE 2.0 Act of 2022 amended Code section 4975 to add a statutory exemption for the receipt of fees and compensation by an automatic portability provider for services provided in connection with an automatic portability transaction. Specifically, Code section 4975(d)(25) provides prohibited transaction relief if the conditions set forth in Code section 4975(f)(12) are met. The Department of Labor is proposing this regulation because, with certain exceptions not relevant here, section 102 of Reorganization Plan No. 4 of 1978 transfers the authority of the Secretary of the Treasury to issue certain regulations, rulings, opinions, and exemptions under Code section 4975 to the Secretary of Labor. Consistent with this transfer of authority, Congress authorized and directed the Department of Labor to issue regulations under Code section 4975 to implement provisions of section 120 of the SECURE 2.0 Act.
Full Text
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<title>Federal Register, Volume 89 Issue 19 (Monday, January 29, 2024)</title>
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[Federal Register Volume 89, Number 19 (Monday, January 29, 2024)]
[Proposed Rules]
[Pages 5624-5672]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-01208]
[[Page 5623]]
Vol. 89
Monday,
No. 19
January 29, 2024
Part II
Department of Labor
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Employee Benefits Security Administration
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29 CFR Part 2550
Automatic Portability Transaction Regulations; Proposed Rule
Federal Register / Vol. 89 , No. 19 / Monday, January 29, 2024 /
Proposed Rules
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DEPARTMENT OF LABOR
Employee Benefits Security Administration
29 CFR Part 2550
RIN 1210-AC21
Automatic Portability Transaction Regulations
AGENCY: Employee Benefits Security Administration (EBSA), Labor.
ACTION: Notice of proposed rulemaking.
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SUMMARY: This document contains a proposed rule that would implement
the statutory prohibited transaction exemption under section 4975 of
the Internal Revenue Code (Code) for certain automatic portability
transactions. Section 120 of the SECURE 2.0 Act of 2022 amended Code
section 4975 to add a statutory exemption for the receipt of fees and
compensation by an automatic portability provider for services provided
in connection with an automatic portability transaction. Specifically,
Code section 4975(d)(25) provides prohibited transaction relief if the
conditions set forth in Code section 4975(f)(12) are met. The
Department of Labor is proposing this regulation because, with certain
exceptions not relevant here, section 102 of Reorganization Plan No. 4
of 1978 transfers the authority of the Secretary of the Treasury to
issue certain regulations, rulings, opinions, and exemptions under Code
section 4975 to the Secretary of Labor. Consistent with this transfer
of authority, Congress authorized and directed the Department of Labor
to issue regulations under Code section 4975 to implement provisions of
section 120 of the SECURE 2.0 Act.
DATES: Comments on these proposed rules are due on March 29, 2024.
ADDRESSES: EBSA encourages interested persons to submit their comments
on these proposed rules online. You may submit comments, identified by
RIN 1210-AC21, by either of the following methods:
Federal eRulemaking Portal: <a href="http://www.regulations.gov">www.regulations.gov</a>. Follow the
instructions for submitting comments.
Mail: Office of Regulations and Interpretations, Employee Benefits
Security Administration, Room N-5655, U.S. Department of Labor, 200
Constitution Avenue NW, Washington, DC 20210, Attn: Automatic
Portability Regulations RIN 1210-AC21.
Instructions: All submissions must include the agency name and
Regulatory Identifier Number RIN 1210-AC21 for this rulemaking. If you
submit comments online, do not submit paper copies. All comments
received will be posted without change on <a href="http://www.regulations.gov">www.regulations.gov</a> and
<a href="http://www.dol.gov/agencies/ebsa">www.dol.gov/agencies/ebsa</a> and will be made available for public
inspection at the Public Disclosure Room, N-1513, Employee Benefits
Security Administration, U.S. Department of Labor, 200 Constitution
Avenue NW, Washington, DC 20210.
Warning: Do not include any personally identifiable or confidential
business information in your comment that you do not want publicly
disclosed. Comments are public records that are posted online as
received and can be retrieved by most internet search engines.
Docket: Go to the Federal eRulemaking Portal at <a href="https://www.regulations.gov">https://www.regulations.gov</a> for access to the rulemaking docket, including any
background documents and the plain-language summary of the proposed
rule of not more than 100 words in length required by the Providing
Accountability Through Transparency Act of 2023.
FOR FURTHER INFORMATION CONTACT: Scott Ness, Office of Regulations and
Interpretations, Employee Benefits Security Administration, (202) 693-
8500 or Joseph Brennan, Office of Exemption Determinations, Employee
Benefits Security Administration, (202) 693-8456. These are not toll-
free numbers.
SUPPLEMENTARY INFORMATION:
A. Background Regarding Automatic Portability Transactions
Section 120 of the SECURE 2.0 Act of 2022 (SECURE 2.0 Act) \1\
amended Internal Revenue Code (Code) section 4975 to add a statutory
prohibited transaction exemption for the receipt of fees and
compensation by an ``automatic portability provider'' for services
provided in connection with an ``automatic portability transaction.''
Specifically, Code section 4975(d)(25) provides prohibited transaction
relief if the conditions set forth in Code section 4975(f)(12) are met.
In the retirement plan context, portability refers to the process of
transferring workers' retirement savings from one tax-advantaged plan
or account to another when their covered service with an employer
terminates (e.g., from a traditional 401(k) plan account to a
traditional individual retirement plan--such as an individual
retirement account or annuity described in Code section 408(a) or (b)
(IRA)--or from a Roth 401(k) plan account to a Roth IRA. As described
in more detail below, the term ``automatic portability transaction''
means a transaction in which mandatory distributions pursuant to Code
section 401(a)(31)(B)(i) from an employer-sponsored retirement plan to
an IRA established on behalf of an individual are subsequently
transferred to an eligible employer-sponsored plan in which such
individual is an active participant, after such individual has been
given advance notice of the transfer and has not affirmatively opted
out of such transfer. According to the most recent Department of Labor
(Department) annual report (Form 5500) data, there are an estimated
635,000 defined contribution plans, covering an estimated 86.6 million
participants with account balances totaling $9.3 trillion in assets.\2\
With the proliferation of these accounts, there is a particular need
for this type of automatic portability solution to help ensure
participants remain connected to their retirement savings when they
change jobs.\3\
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\1\ Public Law 117-328, Dec. 29, 2022, Division T.
\2\ 2021 Form 5500 Data, U.S. Department of Labor.
\3\ Although the Department believes this body of plans is the
one primarily relevant for purposes of the application of the
statutory exemption, the Department notes that additional defined
contribution plans that do not file a Form 5500 or Form 5500-SF and
certain defined benefit plans are eligible to make mandatory
distributions. See the regulatory impact analysis sections in this
document for a discussion of the plans and participants impacted by
this proposed regulation.
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1. Mandatory Distributions of Small Account Balances
Under the Code, qualified retirement plans are permitted to include
provisions requiring an immediate distribution to a separating
participant without the participant's consent if the present value of
the participant's vested accrued benefit does not exceed $5,000 \4\
(for distributions made after December 31, 2023, the $5,000 threshold
is increased to $7,000).\5\ These transactions are generally referred
to as ``mandatory distributions.''
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\4\ Code sections 411(a)(11) and 417(e). See Code section
411(a)(11)(D) for circumstances where the amount of a distribution
may be greater than $5,000 if a participant made a previous roll-in
to a plan from an IRA. In such circumstances, the roll-in funds are
not considered in determining the $5,000 vested accrued balance, so
a larger amount of assets could be subject to a mandatory
distribution under the terms of the plan.
\5\ See SECURE 2.0 Act Sec. 304, updating dollar limit for
mandatory distributions.
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Code section 401(a)(31)(B) provides that a trust will not
constitute a qualified trust unless the plan of which the trust is a
part provides that: (1) if a mandatory distribution of more than $1,000
is to be made; and (2) the participant does not elect to have such
distribution paid directly to an eligible
[[Page 5625]]
retirement plan or to receive the distribution directly, then (3) the
plan administrator must transfer such distribution to an IRA of a
designated trustee or issuer.\6\ These distributions are referred to as
``automatic rollovers of mandatory distributions.'' Code section
401(a)(31)(B)(i) requires the plan administrator to notify the
participant in writing, either separately or as part of the notice
required under Code section 402(f), that the participant may transfer
the distribution to another IRA.\7\ Code section 402(f)(1)(A) requires
plan administrators to provide a participant with a written notice
within a reasonable period of time before making an automatic rollover
of a mandatory distribution explaining, among other things, the
following: (1) the Code provisions under which the participant may
elect to have the distribution transferred directly to an eligible
retirement plan and that if an election is not made, such automatic
rollover of a mandatory distribution is subject to the provisions of
Code section 401(a)(31)(B); (2) the provision requiring income tax
withholding if the distribution is not directly transferred to an
eligible retirement plan; and (3) the provisions under which the
distribution will not be taxed if the participant transfers the
distribution amount (including amounts withheld under Code section
3405) to an eligible retirement plan within 60 days of receipt.\8\
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\6\ Code section 401(a)(31)(B)(i) requires the transfer be made
to an ``individual retirement plan,'' defined by Code section
7701(a)(37) as an individual retirement account described in Code
section 408(a) and an individual retirement annuity described in
Code section 408(b). See IRS Notice 2005-5, 2005-1 C.B. 337,
regarding the applicability of Code section 401(a)(31)(B) to
retirement plans under Code sections 401(a), 401(k), 403(a), 403(b),
and 457(b) (<a href="https://www.irs.gov/irb/2005-03_IRB">https://www.irs.gov/irb/2005-03_IRB</a>).
\7\ ;Code section 401(a)(31)(B)(i).
\8\ See 29 CFR 2550.404a-2; Code section 401(a)(31)(B)(i); and
Code section 402(f).
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The Secretary of Labor (the Secretary) issued regulations in 2004
providing safe harbors for such automatic rollovers of mandatory
distributions from a plan subject to Title I of the Employee Retirement
Income Security Act (ERISA) which provide that (1) a plan
administrator's designation of an IRA to receive the automatic rollover
and (2) the initial investment choice for the rolled-over funds will be
deemed to satisfy the fiduciary responsibility provisions of ERISA
section 404(a) if the safe harbor requirements are met.\9\
Specifically, plan administrators complying with the Department's
fiduciary safe harbor regulations must invest the former participant's
assets in an investment product designed to preserve principal and
provide a reasonable rate of return.\10\ An IRA established pursuant to
Code section 401(a)(31)(B) and/or in compliance with the Department's
regulation is commonly referred to respectively as a ``Default IRA'' or
``Safe Harbor IRA.''
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\9\ See 69 FR 58017 (Sep. 28, 2004).
\10\ 29 CFR 2550.404a-2(c)(3)(i).
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2. Automatic Portability Transactions
An automatic portability transaction as defined in Code section
4975(f)(12)(A)(i) builds on the portability concept and is part of a
larger framework for facilitating the movement of assets from one tax-
favored retirement plan to another. The overall terms and details of an
automatic portability framework would generally be memorialized in
contracts with recordkeepers, plan sponsors, and the automatic
portability provider. A comprehensive automatic portability framework
includes three key components. First, there is a ``transfer-out'' plan
that initiates a mandatory distribution. Second, there is an IRA
established in accordance with Code Section 401(a)(31)(B) (a Default
IRA) to receive (via a rollover) and hold the distributed funds.\11\
Third, there is a ``transfer-in'' plan that receives the roll-in
distribution from the Default IRA when an IRA owner is matched with an
account in an eligible employer-sponsored plan at a new employer.
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\11\ This may be, but is not necessarily, a Safe Harbor IRA
established in accordance with the Department's regulations at 29
CFR 2550.404a-2 because all Safe Harbor IRAs are generally Default
IRAs, but not all Default IRAs are Safe Harbor IRAs.
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To roll in funds from an IRA to the transfer-in plan, the transfer-
in plan must permit such roll-ins. Additionally, an automatic
portability provider must have access to records for the Default IRA
and transfer-in plan sufficient to make a match. The general concept of
``locate, match, and transfer'' involves making queries of cooperating
recordkeepers' systems to determine if a Default IRA owner has become a
participant in an employer-sponsored retirement plan through re-
employment (i.e., the transfer-in plan).\12\ If the individual is
matched with an account in the transfer-in plan, the automatic
portability transaction is designed for the automatic portability
provider to roll the individual's IRA assets into the individual's
account in the transfer-in plan. Automatic portability transactions may
be particularly important and helpful to workers who have lost contact
with their retirement plans when they change jobs, cannot be located
because the plan does not have updated address information or other
contact information for separated employees, or refuse to respond to
plan communications about their retirement account. When an automatic
portability provider transfers funds from the transfer-out plan to a
Default IRA without a participant's active involvement, the risk of
funds becoming lost or difficult to locate increases. Therefore,
automatic portability transactions are intended to benefit participants
and IRA owners that are unresponsive or considered missing.\13\
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\12\ The concept of ``locate, match, and transfer'' is discussed
in more detail below.
\13\ The Department notes that Code section 4975(f)(12) defines
an automatic portability transaction with respect to an individual
that has not affirmatively consented to the transfer. An individual
who affirmatively consents may still have IRA assets rolled into a
new plan through the same mechanisms, although it would not
technically fall within the statutory definition.
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3. Current DOL Individual Prohibited Transaction Exemption for
Automatic Portability Transactions
When an automatic portability provider transfers assets from an IRA
to a new employer's plan without the IRA owner's affirmative consent,
the automatic portability provider is exercising fiduciary discretion
for purposes of the prohibited transaction provisions of the Code.\14\
The assessment of a fee against the IRA, in turn, implicates the
prohibited transaction provisions in Code section 4975(c)(1). The
Department first issued guidance regarding an automatic portability
transaction before the enactment of the SECURE 2.0 Act. Retirement
Clearinghouse (RCH) approached the Department in 2018 for sub-
regulatory guidance and prohibited transaction exemptive relief
regarding its multi-part automatic portability framework (the RCH
Program). In response, the Department issued Advisory Opinion 2018-01A
(AO 2018-01A) \15\ and an administrative prohibited transaction
exemption (PTE 2019-02) \16\ in connection with the RCH Program. AO
2018-01A concerned the status of certain parties involved in the RCH
Program as ``fiduciaries'' within the meaning of ERISA section 3(21)(A)
and Code section 4975(e)(3).\17\ In AO 2018-01A, the Department stated
that plan sponsors exercise discretion in their fiduciary capacity and
would be
[[Page 5626]]
subject to the general fiduciary standards of ERISA when deciding
whether to participate in the RCH Program. The advisory opinion further
explained that, without the individual's affirmative consent, RCH acted
as a fiduciary within the meaning of Code section 4975(e)(3) in
deciding whether to transfer the assets from an individual's Default
IRA to the individual's new employer plan.\18\ Furthermore, the
Department indicated that an individual's failure to respond to RCH's
communications about a default transfer of the assets in the
individual's account to the new employer's plan is not tantamount to
affirmative consent by the individual to the default transfer and does
not relieve RCH from fiduciary status and related responsibilities.\19\
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\14\ See the discussion of AO 2018-01A, below.
\15\ Available at: <a href="https://www.dol.gov/sites/dolgov/files/EBSA/about-ebsa/our-activities/resource-center/advisory-opinions/2018-01a.pdf">https://www.dol.gov/sites/dolgov/files/EBSA/about-ebsa/our-activities/resource-center/advisory-opinions/2018-01a.pdf</a>.
\16\ See 83 FR 55741 (Nov. 7, 2018) (proposed exemption) and 84
FR 37337 (July 31, 2019) (granted exemption).
\17\ AO 2018-01A (Nov. 18, 2018).
\18\ Id. at 5.
\19\ Id. at 5-6.
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The Department additionally stated in AO 2018-01A that, unlike the
Department's automatic safe harbor regulations,\20\ which pertain to
the automatic rollover of an individual's retirement plan mandatory
distribution into an IRA, no similar statutory or regulatory provision
provides relief from fiduciary responsibility for the ``default''
transfer of assets from the Default IRA to a new employer's plan.\21\
Therefore, it was necessary for RCH to receive a prohibited transaction
exemption from the Department in order for RCH to receive a fee or
other compensation when it exercised fiduciary authority to make the
default transfer of assets from the Default IRA to a new employer's
plan.\22\ At RCH's request, the Department issued PTE 2019-02, an
administrative exemption that provides such prohibited transaction
relief for RCH.\23\ Due to the novelty of the RCH Program, the
Department limited the relief provided in PTE 2019-02 to a five-year
term, which expires on July 31, 2024. To receive prohibited transaction
relief beyond the five-year term, RCH would need to submit an
additional individual administrative exemption request to the
Department.
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\20\ 29 CFR 2550.404a-2 and 2550.404a-3.
\21\ Id. at 6. The Department notes that Code section
4975(f)(12) applies only to transfers made under Code section
401(a)(31)(B)(i), so the fiduciary relief provided in 29 CFR 404a-3
is not applicable to transactions covered by 4975(d)(25).
\22\ AO 2018-01A addressed the fiduciary status of an automatic
portability provider but did not address whether a prohibited
transaction would occur.
\23\ 84 FR 37337.
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B. Overview of the SECURE 2.0 Act Statutory Exemption for Automatic
Portability Transactions
Section 120 of the SECURE 2.0 Act added a statutory exemption in
Code section 4975 that allows an automatic portability provider to
receive a fee in connection with executing an automatic portability
transaction that largely mirrors the relief the Department granted RCH
in PTE 2019-02. The availability of the statutory exemption to all
automatic portability providers that meet its requirements generally
eliminates the need for RCH, and other automatic portability providers,
to request an administrative PTE for relief similar to the relief the
Department granted in PTE 2019-02. Specifically, the statutory
exemption in Code section 4975(d)(25) provides a conditional prohibited
transaction exemption from the restrictions in Code sections
4975(c)(1)(D) and (E) for an automatic portability provider to receive
fees and compensation for services provided ``in connection with an
automatic portability transaction'' if the conditions set forth in Code
section 4975(f)(12) are met.\24\
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\24\ Emphasis added.
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Code section 4975(f)(12)(A)(i) generally defines an automatic
portability transaction as a transfer of assets from a Default IRA \25\
to a transfer-in plan after the IRA owner has been given advance notice
of the transfer and has not affirmatively opted out. The ``transfer-
in'' plan covered by the definition is any employer-sponsored
retirement plan (other than a defined benefit plan) that is: a
qualified trust, an annuity plan described in Code section 403(a), an
eligible deferred compensation plan described in Code section 457(b)
which is maintained by an eligible employer described in Code section
457(e)(1)(A), or an annuity contract described in Code section
403(b).\26\
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\25\ The statutory definition specifically references ``an
individual retirement plan which is established on behalf of an
individual and to which amounts were transferred under section
401(a)(31)(B)(i).''
\26\ These are plans described in clause (iii), (iv), (v), or
(vi) of Code section 402(c)(8)(B).
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Notably, the SECURE 2.0 Act amendment to the Code does not
specifically include any references to a transfer-out plan (i.e., the
plan engaging in the mandatory distribution and automatic rollover). As
discussed above, the existence of a transfer-out plan is a necessary
precursor to an automatic portability transaction, but the transfer-out
transaction is already governed by mandatory distribution and automatic
rollover provisions in the Code that are discussed above, and the
Department already has provided conditional fiduciary and prohibited
transaction relief for such transactions under its automatic rollover
safe harbor regulations.\27\ Similarly, the general fiduciary
principles regarding an individual's default investments in the
transfer-in plan and the Department's regulations on qualified default
investment alternatives will govern the transfer-in plan sponsor's
responsibilities once the assets are transferred from the individual
Default IRA into the transfer-in plan.\28\
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\27\ 29 CFR 2550.404a-2.
\28\ 29 CFR 2550.404c-5.
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As noted, Code section 4975(d)(25) provides prohibited transaction
relief if the conditions set forth in Code section 4975(f)(12) are met.
Specifically, Code section 4975(f)(12) and this proposed regulation
require:
<bullet> the automatic portability provider to acknowledge its
fiduciary status with respect to the IRA;
<bullet> that the automatic portability provider's fees do not
exceed reasonable compensation;
<bullet> restrictions to be placed on an automatic portability
provider's use of plan participant and IRA owner data;
<bullet> participation in the program to be available on the same
terms for all eligible transfer-in plans;
<bullet> the automatic portability provider to conduct at least
monthly searches for transfer-in plan accounts;
<bullet> the automatic portability provider to timely execute
automatic portability transactions;
<bullet> the automatic portability provider's discretion to affect
the timing or amount of the transfer pursuant to an automatic
portability transaction to be limited; and
<bullet> the automatic portability provider to retain records
demonstrating it is complying with the exemption conditions, conducting
an annual audit, and maintaining a website with a list of participating
recordkeepers and the automatic portability provider's fees.
Section 120 of the SECURE 2.0 Act also provides that, not later
than 12 months after the date of its enactment, the Secretary shall
issue such guidance as may be necessary to carry out the purposes of
the amendments made by section 120, including regulations or other
guidance which:
1. Require an automatic portability provider to provide a notice to
individuals on whose behalf the default IRA is established in advance
of the pre-transaction notice;
2. Require an automatic portability provider to disclose to a
responsible plan fiduciary information about the
[[Page 5627]]
provider's fees, compensation, and services as required of covered
service providers pursuant to DOL regulations under ERISA section 408
(i.e., 29 CFR 2550.408b-2(c));
3. Require plans involved in the automatic portability transaction
to fully disclose fees related to an automatic portability transaction
in its summary plan description or summary of material modifications;
4. Require plans involved in the automatic portability transaction
to invest amounts received on behalf of a participant pursuant to an
automatic portability transaction in the participant's current
investment election under the plan or, if no election is made or
permitted, in the plan's qualified default investment alternative under
the Department's Qualified Default Investment Alternative (QDIA)
regulations (i.e., 29 CFR 2550.404c-5) or another investment selected
by a fiduciary with respect to such plan;
5. Prohibit or restrict the receipt or payment of third-party
compensation (other than a direct fee paid by a plan sponsor which is
in lieu of a fee imposed on an IRA owner) by an automatic portability
provider in connection with an automatic portability transaction;
6. Prohibit exculpatory provisions in an automatic portability
provider's contracts or communications with individuals disclaiming or
limiting liability in the event that an automatic portability
transaction results in an improper transfer;
7. Require an automatic portability provider to take actions
necessary to reasonably ensure that participant and beneficiary data is
current and accurate;
8. Limit the automatic portability provider's use of data related
to automatic portability transactions for any purpose other than the
execution of such transactions or locating missing participants, except
as permitted by the Secretary;
9. Provide for corrections procedures in the event an auditor
determines the automatic portability provider was not in compliance
with the statute and related regulations, including deadlines,
supplemental audits, and corrective actions which may include a
temporary prohibition from relying on the statutory exemption;
10. Ensure that participants and beneficiaries receive all the
required notices and disclosures; and
11. Make clear that the statutory exemption applies solely to the
automatic portability transactions described in the statutory
exemption, and, to the extent the Secretary deems necessary or
advisable, specify how the application of the exemption relates to or
coordinates with other statutory provisions, regulations, and
administrative guidance.\29\
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\29\ See Public Law 117-328, Dec. 29, 2022, Division T, Sec.
120(c).
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Some interested stakeholders have communicated to the Department
that they have already developed products and established procedures
for an automatic portability service and that they do not believe any
further guidance from the Department is necessary to effectuate the
purpose of section 120 of the SECURE 2.0 Act. However, the Department
believes that regulations, as compared to some other form of guidance,
are needed to implement section 120(c) of the SECURE 2.0 Act in a
manner that addresses and reinforces the consumer protections in the
above list of statutory conditions and requirements. Furthermore, the
Department believes that these proposed regulations will provide a
broader cross-section of interested and affected entities with the
opportunity to formally comment on the proposal, whether implementing
regulations are necessary, and whether elements of the proposed
requirements should be modified or eliminated to best support Congress'
intent in passing the new statutory exemption.
C. Prospective Effect of Implementing Regulations and Interim
Interpretive Policy
The Department is proposing that any final rule adopted based on
this proposal would be effective 60 days after publication in the
Federal Register and that the requirements of the final rule would have
prospective applicability. The Department specifically solicits
comments on whether there should be some delayed applicability date to
allow for automatic portability providers and plan fiduciaries to make
any changes to automatic portability programs or related contracts or
arrangements that may be needed or desired in light of the final rule.
This approach is intended to make it clear the statutory exemption is
available in accordance with the effective date of the SECURE 2.0 Act
while acknowledging that there may be a need to transition contracts or
arrangements to meet specific requirements of the final rule.
As noted above, section 120 of the SECURE 2.0 Act directed the
Secretary to issue such guidance as may be necessary to carry out the
purposes of the amendments made by section 120 no later than 12 months
after the date of the enactment of the Act. Compliance with the
conditions and requirements in Code sections 4975(d)(25) and
4975(f)(12) is an independent statutory obligation for parties seeking
their prohibited transaction relief that is not dependent upon the
issuance of regulations or guidance by the Department. For the period
from publication of this proposed regulation until after the Department
issues a final regulation or other applicable administrative guidance,
automatic portability providers and plan fiduciaries are expected to
comply with the requirements of Code sections 4975(f)(12) and
4975(d)(25) using a good faith, reasonable interpretation of the law
taking into account the list of consumer protection conditions and
requirements in section 120(c) of the SECURE 2.0 Act.\30\ During that
period, to the extent an automatic portability provider or plan
fiduciary believes there is some uncertainty regarding whether the
automatic portability program or the parties' conduct in connection
with the program complies with the statutory provisions, the Department
expects that the provider or fiduciary will strictly adhere to the
requirements in Code section 4975(f)(12) and act in a manner that
furthers the financial interests of the affected plan, plan
participant, or IRA owner taking into account the consumer protection
conditions and requirements listed in section 120(c) of the SECURE 2.0
Act.
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\30\ The Department expects to issue a final rule before the
first annual audit would be required pursuant to the requirement in
Code section 4975(f)(12)(B)(xi)(II) under which an automatic
portability provider must ``conduct an annual audit, in accordance
with regulations promulgated by the Secretary of Labor, of automatic
portability transactions occurring during the calendar year to
demonstrate compliance with this paragraph and any regulations
thereunder and identify any instances of noncompliance therewith,
and shall submit such audit annually to the Secretary of Labor, in
such form and manner as specified by such Secretary.'' However,
because a final rule may be published part way through the first
audit period, the Department specifically solicits comments on
whether the final rule should provide an alternative pursuant to
which the submission of the annual audit for the first year could be
delayed and submitted together with the audit for the second year.
See, for comparison, 29 CFR 2520.104-50--Short plan years, deferral
of accountant's examination and report. The Department also requests
comment on whether certain aspects of this proposal that would be
subject to audit review should have a specific delayed effective
date because the aspect of the proposal may take additional time for
an automatic portability provider to fully implement.
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D. Overview of the Proposed Regulation
Certain provisions of ERISA Title I, such as the provisions on
prohibited transactions, have parallel provisions enacted in Title II
of ERISA and codified in the Code. When ERISA was passed,
[[Page 5628]]
regulatory authority over Title I resided with the Secretary of Labor
while regulatory authority over Title II resided with the Secretary of
the Treasury. To rationalize the administration and interpretation of
these parallel provisions, Reorganization Plan No. 4 of 1978, 5 U.S.C.
App., divided the interpretive and rulemaking authority between the
Secretaries of Labor and of the Treasury, so that, in general, the
agency with regulatory and interpretive responsibility for a given
provision of ERISA Title I would also have regulatory and interpretive
responsibility for the parallel provision in the Code. Among the
sections transferred to the Department were certain of the prohibited
transaction provisions (including exemptions) in Code section 4975.
Title I's prohibited transaction rules, 29 U.S.C. 1106-1108, apply to
Title I-covered plans, and the Code's corresponding prohibited
transaction rules, 26 U.S.C. 4975, apply both to Title I-covered
pension plans that are tax-qualified pension plans, as well as other
specified tax-advantaged arrangements, including IRAs.
Although the new automatic portability transaction prohibited
transaction exemption appears only in Code section 4975 and directly
pertains to transactions involving IRAs, the Secretary of Labor still
retains regulatory authority over certain prohibited transaction
provisions under Code section 4975, as provided in Reorganization Plan
No. 4 of 1978. Consistent with that authority, section 120 of the
SECURE 2.0 Act directs the Secretary of Labor to issue regulations and
guidance related to the new statutory exemption for automatic
portability transactions.
Therefore, the proposed regulation would add a new Sec.
2550.4975f-12 to the Department's fiduciary regulations at 29 CFR part
2550. The proposed regulation tracks the requirements under Code
section 4975(f)(12) that must be satisfied in order for the automatic
portability transaction to be covered by the statutory prohibited
transaction exemption in Code section 4975(d)(25). Paragraph (a)
describes the general scope of the statutory exemption and regulation.
Paragraph (b) sets forth the conditions an automatic portability
provider must satisfy for a transaction to qualify as an ``automatic
portability transaction'' and for the exemption to apply. Paragraph (c)
sets forth proposed annual audit and correction procedure requirements.
Paragraph (d) sets forth website requirements that must be met for
automatic portability providers to satisfy the statutory exemption and
proposed regulation. Paragraph (e) describes prohibitions on the
automatic portability provider's use of exculpatory provisions in
contracts or communications disclaiming or limiting their liability in
the event an improper transfer of assets in connection with an
automatic portability transaction occurs. Paragraph (f) sets forth the
record retention requirement automatic portability providers must meet
to satisfy the statutory exemption and proposed regulation. Paragraph
(g) defines certain terms used in the proposed regulation.
1. Scope of Prohibited Transaction Relief
The relief provided by Code section 4975(d)(25) and the proposed
exemption is limited to Code sections 4975(c)(1)(D) and (E) for the
receipt of fees and compensation by an automatic portability provider
for services provided in connection with an automatic portability
transaction and Code section 4975(c)(1)(F) for the receipt of fees by
an automatic portability provider from a plan sponsor in lieu of fees
imposed on an IRA owner. Neither the statutory exemption in Code
section 4975(d)(25) nor the proposed regulation contains an exemption
for other acts described in Code section 4975(c)(1)(D) and (E)
(relating to the transfer to, or use by or for the benefit of, a
disqualified person of the income or assets of a plan and to
fiduciaries dealing with the income or assets of plans in their own
interest or for their own account) that are not in connection with the
automatic portability transaction. Additionally, neither the statutory
exemption in Code section 4975(d)(25) nor the proposed regulation
contains an exemption for acts described in Code section 4975(c)(1)(F)
(relating to fiduciaries receiving consideration for their own personal
account from any party dealing with a plan in connection with a
transaction involving the income or assets of the plan) except for the
limited relief for a fee paid by a plan sponsor, noted above. Such acts
described in Code sections 4975(c)(1)(D), (E), and (F) are separate
transactions not described in Code section 4975(d)(25). Further,
neither the statutory exemption in Code section 4975(d)(25) nor this
proposed regulation contains an exemption from other provisions of the
Code, such as section 401, or other provisions of law which may impose
requirements or restrictions relating to the transactions that are
exempt under Code section 4975(d)(25). As defined in Code section
4975(f)(12)(A)(ii) and in this proposed regulation, an automatic
portability provider is a person, other than an individual, who
executes the automatic portability transaction on the same terms to all
transfer-in plans and Default IRAs that use the provider.
The Department interprets the ``in connection with'' language from
Code section 4975(d)(25) to include only those services and related
fees and compensation that would not otherwise occur or be incurred if
not for the automatic portability transaction or anticipation of a
future automatic portability transaction. The Department requests
comments on whether additional specificity regarding the types of
services that are covered by Code section 4975(d)(25) should be
included, for example, by a definition added to the regulations that
identifies the types of services. Further, if a commenter believes more
specificity would be helpful, the Department requests that the
commenter include a proposed definition, list, or other identification
of the services that should be covered.
2. Acknowledgment of Fiduciary Status
Code section 4975(f)(12)(B)(i) and this proposed regulation
requires an automatic portability provider to acknowledge that it is a
fiduciary with respect to the IRA in an automatic portability
transaction.\31\ Pursuant to the statutory text authorizing the
Secretary to specify the time and format of such an acknowledgment,
paragraph (b)(1) of this proposed regulation requires the automatic
portability provider to acknowledge in writing that it is a fiduciary
as defined in Code section 4975(e)(3) upon being engaged by a plan
fiduciary, as well as in the required notices and disclosures,
described below, to plan participants and IRA owners. This fiduciary
acknowledgement is designed to ensure that the fiduciary nature of the
relationship is clear to the automatic portability provider and
responsible plan fiduciaries as well as to affected participants and
IRA owners.\32\ The automatic portability provider's acknowledgment of
its fiduciary status may include a description of the scope of the
fiduciary status of the automatic portability provider and may explain
that, consistent with Code section 4975(e)(3), the automatic
portability provider is not a fiduciary under the Code's definition
with respect to any
[[Page 5629]]
assets or administration of the plan or IRA with respect to which the
automatic portability provider does not (1) have any discretionary
authority, discretionary control, or discretionary responsibility (2)
exercise any authority or control, and (3) render investment advice for
a fee or other compensation, nor have any authority or responsibility
to render such investment advice. The Department notes that it is
possible that the automatic portability provider may have fiduciary
status under other laws, e.g., the Federal securities laws. The
acknowledgment required by the exemption does not reach such status but
the Department notes that the acknowledgment required by the exemption
should not be presented in a way that misinforms or misleads
individuals regarding potential fiduciary status under such other laws.
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\31\ As described in Code section 4975(f)(12)(A)(i)(I).
\32\ This is generally when an individual fails to respond to
notices and the automatic portability provider directs the transfer
of assets and assesses fees. See AO 2018-01 for a more detailed
description of fiduciary status in automatic portability
arrangements.
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3. Fees
(a) Reasonable Compensation
Subject to two exceptions described below, Code section
4975(f)(12)(B)(ii)(I) and this proposed regulation permit an automatic
portability provider to receive fees and compensation for services
provided in connection with the automatic portability transaction,
provided that the fees and compensation do not exceed reasonable
compensation. The proposed regulations incorporate the existing
standard regarding reasonable compensation for the provision of
services found at 26 CFR 54.4975-6(e).
(b) Fee and Compensation Disclosure Requirement
This proposed regulation mirrors the statutory text by requiring
the automatic portability provider to disclose to a responsible plan
fiduciary of the transfer-in plan the information that a service
provider to the plan would be required to disclose under 29 CFR
2550.408b-2(c). For purposes of this requirement, the disclosures would
relate to the automatic portability provider's services as an automatic
portability provider and not other services that may be provided. For
purposes of this disclosure requirement, the automatic portability
provider will be considered to be a ``covered service provider'' under
2550.408b-2(c)(1)(iii)(A) and (B) providing services as a fiduciary and
as a recordkeeper. Since the automatic portability provider would
generally be precluded from receiving third-party compensation under
other provisions of the proposal, the Department does not believe the
provisions of 2550.408b-2(c) related to a covered service provider
under 2550.408b-2(c)(1)(iii)(C)--``other services for indirect
compensation''--would be relevant. The Department seeks comments on
whether there are particular compliance issues under 2550.408b-2(c) for
automatic portability providers that the Department should specifically
address in a final rule.
(c) Prohibition of Fees for Automatic Portability Transactions
Involving a Plan of the Automatic Portability Provider or Its
Affiliates
The statute prohibits an automatic portability provider from
receiving any fees or compensation in connection with an automatic
portability transaction involving a plan which is sponsored or
maintained by the automatic portability provider. In other words, the
automatic portability provider may execute such transactions, but it
may not receive fees for doing so. In the Department's view, the
statutory reference to the automatic portability provider in this
circumstance should be read to include any affiliates of the automatic
portability provider. Accordingly, paragraph (b)(2)(iv) of the proposed
regulation mirrors the statutory provision by prohibiting an automatic
portability provider from receiving any fees or compensation in
connection with an automatic portability transaction involving a plan
that is sponsored or maintained by the automatic portability provider
but includes plans maintained by any of the automatic portability
provider's affiliates.
(d) Prohibition on Receipt of Third-Party Compensation in Connection
With Automatic Portability Transactions
Section 120(c)(5) of the SECURE 2.0 Act provides the Secretary with
the regulatory authority to prohibit or restrict the receipt or payment
of third-party compensation (other than a direct fee paid by a plan
sponsor that is in lieu of a fee imposed on an IRA owner) by an
automatic portability provider in connection with an automatic
portability transaction. The proposed regulation includes text that
mirrors the statutory text allowing a direct fee to be paid by a plan
sponsor if it is in lieu of a fee imposed on an IRA owner. The proposed
regulation includes one exception to the general restriction on third-
party compensation. Specifically, under the proposal, an automatic
portability provider would be able to share a portion of its fee or
compensation with another automatic portability provider as long as the
overall fee paid, directly or indirectly, by the plan or IRA does not
increase as compared to the fees disclosed in the description provided
to the plan administrator and in the initial enrollment notice provided
to the IRA owner.
The third-party compensation restriction in the proposed regulation
is limited to fees and compensation in connection with the automatic
portability transaction and would not prevent an automatic portability
provider from receiving fees for services provided to an IRA or
employer-sponsored retirement plan that are in addition to services
provided in connection with the automatic portability transaction.
However, the prohibited transaction relief provided in Code section
4975(d)(25) applies only to fees and compensation received in
connection with the automatic portability transaction. The automatic
portability provider would need to rely upon other statutory or
administrative exemptions if it receives fees for providing additional
services that involve prohibited transactions.
4. Data Usage and Protection
Code section 4975(f)(12)(B)(iii) prohibits an automatic portability
provider from using data it obtains in connection with automatic
portability transactions for any purpose other than to execute the
automatic portability transactions or locate missing participants as
part of its automatic portability service, except as permitted by the
Secretary. The automatic portability provider is specifically
prohibited by the statute from marketing or selling data relating to
the IRA or to the plan participants. Paragraph (b)(3) of the proposed
regulation parallels the statutory language by not permitting the use
of data for any purpose other than the execution of automatic
portability transactions or locating missing participants. For purposes
of the restriction on marketing or selling IRA data, the Department
interprets this to include specific data regarding the IRA owner. The
Department is not proposing any exceptions to this restriction.
However, the Department welcomes comments on whether the regulations
should permit use of data for other purposes, and, if it should, what
those other purposes would be, whether allowing use of data for those
purposes would provide a benefit to IRA owners and plan participants,
and what regulatory protections should be applied to that use of the
data.
In support of the obligation to limit use of data, the proposed
regulation provides that the automatic portability provider must take
steps that a prudent fiduciary would take to safeguard plan participant
and IRA data in its
[[Page 5630]]
possession or under its control.\33\ The proposal further would
require, if data were improperly accessed, that the automatic
portability provider take appropriate remedial actions to safeguard the
data based on the sensitivity of the accessed data and the nature and
severity of the breach. The Department seeks comment on whether the
regulation should include specific data security requirements, such as
a requirement to carry insurance to cover data breaches.
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\33\ See generally Cybersecurity Program Best Practices at
<a href="https://www.dol.gov/sites/dolgov/files/ebsa/key-topics/retirement-benefits/cybersecurity/best-practices.pdf">https://www.dol.gov/sites/dolgov/files/ebsa/key-topics/retirement-benefits/cybersecurity/best-practices.pdf</a>; Online Security Tips at
<a href="https://www.dol.gov/sites/dolgov/files/ebsa/key-topics/retirement-benefits/cybersecurity/online-security-tips.pdf">https://www.dol.gov/sites/dolgov/files/ebsa/key-topics/retirement-benefits/cybersecurity/online-security-tips.pdf</a>; and Tips for Hiring
a Service Provider with Strong Cybersecurity Practices at <a href="https://www.dol.gov/sites/dolgov/files/ebsa/key-topics/retirement-benefits/cybersecurity/tips-for-hiring-a-service-provider-with-strong-security-practices.pdf">https://www.dol.gov/sites/dolgov/files/ebsa/key-topics/retirement-benefits/cybersecurity/tips-for-hiring-a-service-provider-with-strong-security-practices.pdf</a>.
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5. Open Participation
Paragraph (b)(4) of this proposed regulation parallels Code section
4975(f)(12)(B)(iv) by requiring as a condition of the availability of
the exemption that the automatic portability provider offer automatic
portability transactions on the same terms to any transfer-in plan.
This proposed requirement does not mean that fees can never change.
Rather, at any given time, the fees paid for automatic portability
transactions should be the same for any transfer-in plan that engages
the automatic portability provider.
Based on the general regulatory authority granted to the Secretary
in section 120(c) of the SECURE 2.0 Act, the Department is also
proposing that open participation would require that the automatic
portability provider not restrict or limit the ability of an employer-
sponsored retirement plan, IRA provider (including trustees under Code
section 408(a), custodians under Code section 408(h), or issuers under
Code section 408(b)), or recordkeeper to engage other automatic
portability providers to execute automatic portability transactions. In
proposing this requirement, the Department recognizes that numerous
service providers that have existing systems for automatic rollovers of
mandatory distributions may want to supplement their services with
automatic portability transaction features. Plan fiduciaries or service
providers may determine that there are cost-effective ways to integrate
services of more than one automatic portability provider to increase
the likelihood of successfully locating participant funds for transfer
into the transfer-in plan.
6. Notices
(a) Notice to the Department
The Department has an obligation under the statute to monitor and
enforce the audit reporting requirements for automatic portability
providers relying on the exemption, including deadlines for submitting
the audit report to the Department. Accordingly, under the proposed
regulation, within 90 calendar days of the date that the automatic
portability provider begins operating an automatic portability
transaction program that is intended to rely on prohibited transaction
relief provided by section 4975(d)(25), the automatic portability
provider must notify the Secretary at <a href="/cdn-cgi/l/email-protection#3f5e4a4b50124f504d4b5e5d5653564b467f5b505311585049"><span class="__cf_email__" data-cfemail="f697838299db8699848297949f9a9f828fb692999ad8919980">[email protected]</span></a> that it
is operating as an automatic portability provider in accordance with
Code section 4975(d)(25). The automatic portability provider must
report the legal name of each business entity relying upon the
exemption and any name (e.g., trade or Doing Business As (DBA) name)
under which the business entity may be operating. This notification
needs to be updated to report a change to the legal or operating
name(s) of the automatic portability provider that is relying upon the
exemption. The automatic portability provider will have 90 calendar
days to report a change to the legal or operating name. The automatic
portability provider may also notify the Department if it is no longer
operating in reliance upon the exemption. The notification requirement
will allow the Department to monitor and enforce the audit report
requirements.
(b) Model Description of Automatic Portability Program for Use in
Summary Plan Descriptions by Transfer-Out and Transfer-In Plans
In the Department's view, to comply with the summary plan
description (SPD) content requirements in 29 CFR 2510.102-2 that the
SPD ``shall be sufficiently comprehensive to apprise the plan's
participants and beneficiaries of their rights and obligations under
the plan,'' participating transfer-out plans and transfer-in plans
subject to ERISA's SPD requirements must include a description of the
automatic portability program in the plan's SPD. Further, section
120(c)(3) of the SECURE 2.0 Act provides the Secretary with authority
to require a transfer-in plan to fully disclose fees related to an
automatic portability transaction in its SPD or summary of material
modifications (SMM) to the extent an SMM is used to fulfill this SPD
disclosure requirement.
The Department's existing regulatory safe harbors for automatic
rollovers by the transfer-out plan already require plan administrators
for ERISA Title I plans to provide participants with an SPD or SMM that
describes the plan's automatic rollover provisions. The SPD or SMM also
must include: (1) an explanation that the mandatory distribution will
be invested in an investment product designed to preserve principal and
provide a reasonable rate of return and liquidity; (2) a statement
indicating how fees and expenses attendant to the IRA will be allocated
(i.e., the extent to which expenses will be borne by the IRA owner
alone or shared with the distributing plan or plan sponsor); (3) the
name, address and phone number of a plan contact (to the extent not
otherwise provided in the SPD or SMM) for further information
concerning the plan's automatic rollover provisions; and (4) the IRA
provider and the fees and expenses attendant to the IRA.
The Department proposes a requirement that the automatic
portability provider provide the administrator of participating plans
with a description of the automatic portability program, including fees
and expenses, that the administrator could use in fulfilling its SPD
obligations, as relevant. The Department requests comments on whether
the final rule should set forth specific content requirements for an
automatic portability provider model notice.
(c) Notices to IRA Owner
This proposed regulation specifies two notices an automatic
portability provider is required to send to IRA owners before an
automatic portability transaction is executed and one notice after the
automatic portability transaction is executed, as described below.
i. Initial Enrollment Notice
Section 120(c)(1) of the SECURE 2.0 Act authorizes the Secretary to
require the automatic portability provider to provide a notice to IRA
owners in advance of the pre-transaction notice specified in Code
section 4975(f)(12)(B)(v). Consistent with this authority, this
proposed regulation includes a requirement that an automatic
portability provider provide an ``initial enrollment notice'' to the
IRA owner no later than 15 calendar days after the IRA is enrolled in
an arrangement that includes an automatic portability transaction
component. The Department assumes that the date of enrollment will
generally be the date that an IRA is established in connection with a
mandatory distribution. However, for IRAs that were established
[[Page 5631]]
prior to the existence of the new statutory exemption, or established
and then later added into an automatic portability arrangement, the
enrollment date may be a later date (e.g., when the IRA provider begins
acting as an automatic portability provider or engages an automatic
portability provider to begin including the IRA in a locate-and-match
service).
The Department requests comments regarding the 15-calendar-day
timeframe for sending the initial enrollment notice, particularly if
the automatic portability provider is not the provider of the IRA. In
this regard, the Department requests comments about the process by
which IRAs that are not established with or provided by the automatic
portability provider would engage an automatic portability provider and
how the automatic portability provider would ensure that such a notice
would be provided.
The Department proposes that the initial enrollment notice would
include a variety of information regarding the nature of the automatic
portability transaction and additional aspects of the IRA arrangement
that are required to be included in the pre-transaction notice,
discussed below. The Department anticipates that this notice
requirement could be satisfied by including the information specified
in proposed paragraph (b)(5)(iv) in the notice required under Code
section 401(a)(31)(B) upon the establishment of a Default IRA.
ii. Pre-Transaction Notice
Paragraph (b)(5)(iv) of the proposed regulation incorporates the
statutory provisions of Code section 4975(f)(12)(B)(v) requiring the
automatic portability provider to provide a pre-transaction notice to
the IRA owner at least 60 days before an automatic portability
transaction occurs with information describing the automatic
portability transaction, fees to be received in connection with the
transaction, the right to elect not to participate in an automatic
portability transaction, distribution options, deadlines for making
elections, a telephone number for the automatic portability provider,
and the right to and procedures for designating a beneficiary.
The proposed regulation provides additional clarification regarding
the timing of the pre-transaction notice by requiring that the notice
be sent no earlier than 90 days in advance of the automatic portability
transaction. This is intended to ensure that the notice is sent
sufficiently close to the actual execution of the automatic portability
transaction so that the assets of the IRA do not remain there for an
unreasonable period waiting to be rolled-in to the transfer-in plan.
The Department seeks comments on the proposed pre-transaction
notice and whether additional information should be required. The
Department is particularly interested in comments regarding whether
specific information should be provided to the IRA owner explaining the
significance of transferring assets into an employer-sponsored plan as
opposed to retaining those assets in an IRA, as well as any plain
language examples to help the IRA owner better understand the various
aspects of an automatic portability arrangement. Relatedly, the
Department requests comment on whether model disclosures or model
language for the pre-transaction notice would be helpful and encourages
commenters who support a model disclosure or model language, model
charts, or other formats submit suggestions for the model language,
chart or format they believe would help ensure readability and
accessibility for the target audience. The Department also requests
comment on whether a final rule should specify a minimum amount of time
that the IRA owner has to make an election to opt out of the automatic
portability transaction, e.g., no sooner than 10 days before the
anticipated execution of the automatic portability transaction
identified in the pre-transaction notice.
iii. Post-Transaction Notice
This post-transaction notice, which would occur after a transfer-in
plan receives an individual's IRA funds, is the last notice that the
automatic portability provider would be required to provide to the IRA
owner or plan participant. Paragraph (b)(5)(v) of this proposed
regulation incorporates the statutory requirements in
4975(f)(12)(B)(vi). The statute requires that no later than three
business days after the completion of an automatic portability
transaction, the automatic portability provider shall provide notice to
the IRA owner of the actions taken by the automatic portability
provider with respect to the IRA. The statute also requires the notice
to include all relevant information regarding the location and amount
of any transferred assets, a statement of fees charged against the IRA
or transfer-in plan account in connection with the transfer, and a
contact phone number for the automatic portability provider.
The proposed regulation provides some minor clarifying language
intended to explain the Department's view regarding the information
needed to satisfy the statutory language. For instance, the proposed
regulation adds that (1) a description of the actions taken by the
automatic portability provider specifically includes that the
individual was matched with an account in a new employer plan, (2)
relevant information regarding the amount of transferred assets
includes the name of the employer and name of the plan where the assets
were transferred, and (3) the telephone number required by the
statutory text is a customer service telephone number.
The Department requests comment on whether model disclosures or
model language for the post-transaction notice would be helpful and
encourages commenters to submit language or formats they believe would
help ensure readability and accessibility for the target audience.
(d) Consolidation of Automatic Portability Provider Notices With Other
Disclosures
The Department understands that an automatic portability provider
may also be the designated provider of Default IRAs for a transfer-out
plan and may be providing notices required by the Code and/or the
Department's Safe Harbor Regulation. To the extent that the automatic
portability provider has been engaged to provide notices to
participants in connection with mandatory distributions on behalf of
employer-sponsored plans, the notices and disclosures to individuals
required by the statutory exemption and this proposed regulation would
not have to be provided separately. However, the automatic portability
provider should take care to ensure that the information required by
the notice provisions to individuals in this proposed regulation is
clearly displayed to reduce possible confusion with other provided
information.
(e) Accessibility of Disclosures to Participants and IRA Owners
Paragraph (b)(5)(vi) of this proposed regulation parallels the
statutory text of Code section 4975(f)(12)(B)(vii) by requiring all
required notices to participants and IRA owners to be written in a
manner calculated to be understood by the average person and not
include inaccurate or misleading statements. The proposed regulation
includes provisions intended to clarify and explain this requirement.
In the Department's view, the idea of an ``average person'' in the
context of understanding the notices under the exemption should be read
as the average person receiving the notices rather than an abstract
concept of an average person at large. Accordingly, the proposed
[[Page 5632]]
regulation speaks in terms of the average intended recipient of the
notices. The proposal also specifies that the disclosures must be
accurate, not misleading,\34\ and sufficiently comprehensive to apprise
the individual of their rights and obligations under the automatic
portability program, must not be formatted to have the effect of
misleading, misinforming, or failing to inform the recipient, and be
written in a culturally and linguistically appropriate manner (see
discussion below). In fulfilling these requirements, the proposed
regulation requires the automatic portability provider to exercise
considered judgment and discretion by taking into account such factors
as the level of comprehension and education of the typical intended
recipient and the complexity of the terms of the program. Consideration
of these factors will usually require the limitation or elimination of
technical jargon and of long, complex sentences, the use of clarifying
examples and illustrations, the use of clear cross references, and a
table of contents. These proposed requirements are modeled on the
Department's regulation governing the style and format of SPDs that
plan administrators are required to provide plan participants and
beneficiaries.\35\
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\34\ The Department would consider it misleading, for example,
for the automatic portability provider to include in notices to
individuals any exculpatory clauses or indemnification provisions
that are not permitted under this proposed regulation or by
applicable law.
\35\ 29 CFR 2520.102-2.
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(f) Culturally and Linguistically Appropriate Standards for Required
Notices and Disclosures to Participants and IRA Owners
The proposed regulation would require that notices and disclosures
to participants and IRA owners be provided in a culturally and
linguistically appropriate manner in certain situations. The proposal
essentially adopts the ACA standard for group health benefit
notices.\36\ Specifically, if the address of a recipient of a required
notice or disclosure is in a county where 10 percent or more of the
population is literate only in the same non-English language, the
notice or disclosure must include a prominent statement in the relevant
non-English language about the availability of language services. The
automatic portability provider would also be required to provide a
verbal customer assistance process in the non-English language and
provide written notices in the non-English language upon request.
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\36\ See, e.g., 29 CFR 2590.715-2715 and 2590.715-2719(e).
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(g) Ensuring Participants and IRA Owners Receive Notices
Section 120(c)(10) of the SECURE 2.0 Act authorizes the Secretary
to issue regulations to ensure that the participants and IRA owners,
``in fact, receive all required notices and disclosures.'' Furthermore,
Section 120(c)(7) of the SECURE 2.0 Act grants the Secretary regulatory
authority to require the automatic portability provider ``to take
actions necessary to reasonably ensure that participant and beneficiary
data is current and accurate.'' To this end, paragraph (b)(5)(vii) of
the proposed regulation would require the automatic portability
provider to adopt and implement prudent policies and procedures to
ensure that it obtains individual participant and IRA owner data
necessary to effectively administer the automatic portability program
and that the participant and IRA owner data in its possession or
control is current and accurate. The proposed regulation also specifies
that notices and disclosures to participants and IRA owners must be
made using methods that satisfy the disclosure requirements in 29 CFR
2520.104b-1(b). The regulation at 29 CFR 2520.104b-1(b) provides a
general standard that covered materials shall be furnished using
``measures reasonably calculated to ensure actual receipt of the
material by plan participants, beneficiaries and other specified
individuals.'' The Department requests comments on how an automatic
portability provider would handle undeliverable mail and whether
specific additional regulatory protections should be established for
individuals with respect to whom the automatic portability provider has
received returned mail. The Department also invites comments on whether
the regulation should specifically address electronic disclosure of
notices and disclosures under the exemption, including how to deal with
undeliverable electronic notices.
7. Frequency of Searches
The proposed regulation parallels the Code section
4975(f)(12)(B)(viii) requirement that the automatic portability
provider query on at least a monthly basis whether any individual with
an IRA has an account in a transfer-in plan. The Department believes
that verification of the information used in connection with performing
searches is important to carrying out the purposes of the statutory
exemption. Accordingly, under the proposal, the automatic portability
provider must perform ongoing participant address validation searches
via automated checks of (1) National Change of Address records, (2) two
separate commercial locator databases, and (3) any internal databases
maintained by the automatic portability provider. If a valid address is
not obtained from the automated checks, the automatic portability
provider must also perform a manual internet-based search. The proposal
would require these verification steps to be performed at least twice
in the first year an account is entered into the automatic portability
provider system and once a year thereafter. The Department invites
comments on whether additional or different verification steps should
be required and on whether a final regulation should specifically list
other information to be used in the searches that may aid in validating
a match, for example, beneficiary information. In the Department's
view, the statutory exemption's description of the search requirement
envisions the automatic portability provider taking reasonable steps to
verify the accuracy of the information used for conducting the required
searches.
The Department requests comment on whether the final regulations
should permit the query to be performed by a partnering recordkeeper in
addition to the automatic portability provider and how the automatic
portability provider would share information with recordkeepers for
purposes of running the query. If the Department permits this under the
final regulations, the Department anticipates that the ultimate
obligation to ensure the required searches are performed would remain
with the automatic portability provider. The Department also requests
comment on whether there should be specific parameters or obligations
for partnering recordkeepers if they are permitted to run the queries.
Finally, if any commenter believes partnering recordkeepers should be
permitted to run queries, the Department requests any additional
information that would support the need and rationale for permitting
this under a final regulation.
8. Monitoring Transfers
The Department believes proper monitoring of automatic portability
transactions by the transfer-in plan is also critical to ensuring the
successful execution of the transactions, and, accordingly, the
proposal includes a monitoring requirement. The Department believes
general prudence obligations would require such monitoring but is
including this
[[Page 5633]]
requirement in the proposed regulation pursuant to the general
regulatory authority provided to the Department in section 120(c) of
the SECURE 2.0 Act and the authority transferred to the Secretary under
section 102 of Reorganization Plan No. 4 of 1978. Paragraph (b)(7) of
the proposed regulation requires that the automatic portability
provider ensure that each transfer-in plan for whom the automatic
portability provider performs automatic portability transactions
designates a plan official responsible for monitoring transfers into
the plan and confirming that amounts received on behalf of a
participant are invested properly. Under the proposal, amounts received
would be deemed to be invested properly if made according to the
participant's current investment election under the plan or, if no
election is made or permitted, in the plan's qualified default
investment alternative under 29 CFR 2550.404c-5 or in another
investment selected by a fiduciary with respect to such plan.
9. Timeliness of Execution
Code section 4975(f)(12)(B)(ix) requires timely execution of
transfers by requiring the automatic portability provider to transfer
the liquidated account balance of the IRA as soon as practicable.
Paragraph (b)(8) of the proposed regulation incorporates the statutory
text and includes provisions intended to clarify the statutory
requirement. First, the proposal clarifies the timeliness of execution
is measured from the date after the final deadline passes for the
affected individual to affirmatively elect not to participate in the
transaction, as specified in the pre-transaction notice. The proposed
regulation also provides that the automatic portability provider must
follow timeframes formally established in policies and procedures,
discussed in more detail below. The proposal does not include a
specific timeframe for what would be considered ``as soon as
practicable'' but requests comments on whether the final rule should
include such a specific timeframe or other clarification of the
standard.
10. Limitation on Exercise of Discretion and Policies and Procedures
Code section 4975(f)(12)(B)(x) provides that the automatic
portability provider will neither have nor exercise discretion to
affect the timing or amount of the transfer pursuant to an automatic
portability transaction other than to deduct the appropriate fees.
Paragraph (b)(9) of the proposed regulation incorporates the statutory
limitation on discretion and expands upon the statutory text by
specifying that an automatic portability provider will be deemed to
satisfy the limited discretion requirement if it establishes,
maintains, and follows policies and procedures regarding the process
for executing automatic portability transactions. The policies and
procedures must set specific standards and timeframes that are equally
applied to all automatic portability transactions. The Department is
proposing the policies and procedures to operationalize the limited
discretion standard in accordance with the general regulatory authority
granted to the Secretary under section 120(c) of the SECURE 2.0 Act and
the authority transferred to the Secretary under section 102 of
Reorganization Plan No. 4 of 1978. The policies and procedures are
intended to ensure that the automatic portability provider is acting in
accordance with its obligations under the exemption and these
regulations and consistently with the intent of the statutory
exemption. The Department also believes the policies and procedures
will ensure that there is appropriate operational documentation by the
automatic portability provider to support the audit, described below.
The policies and procedures must, at a minimum, specifically and
prudently address: (1) the process to ensure that transfer-in plans
designate a plan official that will be responsible for monitoring
transfers into the plan due to automatic portability transactions; (2)
the process and timing for liquidating the assets of the Default IRA to
cash and closing the IRA; (3) the process for verifying and validating
that the correct fees are withdrawn from the Default IRA; (4) the
process and timing for transmitting assets to the transfer-in plan; (5)
verifying the assets were received by the transfer-in plan; and (6)
sending all notices to plan participants or individuals on whose behalf
a Default IRA is established as required in this proposed regulation.
11. Audit and Corrections
(a) Audit and Audit Report
Code section 4975(f)(12)(B)(xi) includes a requirement for an
annual audit to be conducted in accordance with regulations promulgated
by the Secretary. The statute requires that an audit be conducted that
demonstrates compliance with Code section 4975(f)(12) and any
regulations thereunder and that identifies any instances of
noncompliance with the statute or such regulations. The statute
requires the automatic portability provider to submit a copy of the
auditor's report to the Secretary in such form and manner as specified
by the Secretary.
(b) Auditor and Auditor's Report
After consideration, the Department is proposing that the audit be
an independently conducted audit to best ensure that the automatic
portability provider is executing automatic portability transactions in
a manner that is consistent with ERISA and that promotes the retirement
security of workers. An auditor will be considered independent if: (1)
the auditor is a person or an entity that the automatic portability
provider does not own or control, and (2) the auditor does not derive
more than two percent of its annual revenue from services provided
directly or indirectly to the automatic portability provider or any of
its affiliates. In addition, the auditor must have the appropriate
technical training and proficiency necessary to carry out the audit.
The Department invites comments regarding the two percent threshold.
The Department believes the two percent threshold supports a
presumption of independence but requests comment with supporting
rationale if affected entities believe a higher threshold should be
permitted. Additionally, the Department requests comment on what
additional protections commenters would propose to support one or more
higher thresholds.
Paragraph (c) of this proposed regulation would also require the
independent auditor to review the automatic portability provider's
policies and procedures as well as representative samples of the
required disclosures and related automatic portability transactions
sufficient for the auditor to make the required audit determinations
and findings. The findings must be memorialized in a written audit
report, which would include the following: (1) the number of completed
automatic portability transactions during the audit period; (2) whether
the required notices met the timing and content requirements of these
regulations; (3) whether the required notices were written and
delivered in a manner reasonably designed to ensure that affected
individuals would both receive and understand the notices; (4) whether
any required notices were returned as undeliverable and what steps were
taken by the automatic portability provider to address undeliverable
notices; (5) whether the appropriate transfer-in plan accounts received
all the assets due as a result of the automatic portability
transactions; (6) a summary of all fees charged by the automatic
portability provider (and any
[[Page 5634]]
affiliates) for services in connection with automatic portability
transactions, including whether those fees increased since the last
report; (7) whether the fees and compensation received by the automatic
portability provider (including its affiliates) are consistent with the
fees authorized by the appropriate fiduciaries and did not exceed
reasonable compensation; (8) whether all requirements of section
4975(f)(12) and these proposed regulations were satisfied with respect
to: (a) the policies and procedures and (b) the transactions and
disclosures that were reviewed; (9) a summary of compliance issues
reported to or discovered by the auditor, the auditor's
recommendations, and the extent to which the automatic portability
provider has addressed or is addressing the issues pursuant to the
correction procedures; (10) any other recommendations from the auditor
to improve the policies and procedures and overall execution of
automatic portability transactions; and (11) a description of the
auditor's audit methodology. In order to assist the auditor in the
review, the automatic portability provider is required to grant the
auditor access to its automatic portability operations and records
(including, as necessary, the operations and records of its affiliates)
sufficient to allow the auditor to make the determinations and findings
noted above.
Section 120(d) of the SECURE 2.0 Act requires the Secretary to
provide periodic reports to Congress that include a variety of
information related to automatic portability transactions and
portability arrangements more generally. The Department envisions that
most of the information required for this report to Congress will come
from information included in the audit reports filed by automatic
portability providers. Therefore, the Department is proposing that the
written audit report would also include: (1) the number of automatic
rollovers of mandatory distributions from qualified plans into Default
IRAs that are included in the automatic portability program; \37\ (2)
the number of completed automatic portability transactions; and (3) the
number of Default IRAs separately in each of the following categories:
(a) which have been transferred to designated beneficiaries, (b) for
which the automatic portability provider is searching for next of kin
due to a deceased IRA owner without a designated beneficiary, and (c)
that were reduced to a zero balance while in the automatic portability
provider's custody.
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\37\ Sec. 120(d)(1)(A)(i) uses the term ``automatic cash outs''
but the Department believes, based on the context, that it is
referring to automatic rollovers of mandatory distributions as that
term is used throughout this preamble.
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If the automatic portability provider does not have direct access
to any information required to be included in the audit report, the
automatic portability provider would be required, as a condition of its
services, to obtain appropriate information from partnering
recordkeepers and participating plans in their possession or control,
on request from the automatic portability provider, so it can be
provided to the independent auditor and incorporated into the audit
report.\38\ The Department seeks comments on the availability of any
information not otherwise directly accessible by the automatic
portability provider and if there are any barriers to obtaining this
information from participating recordkeepers or employer-sponsored
plans. The Department also seeks comment on whether there are other
readily available sources for such information that would be accessible
to the Department.
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\38\ The automatic portability provider may not have direct
access to all the information identified in section 120(d) of the
SECURE 2.0 Act if, for instance, the automatic portability provider
is not the provider or custodian of all IRAs for which it will
execute automatic portability transactions.
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i. Timing of Audit Report & Certification
This proposed regulation would require the independent auditor to
complete the audit within 180 calendar days following the annual period
to which the audit relates. The automatic portability provider must
then submit a copy of the written audit report to the Department at
<a href="/cdn-cgi/l/email-protection#137266677c3e637c616772717a7f7a676a7266777a6753777c7f3d747c65"><span class="__cf_email__" data-cfemail="ef8e9a9b80c29f809d9b8e8d8683869b968e9a8b869baf8b8083c1888099">[email protected]</span></a> within 30 calendar days of completion.
The automatic portability provider's submission to the Department must
also include a certification, under penalty of perjury, that the
automatic portability provider reviewed the audit report and that, to
the best of its knowledge at the time, it has addressed, corrected, or
remedied any noncompliance or inadequacy, or has an appropriate written
plan to address any such issues identified in the audit report.
(c) Corrections
Section 120(c)(9) specifically grants the Secretary authority to
provide for correction procedures in the event the auditor determines
the automatic portability provider was not in compliance with the
statute and related regulations. To effectuate the intent of this
provision, the Department is proposing three components for
corrections.
First, the Department is providing an opportunity for an automatic
portability provider to make certain self-corrections. Under paragraph
(c)(9)(i), the Department would not consider a non-exempt prohibited
transaction to have occurred due to a violation of the requirements of
Code section 4975(f)(12) and these regulations with respect to a
transaction, provided that either the violation does not result in
investment losses to the Default IRA or the automatic portability
provider made the IRA whole for any resulting losses. In order to self-
correct in those situations, the automatic portability provider would
be required to correct the violation and document the correction in
writing within 30 calendar days of correction. The correction would
only be permitted if it occurs no later than 90 calendar days after the
automatic portability provider learned of the violation or reasonably
should have learned of the violation. Finally, all instances of
noncompliance and accompanying corrections would be required to be
reported in writing to the auditor and the auditor would have to agree
that the transaction did not result in investment losses or that the
IRA was made whole. The Department solicits comments on whether
specific criteria should be included in the final rule on measuring
investment losses and make whole requirements.
The second component for corrections involves additional
recommendations from the auditor. If the auditor determines that the
automatic portability provider was not in compliance with any provision
of Code section 4975(f)(12) or these regulations during the audit
period, the auditor must identify the instances of noncompliance in the
audit report along with its recommended corrections. An automatic
portability provider would not be treated as having failed to comply
with any provision of Code section 4975(f)(12) or these regulations,
provided it corrects any instance of noncompliance identified by the
auditor as soon as reasonably practicable according to the auditor's
recommendations.
The Department believes that the first two components for
corrections will provide an automatic portability provider with
additional incentive to take the audit process seriously, timely
identify and correct violations of Code section 4975(f)(12) and these
proposed regulations, and use the audit process to correct deficiencies
in the automatic portability provider's operations to avoid potential
future violations,
[[Page 5635]]
penalties, losses to IRA owners/plan participants, and lawsuits.
The third and final component for corrections would involve the
Secretary requiring an automatic portability provider to submit to
supplemental audits and corrective actions if significant compliance
issues are uncovered. The Department is proposing the following
scenarios involving the automatic portability provider or an affiliate
under which the Secretary may impose additional corrective actions: (1)
engaging in a systematic pattern or practice of violating any provision
of section 4975(f)(12) or an implementing regulation; (2) intentionally
violating any provision of section 4975(f)(12) or an implementing
regulation; (3) providing materially misleading information to the
Secretary, Secretary of the Treasury, or the auditor in connection with
automatic portability transactions; (4) a foreign or domestic criminal
conviction involving or arising out of the conduct of the automatic
portability program or any automatic portability transaction; or (5) a
foreign (or foreign equivalent) \39\ or domestic criminal conviction
for any felony involving the following crimes: larceny, theft, robbery,
extortion, forgery, counterfeiting, fraudulent concealment,
embezzlement, fraudulent conversion, misappropriation of funds or
securities, or conspiracy to commit any such crimes or a crime in which
any of the foregoing crimes is an element.
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\39\ The Department does not expect that foreign crimes will
arise frequently in connection with automatic portability providers,
but if they do, impacted entities may contact the Department for
guidance. Additionally, the Department requests comment regarding
whether any additional process should be provided for foreign crimes
before the Department imposes supplemental audits or corrective
actions, particularly those foreign crimes that raise issues
regarding their equivalence to a domestic crime.
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12. Automatic Portability Provider website
The proposed regulation in paragraph (d) parallels the statutory
language in Code section 4975(f)(12)(B)(xii) requiring the automatic
portability provider to: (1) maintain a website which contains a list
of recordkeepers with respect to which the automatic portability
provider carries out automatic portability transactions and (2) list
all fees paid to the automatic portability provider. Under the proposed
regulation the list would have to include the fees and the identity of
the party or account that is paying the particular fee. The proposal
also requires that the website include the number of plans and
participants covered by each recordkeeper. The Department solicits
comments on whether other documents or materials should be required to
be posted on the website, for example, a copy of the independent
auditor's audit report redacted as needed to protect confidential
business information, if any, in the audit report.
Because the Department anticipates that automatic portability
providers may include a range of other services and information,
customer support features, and functionalities in addition to automatic
portability transactions, the proposal would also require the website
to display automatic portability transaction-related information in a
way that differentiates that information from other information or
elements of the website (e.g., separately identifying the automatic
portability transaction fees and services from fees and services in
connection with establishing and custody of a Default IRA).
The Department intends that these website disclosures and
additional parameters will make it easier for plan sponsors to
independently assess the overall cost of an automatic portability
arrangement in connection with signing up for an automatic portability
transaction service covered by the statutory exemption and this
regulation.
13. Limitations on Exculpatory Provisions
Section 120(c)(6) of the SECURE 2.0 Act specifically provides the
Secretary with the authority to place limitations on exculpatory
provisions due to an improper transfer of Default IRA assets.
Therefore, the Department is proposing that the automatic portability
provider may not include exculpatory provisions in its contracts
disclaiming or limiting the automatic portability provider's liability
in the event that the automatic portability transaction results in an
improper roll-in to the transfer-in plan. However, this requirement
would not prohibit disclaimers for liability caused by an error,
misrepresentation, or misconduct of a party independent of the
automatic portability provider and its affiliates, or damages arising
from acts outside the control of the automatic portability provider.
Section 120(c)(6) of the SECURE 2.0 Act does not specifically address
other exculpatory provisions. The Department requests comments on
whether the prohibition on exculpatory provisions should be broader and
include violations of the prohibited transaction provisions in Code
section 4975 generally and ERISA in connection with any conduct of the
automatic portability provider or an affiliate that is subject to Title
I.
14. Record Retention
This proposed regulation incorporates the statutory language in
Code section 4975(f)(12)(B)(xi)(I) regarding record retention by
requiring that an automatic portability provider maintain, for not less
than six years, records sufficient to demonstrate compliance with the
requirements of the statute and this proposed regulation and make them
available to authorized employees of the Department and the Department
of the Treasury within 30 calendar days of a written request. This
proposal also includes clarifying language regarding the record
retention requirement and its impact on the prohibited transaction
relief provided by Code section 4975(d)(25), which clarifying language
the Department has frequently included in administrative prohibited
transaction exemptions. First, the proposal provides that no prohibited
transaction will be considered to have occurred if, solely because of
circumstances beyond the control of the automatic portability provider,
the records are lost or destroyed before the six-year period ends
(e.g., due to a natural disaster). Second, an automatic portability
provider's failure to maintain the records necessary to determine
whether the conditions of Code section 4975(d)(25) and this regulation
have been met will result in the loss of the relief provided under this
exemption only for the transaction or transactions for which such
records are missing or have not been maintained. Such failure does not
affect the relief for other transactions if the automatic portability
provider maintains records for such other transactions in compliance
with the record retention requirements.
15. Definitions
The Department included three definitions in proposed paragraph
(g). The proposed definition of ``affiliate'' is consistent with the
Department's definition of affiliate in many other regulations.\40\
Likewise, the definition of ``control'' is intended to be consistent
with the Department's use of that term in other regulations.\41\ The
definition of ``individual retirement plan'' refers to an individual
retirement account or annuity described in Code section
[[Page 5636]]
408(a) or 408(b). The Department requests comment on whether any other
definitions may be necessary to provide additional clarity to the
proposed regulation.\42\
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\40\ A person or entity is an ``affiliate'' if, directly or
indirectly (through one or more intermediaries) it controls, is
controlled by, or is under common control with such person or
entity; or is an officer, director, or employee of, or partner in,
such person or entity. Unless otherwise specified, an ``affiliate''
refers to an affiliate of the automatic portability provider.
\41\ The term ``control'' means the power to exercise a
controlling influence over the management or policies of an entity
or person other than an individual.
\42\ As one example, should the Department define ``active
participant'' or is this term generally understood?
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E. Request for Public Comments
The Department invites comments from interested persons on all
facets of the proposed rule. Commenters are free to express their views
not only on the specific provisions of the proposal as set forth in
this document, but on any issues germane to the subject matter of the
proposal. Comments should be submitted in accordance with the
instructions at the beginning of this document.
Without limiting the generality of the above request for comments,
the Department requests comments on whether the rule should include
provisions that specially address issues related to IRA beneficiaries.
The statutory provisions envision an automatic portability transaction
as a transfer of assets ``made from an individual retirement plan which
is established on behalf of an individual and to which amounts were
transferred under section 401(a)(31)(B)(i)'' to an eligible employer-
sponsored retirement plan in which ``such individual is an active
participant.'' The statutory provisions do not expressly reference
moving funds for a beneficiary from a default IRA to an employer-
sponsored plan in which the beneficiary participates. The statutory
provisions similarly require notices to ``the individual on whose
behalf the individual retirement plan . . . is established.''
Nonetheless, the Department notes the recordkeeping provisions in the
statute expressly reference the automatic portability provider taking
steps to ensure it has accurate beneficiary information and the
statutory provisions on the required Report to Congress call for
separate identification of IRAs transferred to designated beneficiaries
and IRAs for which a next of kin is being identified after the death of
the IRA owner without a designated beneficiary. Accordingly, the
Department is interested in comments on whether the final regulation
should address specific beneficiary issues, and, if the commenter
believes it should, the Department asks that the commenter identify the
issue or issues and include recommendations on how the issue or issues
should be addressed in the regulation.
The Department also specifically requests comments on exemptive
relief for Default IRAs involving rollovers of mandatory distributions
with a value of $1,000 or less. The proposal does not expressly include
such mandatory distributions in light of the SECURE 2.0 Act amendment
of Code section 4975 defining the term ``automatic portability
transaction'' to mean a transaction in which mandatory distributions
pursuant to Code section 401(a)(31)(B)(i) from an employer-sponsored
retirement plan to an IRA established on behalf of an individual are
subsequently transferred to an eligible employer-sponsored plan in
which such individual is an active participant, after such individual
has been given advance notice of the transfer and has not affirmatively
opted out of such transfer. As noted elsewhere in this document, Code
section 401(a)(31)(B)(i) refers to distributions of nonforfeitable
accrued benefits the present value of which is in excess of $1,000 but
less than or equal to $7,000. The Department confronted a similar issue
in implementing section 657(c)(2)(A) of the Economic Growth and Tax
Relief Reconciliation Act of 2001 (EGTRRA), which directed the
Department to issue regulations providing safe harbors under which (1)
a plan administrator's designation of an institution to receive the
automatic rollover, and (2) the initial investment choice for the
rolled-over funds would be deemed to satisfy the fiduciary
responsibility provisions of section 404(a) of ERISA. Section 657 of
EGTRRA also referenced Code section 401(a)(31)(B) automatic rollovers.
However, in its final rule in 2004, the Department, in response to
public comments, included mandatory distribution amounts of $1,000 or
less noting that, although not described in Code section 401(a)(31)(B),
tax-qualified retirement plans are permitted to distribute to a
separating participant without the participant's consent provided the
present value of the participant's vested accrued benefit did not
exceed the maximum value at that time of $5,000.\43\ The Department
said that, after taking into account the purpose and provisions of the
safe harbor regulation, it was persuaded that application of the safe
harbor to rollovers of mandatory distributions of $1,000 or less was
appropriate because the availability of the safe harbor for such
distributions might increase the likelihood that such amounts will be
rolled over to individual retirement plans and thereby may promote the
preservation of retirement assets without compromising the interests of
the participants on whose behalf such rollovers are made.\44\ In
addition, some plans may find it advisable to provide for automatic
rollovers of all sizes of small accounts to avoid the issues that arise
when distribution checks remain uncashed.\45\ Thus, in light of the
fact that the regulatory exemption in Code section 4975 established by
the SECURE 2.0 Act specifically references 401(a)(31)(B), the
Department is interested in public comments on whether it should use
its general exemption authority under ERISA section 408(a) to provide
parallel exemptive relief for mandatory distributions of $1,000 or less
for reasons similar to those noted above in connection with the
Department's automatic rollover safe harbor in 29 CFR 2550.404a-2.
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\43\ See 29 CFR 2550.404a-2(d); Final Rule on Fiduciary
Responsibility Under the Employee Retirement Income Security Act of
1974 Automatic Rollover Safe Harbor, 69 FR 58018 (Sept. 28, 2004).
\44\ Id. at 58019.
\45\ See ``The Benefits of Mandatory Distributions,'' A White
Paper by Fred Reish and Bruce Ashton (2013)(available at <a href="https://fredreish.com/wp-content/uploads/2013/03/The-Benefits-of-Mandatory-Distributions-A-White-Paper-February-2013_NEW.pdf">https://fredreish.com/wp-content/uploads/2013/03/The-Benefits-of-Mandatory-Distributions-A-White-Paper-February-2013_NEW.pdf</a>).
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F. Regulatory Impact Analysis
The Department has examined the effects of this proposed rule as
required by Executive Order 12866,\46\ Executive Order 13563,\47\ the
Congressional Review Act,\48\ the Paperwork Reduction Act of 1995,\49\
the Regulatory Flexibility Act,\50\ section 202 of the Unfunded
Mandates Reform Act of 1995,\51\ and Executive Order 13132.\52\
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\46\ Regulatory Planning and Review, 58 FR 51735 (Oct. 4, 1993).
\47\ Improving Regulation and Regulatory Review, 76 FR 3821
(Jan. 21, 2011).
\48\ 5 U.S.C. 804(2) (1996).
\49\ 44 U.S.C. 3506(c)(2)(A) (1995).
\50\ 5 U.S.C. 601 et seq. (1980).
\51\ 2 U.S.C. 1501 et seq. (1995).
\52\ Federalism, 64 FR 43255 (Aug. 10, 1999).
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1. Executive Order 12866 (Regulatory Planning and Review), Executive
Order 14094 (Modernizing Regulatory Review), and 13563 (Improving
Regulation and Regulatory Review)
Under E.O. 12866 (as amended by Executive Order 14094), the Office
of Management and Budget (OMB)'s Office of Information and Regulatory
Affairs determines whether a regulatory action is significant and,
therefore, subject to the requirements of the E.O. and review by OMB.
58 FR 51735. As amended by Executive Order 14094, section 3(f) of
Executive Order 12866 defines a ``significant regulatory action'' as a
regulatory action that is likely to result
[[Page 5637]]
in a rule that may: (1) have an annual effect on the economy of $200
million or more; or adversely affect in a material way the economy, a
sector of the economy, productivity, competition, jobs, the
environment, public health or safety, or state, local, territorial, or
tribal governments or communities; (2) create a serious inconsistency
or otherwise interfere with an action taken or planned by another
agency; (3) materially alter the budgetary impact of entitlements,
grants, user fees or loan programs or the rights and obligations of
recipients thereof; or (4) raise legal or policy issues for which
centralized review would meaningfully further the President's
priorities or the principles set forth in the Executive order. OMB has
determined that this revision is a significant regulatory action under
section 3(f)(1) of E.O. 12866.
Executive Order 13563 directs agencies to propose or adopt a
regulation only upon a reasoned determination that its benefits justify
its costs; the regulation is tailored to impose the least burden on
society, consistent with achieving the regulatory objectives; and in
choosing among alternative regulatory approaches, the agency has
selected those approaches that maximize net benefits. E.O. 13563
recognizes that some benefits are difficult to quantify and provides
that, where appropriate and permitted by law, agencies may consider and
discuss qualitative values that are difficult or impossible to
quantify, including equity, human dignity, fairness, and distributive
impacts.
2. Need for Regulation
When American workers change jobs, they often encounter frictions
that result in reduced retirement savings in aggregate. This regulation
will alleviate some of those frictions, resulting in more retirement
savings, which will improve Americans' preparation for retirement. This
is particularly beneficial given the wider context that many workers
have insufficient retirement savings. Only 57 percent of households
headed by 55-64 year olds held any retirement savings accounts in 2022,
and the median amount in those accounts was $185,000.\53\ The Federal
Reserve reports that only one-third of Americans view their retirement
savings plan as sufficient to meet their needs in retirement.\54\ This
is consistent with projections by VanDerhei (2019) showing that about
41 percent of households ages 35 to 64 will run short of money in
retirement.\55\ Similarly, Brown et al. (2018) find that nearly 77
percent of Americans are behind in saving for retirement given their
age and income.\56\
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\53\ 2022 Survey of Consumer Finance. ``Retirement Account by
Age of Reference Person,'' The Fed--Table: Survey of Consumer
Finances, 1989--2022 (<a href="http://federalreserve.gov">federalreserve.gov</a>).
\54\ Federal Reserve. ``Survey of Household Economics and
Decisionmaking.'' 2022.
\55\ Jack VanDerhei, ``Retirement Savings Shortfalls: Evidence
from EBRI's 2019 Retirement Security Projection Model.'' Employee
Benefit Research Institute (March 7, 2019).
\56\ Jennifer Brown, Joelle Saad-Lessler, and Diane Oakley.
``Retirement in America: Out of Reach for Working Americans?''
National Institute on Retirement Security. 2018.
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Previous generations of American workers who had a retirement plan
usually had a defined benefit (DB) pension plan that promised fixed
payments to them upon retirement. An employee's retirement benefit
under a DB plan often is based on a percentage of their final year's
compensation multiplied by their total years of employment with the
sponsoring employer.\57\ Workers who changed jobs and moved to another
plan, however, received less benefits from DB plans, as these plans
often had a five-year cliff vesting policy, so a worker who stayed at a
job for fewer than five years received no retirement benefits from that
job. Even when a worker accrued benefits under a former employer's DB
plan, the effects of inflation often meant that their final year's
salary earned from their former employer tended to be lower than their
final year's salary earned from a subsequent employer before
retirement. Since the employee's final year's salary is a key factor in
the benefit formula, they would receive lower lifelong pension benefits
as a result of switching jobs even if they worked the same number of
years at the same salaries.
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\57\ U.S. Bureau of Labor Statistics, Employee Benefits,
``Retirement plan provisions for private industry workers in the
United States,'' Table 2, reference year 2022, (April, 2023).
Available at: <a href="https://www.bls.gov/ebs/publications/retirement-plan-provisions-for-private-industry-workers-2022.htm">https://www.bls.gov/ebs/publications/retirement-plan-provisions-for-private-industry-workers-2022.htm</a>.
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In recent decades defined contribution (DC) plans have supplanted
DB plans as the most prevalent type of pension plan provided to
workers.\58\ DC plans, such as 401(k) plans, base their benefit on
employer and employee contributions to an individual's account and the
investment earnings on their account balance. Currently, 49 percent of
private industry workers (59 percent of full-time private industry
workers) are participating in a DC plan.\59\ For workers that change
jobs frequently, DC plans have certain portability advantages over
traditional DB plans. Public policies such as this new automatic
portability statutory exemption and this proposed regulation can
further benefit participants by facilitating portability among DC plans
and IRAs.
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\58\ Employee Benefits Security Administration, Private Pension
Plan Bulletin Historical Tables and Graphs 1975-2021, (September
2023), Table E4, (September 2023), <a href="https://www.dol.gov/sites/dolgov/files/ebsa/researchers/statistics/retirement-bulletins/private-pension-plan-bulletin-historical-tables-and-graphs.pdf">https://www.dol.gov/sites/dolgov/files/ebsa/researchers/statistics/retirement-bulletins/private-pension-plan-bulletin-historical-tables-and-graphs.pdf</a>.
\59\ U.S. Bureau of Labor Statistics, National Compensation
Survey, Series: NBU29000000000000026313 & NBU29000000000002526313,
(March, 2023), Available at: <a href="https://data.bls.gov/cgi-bin/srgate">https://data.bls.gov/cgi-bin/srgate</a>.
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In the current retirement system where employer-sponsored DC plans
are the primary vehicle available for employees to save for retirement,
an employee separating from service with an employer may be suddenly
confronted with an important financial decision regarding how to handle
retirement assets they have accrued in their employer's DC plan. Making
it simpler for employees to consolidate their retirement accounts and
maintain their tax-favored status can improve retirement security for
American workers.
Currently, employees who change jobs generally have the following
four options for handling their retirement assets:
1. Leave the assets in their former employer's plan. The separating
employee can do this if the value of their accrued benefit under the
plan meets any threshold imposed by the plan, which can be at most
$7,000 beginning in 2024. (A participant might choose this option
because they find the former plan's services, investments, and fees to
be attractive or because of simple inattention.)
2. Roll over their savings into a retirement plan sponsored by
their new employer.
3. Roll over their assets into an IRA.
4. Cash out the balance.
The first three of these options, where the assets are in a plan or
an IRA, retain their tax-preferred status. A cashout, on the other
hand, results in the loss of tax-preferred status for those assets. It
is no longer earning investment returns that are tax-deferred. The
funds are distributed directly to the employee and are subject to
regular income taxes. Additionally, a 10 percent penalty tax applies if
the employee is under age 55 throughout the year in which they
terminate service with the employer and if the employee does not
qualify for an exception.
When a plan participant separates from service with an employer
with an account balance in the former employer's DC plan, the former
employer has the option to immediately
[[Page 5638]]
cash out account balances of $5,000 or less without the participant's
consent (if the plan has a provision allowing the immediate
distribution).\60\ These distributions are a form of cashout and are
often referred to as ``mandatory distributions.'' If, however, the
participant's account balance is between $1,001 and $5,000, and the
participant does not elect to have the account balance paid to an
eligible retirement plan or receive the distribution directly in cash,
then the plan administrator of the former employer's plan must transfer
such account balance to a so-called ``Default IRA'' if this is required
by the plan's provisions. These distributions are commonly referred to
as ``force-outs'' or ``automatic rollovers of mandatory
distributions.'' \61\ As part of the SECURE 2.0 Act, Congress raised
the $5,000 threshold to $7,000 (effective for distributions occurring
after December 31, 2023).\62\
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\60\ Code sections 411(a)(11) and 417(e).
\61\ Code section 401(a)(31)(B)(i).
\62\ See SECURE 2.0 Act, Sec. 304.
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Default IRAs, while intended to preserve retirement assets in
conservatively managed accounts, typically yield only minimal returns
for investors while often imposing considerable fees.\63\ A 2014 study
by the Government Accountability Office (GAO) found that, ``fees
outpaced returns in most of the [forced-out] IRAs analyzed'' and that
account balances ``tended to decrease over time.'' \64\ GAO also found
the average return to be less than two percent for money market funds,
which are typical investments for Default IRAs. In contrast, many
accounts rolled into a worker's new employer's plan likely will be
invested in the plan's default investment, usually target date funds,
which typically outpace the return on money market funds. Observing
data on small balance rollover IRAs in general suggests that most
Default IRA owners will stay invested in money market funds for a
substantial length of time; recent data suggest roughly 40 percent of
these accounts remain in principal-preserving investments for at least
10 years.\65\
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\63\ Government Accountability Office (GAO). ``401(k) Plans:
Greater Protections Needed for Forced Transfers and Inactive
Accounts.'' (2014).
\64\ Id.
\65\ Lucas Goodman, Anita Mukherjee, and Shanthi Ramnath (2023):
``Set it and forget it? Financing retirement in an age of
defaults'', Journal of Financial Economics, vol 148, p.47-68.
Investment Company Institute. ``The IRA Investor Profile:
Traditional IRA Investors' Activity, 2007-2016.'' (September 2018),
Appendix: Figure A.2, Page 68.
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With job turnover, a single individual may end up with multiple
Default IRAs, further complicating the management of their retirement
account assets, and in many cases, exposing participants to duplicative
fees that might otherwise have been avoided if their assets were
consolidated into a single account. Also, these Default IRAs are
established by employers on behalf of non-responsive participants;
therefore, they are more susceptible to being abandoned or forgotten by
participants.
Cashouts affect participants by removing their assets from tax-
favored retirement accounts. A 2023 study by Wang, Zhai, and Lynch
found that over 40 percent of separating employees report cashing out
at least some of their retirement account balance, consistent with
reporting from numerous recordkeepers suggesting a cashout rate of
approximately 40 percent among separating participants with account
balances below $5,000.\66\ VanDerhei (2019) analyzes individuals age 35
to 64, projects forward their main sources of retirement resources,
estimates how much they will fall short, aggregates that across all
individuals, and calculates a present value, estimating an aggregate
retirement savings shortfall in excess of $3 trillion. In light of this
shortfall, reducing cashouts and retaining assets in the retirement
system is an important retirement policy objective, particularly for
those workers with small balance accounts who may be struggling to
accumulate significant retirement assets.\67\
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\66\ Yanwen Wang, Muxin Zhai, and John G. Lynch, Jr. ``Cashing
Out Retirement Savings at Job Separation.'' (2023). Vanguard. ``How
America Saves.'' 2023. Alight. ``Universe Benchmarks Report: How
Workers Are Saving and Investing in Defined Contribution Plans.''
(2023). Alight. ``Distributions from Defined Contribution Plans:
What Do Workers Do with their Retirement Savings After They Leave
Their Employers? A Deep Dive into Post-Termination Behavior, 2008-
2017.'' (2019). Lucus Goodman, Jacob Mortenson, Kathleen Mackie, and
Heidi R. Schramm, ``Leakage from Retirement Savings Accounts in the
United States,'' (2021) National Tax Journal, 74(3), 689-719.
\67\ VanDerhei, ``Retirement Savings Shortfalls,'' 2019.
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Taking a cashout or taking no action at all may seem like the
simplest and most expedient courses of action for a small-balance
account participant upon job separation but can result in sub-optimal
outcomes. A 2013 GAO study found that the rollover process was complex,
inefficient, and burdensome for participants.\68\ These findings were
reinforced by a 2019 GAO report, which suggested that frictions in the
rollover process likely contributed to participants cashing out their
accounts prematurely.\69\ Both studies advised that improving the
processes for account consolidation after job separation is imperative
to reducing the leakage of assets from the retirement system.
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\68\ Government Accountability Office. ``401(k) Plans: Labor and
IRS Could Improve the Rollover Process for Participants.'' Report to
Congressional Requesters. (2013).
\69\ Government Accountability Office. ``Retirement Savings:
Additional Data Analysis Could Provide Insight into Early
Withdrawals.'' Report to the Chairman, Special Committee on Aging,
U.S. Senate. (2019).
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Plan account portability is thus integral to the retention and
accumulation of retirement assets for workers. Measures to improve
account portability would serve to reduce participant losses due to
cashouts (and the associated taxes and penalties for early
withdrawals), lost accounts, duplicative fees arising from multiple
accounts, and boost average investment return.
The SECURE 2.0 Act includes a new statutory prohibited transaction
exemption that seeks to improve retirement plan portability by
permitting an automatic portability provider to perform automatic
portability transactions for participants with Default IRA accounts
established as a result of a mandatory distribution from a former
employer's plan if the individual does not respond to their former
plan's administrator's notices.\70\ If an automatic portability
provider meets the conditions of the statutory exemption, it can
transfer assets from a worker's Default IRA to their active account in
their new employer's DC plan. The proposed rule would implement the new
statutory exemption.
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\70\ Internal Revenue Code section 4975(d)(25).
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3. Baseline and Post Statute and Regulation Scenarios
Prior to the passage of SECURE 2.0 Act, RCH operated in the
automatic portability marketplace using PTE 2019-02 which is the
``baseline'' scenario for this analysis. As discussed previously, the
PTE was issued for a five-year term. The need to renew the PTE, and the
uncertainty associated with its continual renewal, creates uncertainty
for the marketplace. The baseline includes the assumptions of future
renewals of PTE 2019-02 for RCH and the mandatory distribution
threshold to be at the pre-statute level of $5,000. SECURE 2.0 Act
raised the mandatory distribution threshold for a plan administrator to
transfer assets into a Default IRA from $5,000 to $7,000 and creates a
statutory exemption that eliminated the uncertainty in the marketplace
about the continued existence of PTE 2019-02, which should encourage
the marketplace to expand its reach in the Defined Contribution
universe.\71\ The analysis looks at the
[[Page 5639]]
combined impacts of the SECURE 2.0 Act and the proposed regulations and
does not distinguish between the two.
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\71\ Brian Croce, ``SECURE 2.0 Enshrines Auto Portability Into
Law,'' Pensions and Investments, (January 27, 2023) at https://
www.pionline.com/retirement-plans/secure-20-enshrines-auto-
portability-
law#:~:text=The%20SECURE%202.0%20provision%20stipulates,sell%20data%2
0relating%20to%20the.
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The baseline assumes that the recordkeepers currently performing
automatic portability transactions continue to be the only
recordkeepers providing automatic portability transactions in the
future, therefore the percent of plans and accounts covered by
automatic portability remains unchanged at 65 percent. However, the
percent of plans and accounts covered by automatic portability is
expected to increase in the post-rule and regulation scenario,
increasing from 65 percent to 90 percent by year 10.\72\ This is
actually a simplification, the average of a number that likely would
have grown slightly in the absence of the Secure 2.0 Act. Before
passage of the Act, in October 2022, there were only three
recordkeepers who had joined the automatic portability consortium. of
2022, the Secure 2.0 Act was signed in late December 2022, and very
soon shortly thereafter other large recordkeepers joined. While much of
this growth in consortium members is likely related to the prospect and
enactment of legislation, there might have been some growth even
without the legislation. The inclusion of automatic portability in the
Secure 2.0 Act increases awareness of the program and that publicity
may promote growth.
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\72\ In other words, for an affected participant who changes
jobs in year 10, there is a 90 percent chance that their former plan
has a recordkeeper that belongs to PSN and also a 90 percent chance
that their new plan has a recordkeeper that belongs to PSN. This
means that 81 percent of the workers who switch from one DC plan to
another in year 10, have a small balance account, and do not take
any affirmative action, would experience an automatic portability
transaction.
---------------------------------------------------------------------------
This assumption is based on 2016 testimony by RCH and EBRI before
the ERISA Advisory Council wherein they stated that the ability to
locate and match accounts to conduct automatic portability transfers is
``highly dependent on market adoption.'' \73\ As the network grows,
there is a greater likelihood of being able to match a separating
participant with their new employer's plan. As a result, the benefits
of belonging to the network increase, encouraging more recordkeepers to
join. It is anticipated that as a result of the legislation and the
reduced uncertainty, more recordkeepers will join the consortium, and
this dramatic growth is reflected in the post-rule estimates. Section 9
``Uncertainty'' provides an alternative estimate reflecting growth in
the number of recordkeepers joining the network in the baseline
scenario. The Department requests comment on the portion of the
expansion in recordkeepers joining the network that would be
attributable to the proposal.
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\73\ Retirement Clearinghouse, LLC, Employee Benefit Research
Institute, and contributor Boston Research Technologies. ``Auto
Portability Research & Simulation: Automating Plan-to-Plan Transfers
for Small Accounts.'' Consolidated Testimony in front of the ERISA
Advisory Council, June 8, 2016.
---------------------------------------------------------------------------
4. Affected Entities
4.1. Automatic Portability Providers
Retirement Clearinghouse (RCH), originally founded as
RolloverSystems in 2001, was the first company to approach the
Department for sub-regulatory guidance and prohibited transaction
relief to offer an automatic portability program to plans. RCH asserted
that its services would facilitate automatic rollovers into Default
IRAs from accounts in plans of individuals' former employers that are
eligible for mandatory distributions under Code section 401(a)(31)(B),
automatic rollovers into Default IRAs of account balances from
terminated DC plans, and automatic roll-in of funds held in Default
IRAs to an individual account plan maintained by the IRA owner's new
employer when the Default IRA owner changes jobs and has an account in
their new employer's DC plan. In 2019, the Department issued PTE 2019-
02, an individual prohibited transaction exemption permitting RCH to
receive certain fees in connection with the transfer of an individual's
Default IRA to the individual's account in a new employer-sponsored
plan, without the individual's affirmative consent.\74\
---------------------------------------------------------------------------
\74\ See 83 FR 55741 (Nov. 7, 2018) (proposed exemption) and 84
FR 37337 (July 31, 2019) (granted exemption).
---------------------------------------------------------------------------
Since then, RCH's footprint in the automatic portability space has
grown with its formation of the Portability Services Network (PSN).
This network currently consists of founding owning members RCH and six
recordkeepers: Alight, Empower, Fidelity, Principal, TIAA, and
Vanguard, and it can incorporate an unlimited number of additional
member recordkeepers. While PSN operates as a separate entity from RCH
that is controlled by RCH's founding owning members, PSN solely relies
on the technological infrastructure and operations established by
RCH.\75\ PSN's website currently states that it does not charge a fee
to recordkeepers or plan sponsors for its automatic portability
services; instead, it charges participants a one-time fee when their
account balances are transferred into a new employer's plan. Currently,
the maximum transfer fee is $30, and the fee could be lower for smaller
accounts.\76\
---------------------------------------------------------------------------
\75\ Portability Services Network, Our Structure, (2023),
<a href="https://psn1.com/learning-center/about-psn/structure-of-psn">https://psn1.com/learning-center/about-psn/structure-of-psn</a>.
\76\ Portability Services Network, Our Fees, (2023), https://
psn1.com/learning-center/about-psn/what-are-psns-
fees#:~:text=Key%20aspects%20of%20PSN's%20fee,be%20processed%20at%20n
o%20charge.
---------------------------------------------------------------------------
The automatic portability provider market is new and complex.
Therefore, there is significant uncertainty regarding how many entities
will offer automatic portability services in the future and how the
automatic portability marketplace will evolve. Barriers to entry exist
in the business model, because entities must have sufficient access to
plan and IRA participant data and information systems technology that
would allow it to match a worker's default IRA with their plan account
and transfer the employee's Default IRA to their new employer's plan.
The larger the amount of data available to the automatic portability
provider, the more successful it will be in matching participants'
Default IRAs with their active accounts in a new employer's plan.
Based on the best available data, the Department estimates that PSN
currently covers more than 60 percent of account holders in large DC
plans \77\ and that its market share is likely to increase further due
to the new statutory prohibited transaction exemption. Due to the
aforementioned barriers to entry for potential automatic portability
providers, the Department is unaware of any entities other than PSN
that are currently planning to become an automatic portability provider
in reliance on Code section 4975(d)(25).\78\ Therefore, for purposes of
this analysis, the Department assumes that PSN will be the only entity
providing automatic portability provider services pursuant to the
statutory exemption. The Department assumes this will be the case even
though RCH was granted PTE 2019-02, because the individual exemption
has a limited five-year term that expires on July 31, 2024, while the
[[Page 5640]]
statutory exemption does not, and RCH would have to request additional
relief from the Department to continue relying on PTE 2019-02 after its
five-year term expires. If, counter to the Department's assumption, it
turns out that there is more than one automatic portability provider,
the Department anticipates that the number of automatic portability
providers would be very small because of the barriers to entry. They
might specialize by geography or by types of plan; for example, one
automatic portability provider might specialize in plans for government
employees. It seems likely that their networks would overlap so both
automatic portability providers could be successful in making many
matches. The Department welcomes comments regarding how many automatic
portability providers there would be, as well as data and other
information that will allow the Department to further assess how the
automatic portability marketplace will develop.
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\77\ Plans classified as large constitute nearly 90 percent of
account holders in plans required to file the Form 5500 and must
submit the Schedule C of the Form 5500, which covers service
providers, such as recordkeepers. Plans considered small do not
report this information. Calculation based on tabulations of the
2021 EBSA Private Pension Plan Bulletin Research File.
\78\ The Department is aware of one additional entity that had
expressed interest in becoming an automatic portability provider;
however, the Department understands this entity is no longer moving
ahead with plans to become an automatic portability provider.
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4.2. Recordkeepers
As discussed above, the Department assumes that PSN will be the
only automatic portability provider in the market. PSN is structured
with seven ``owner members,'' who have board control. It allows for
open recordkeeper membership without board control. In September of
2023, PSN stated that the owner members, which include Alight, Empower,
Fidelity, Principal, RCH, TIAA, and Vanguard, were the only members at
that time.\79\ There is significant uncertainty regarding how many
recordkeepers will join PSN. The Department believes that automatic
portability transactions will be a desirable feature for plan sponsors
and participants, which may drive growth in recordkeeper participation.
Recordkeepers do not incur a direct cost to join PSN. The Department
requests comment on how many recordkeepers would choose to join PSN.
---------------------------------------------------------------------------
\79\ Portability Services Network, PSN Participating Owner
Members and Members, (2023), <a href="https://psn1.com/auto-portability/regulatory-information/participating-recordkeepers">https://psn1.com/auto-portability/regulatory-information/participating-recordkeepers</a>.
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While this analysis assumes that PSN will be the only automatic
portability provider, the Department acknowledges that another
automatic portability provider may enter the market. Entry of
additional automatic portability providers may impact the number of
affected recordkeepers and the manner in which those recordkeepers are
affected by this proposed regulation.
According to the Department's analysis of 2021 Form 5500 data,
there were 1,951 recordkeepers providing services to private sector DC
retirement plans.\80\ As described in more detail in subsection 3.1
above, the six recordkeepers that are founding owner members of PSN
administer accounts for over 60 percent of account holders in large DC
plans that file Form 5500. The Department estimates that by the end of
the ten-year estimation period for this analysis, roughly 90 percent of
the DC account holders in plans filing Form 5500 would be associated
with participating recordkeepers. As an illustration, this level of
recordkeeper participation could be achieved if the next 12 largest
recordkeepers, in terms of account holders serviced, fully participated
in the program. Because the market is currently dominated by large
recordkeepers, the Department anticipates that additional entry into
the market will be initially dominated by other large recordkeepers.
However, because of the low cost to participate in the PSN, it is
possible that most recordkeepers will eventually participate in it. The
Department solicits comments on its assumptions and estimates regarding
recordkeeper participation.
---------------------------------------------------------------------------
\80\ The analysis only included plans with nonzero plan assets
and nonzero participants. Calculations based on the 2021 Form 5500.
---------------------------------------------------------------------------
4.3. Plans, Plan Participants, and the Number of Automatic Portability
Transactions
This section derives an estimate of the number of automatic
portability transactions. It does so by (1) identifying plans,
participants, and assets covered by PSN-participating recordkeepers,
(2) estimating the number of accounts below the mandatory distribution
threshold, and (3) estimating employment separations and post-
separation behavior. It estimates these figures under the baseline
scenario and under implementation of the statute and regulation.
4.3.1. Plans, Participants and Assets
The proposed regulation has the potential to affect participants
with account balances in any employer-sponsored retirement plan that
is: (1) a qualified trust; (2) an annuity plan described in Code
section 403(a); (3) an eligible deferred compensation plan described in
Code section 457(b) which is maintained by an eligible employer
described in Code section 457(e)(1)(A); or (4) an annuity contract
described in Code section 403(b).\81\ Approximately 635,000 DC plans
reported participants with account balances on their 2021 Form 5500.
These plans cover 86.6 million participants with total account balances
of $9.3 trillion.
---------------------------------------------------------------------------
\81\ While this rulemaking technically may apply to separated,
vested DB participants as well, the Department believes that it is
rare that they would be affected by the rule and therefore does not
include them in its estimates. For further discussion, please see
section 9. Uncertainty. The number of participants is left static
throughout the ten-year time period of analysis. While this could
impact the overall estimate of the benefits and costs, it does not
impact the relative difference between benefits and costs.
---------------------------------------------------------------------------
To understand the number of plans, participants and assets that
could be impacted one would need to know if the plan's recordkeeper is
part of the PSN network and if their account balance is below the
mandatory distribution threshold ($5,000 baseline or $7,000 post
statute and regulation) when they separate from employment. To identify
plans with PSN-participating recordkeepers the Department queried Form
5500 Schedule C data, which has information on a plan's service
providers. The data has limitations. in particular, only large plans
are required to submit the Schedule C, which means the majority of
plans do not have to file the Schedule C. However, the group of
retirement plans required to submit the Schedule C covers nearly 90
percent of participants with account balances and 90 percent of assets,
which are the main variables of interest.
The query of Schedule C data showed that the six recordkeepers that
are founding owner members of PSN provided services to over 34,600
large plans (40 percent of large plans) with 47 million account holders
(61 percent of account holders in large plans). These plans held $5.5
trillion in assets (66 percent of large plan assets) in 2021.\82\
---------------------------------------------------------------------------
\82\ Tabulations presented are based on the 2021 EBSA Private
Pension Plan Bulletin Research File.
---------------------------------------------------------------------------
Some plans with participants that may be impacted by the proposed
rule are not required to file the Form 5500, for example state and
local governmental plans. Account holders who participate in state and
local governmental plans that are not covered by ERISA may also be
affected by the proposed rule if their plan sponsor contracts with an
automatic portability provider to provide automatic portability
services. According to BLS employment data, there are almost 20 million
currently employed state and local government workers in the United
States.\83\ The March 2021 National Compensation Survey: Employee
Benefits in the United States indicates that 18 percent of state and
local
[[Page 5641]]
government workers participate in a defined contribution plan.\84\
Without more granular data, it is difficult for the Department to
determine a reasonably specific proportion of these workers that could
be affected by the proposed rule. However, the Department estimates
that up to 3.5 million state and local government workers participate
in a DC plan that may also incorporate a mandatory distribution
provision for small account balances.\85\
---------------------------------------------------------------------------
\83\ BLS Series Report(s) from the Current Employment Statistics
program: CES9092000001 & CES9093000001, Dec 2022 data element, data
accessed 10/2/2023 from: <a href="https://data.bls.gov/cgi-bin/srgate">https://data.bls.gov/cgi-bin/srgate</a>.
5,087,000 state employees and 14,370,000 local government employees.
\84\ BLS, ``National Compensation Survey: Employee Benefits in
the United States'', (September 2021), Employee Benefits in the
United States, March 2021 (<a href="http://bls.gov">bls.gov</a>).
\85\ Calculated as: 18% x (5,087,000 state employees +
14,370,000 local government employees) = 3,502,260.
---------------------------------------------------------------------------
4.3.2. Accounts With Balances Less Than the Mandatory Distribution
Amount
The proposed regulation directly affects participants with account
balances less than $7,000 in a plan at the time of separation from
employment, previously only $5,000.\86\ To estimate the number of
affected participants, the Department considered the separation rate
for participants within this group and the proportion of DC plan
accounts with balances under $7,000.
---------------------------------------------------------------------------
\86\ There are some accounts that could have balances above the
$7,000 threshold that are still subject to a mandatory distribution.
See Code section 411(a)(11)(D) for circumstances where the amount of
a distribution may be greater than $5,000 if a participant made a
previous roll-in to a plan from an individual retirement plan. In
such circumstances, the roll-in funds are not considered in
determining the $5,000 vested accrued balance, so a larger amount of
assets could be subject to a mandatory distribution under the terms
of the plan.
---------------------------------------------------------------------------
While the Department lacks data specifically on DC accounts with
less than $7,000, there are related data that are useful in the
construction of an estimate. The Employee Benefit Research Institute
(EBRI) reported that in 2020, 40 percent of 401(k) plan accounts with
balances had less than $10,000 in their accounts and 28 percent had
less than $5,000 in their account.\87\ The Department used this data to
estimate that approximately 33 percent of DC plan accounts will have
balances below the new mandatory distribution threshold of $7,000.
Additionally, the Department estimates that 28 percent of DC plan
accounts would have balances below the current mandatory distribution
threshold of $5,000 that represent the baseline. The Department
requests comment on these assumptions and this estimate.
---------------------------------------------------------------------------
\87\ Sarah Holden, Steven Bass, and Craig Copeland. ``401(k)
Plan Asset Allocation, Account Balances and Loan Activity in 2020,''
EBRI Issue Brief #576. November 29, 2022. Retirement Clearinghouse,
LLC, Employee Benefit Research Institute, and contributor Boston
Research Technologies. ``Auto Portability Research & Simulation:
Automating Plan-to-Plan Transfers for Small Accounts.'' Consolidated
Testimony in front of the ERISA Advisory Council, June 8, 2016.
---------------------------------------------------------------------------
4.3.3. Affected Accounts
Table 1 shows the estimates of the number of accounts, how the
affected accounts are identified, and how the affected accounts are
impacted in the baseline scenario and post-rule scenario for the first
year in the estimation period. This section explains the assumptions
and calculations used to obtain the estimates in the table. A similar
table could be constructed for each year, with the difference for each
year being the percent of accounts covered by the automatic portability
network. A key takeaway from the table is the increase in accounts in
plans with the automatic portability feature from the baseline to the
post-rule scenario. The increase in these accounts is the source of
much of the benefits of the rule. Bolded numbers at the bottom of a
table are numbers that flow into a subsequent table.
Table 1--Affected Accounts
------------------------------------------------------------------------
Baseline Post-rule
------------------------------------------------------------------------
Defined Contribution Plan Account 86,573,634 86,573,634
Holders................................
x Job Separation Rate Associated with 20% 20%
Modest Account Balances................
-------------------------------
= Annual Account Churn.................. 17,314,727 17,314,727
x Proportion with Balance of $7,000 or 33% 33%
less...................................
-------------------------------
= Affected Accounts..................... 5,713,860 5,713,860
x Proportion of Separating Account 85% 100%
Holders Subject to Mandatory
Distribution...........................
-------------------------------
= Accounts Subject to Mandatory 4,848,124 5,713,860
Distribution \1\.......................
Accounts Not Subject to Mandatory 865,736 0
Distribution \1\.......................
------------------------------------------------------------------------
\1\ These values flow into Table 3.
A 2023 report by Vanguard suggests that accounts with balances
below $10,000, which is the most similar balance category that aligns
with the mandatory distribution limit and therefore used as a proxy for
this group, are primarily held by participants with household incomes
of less than $50,000.\88\ The Federal Reserve Economic Well-Being of
U.S. Households Survey of Household Economics and Decisionmaking (SHED)
survey provides data on voluntary and involuntary employment
separations by income range. Based on SHED data from 2018-2022, the
Department assumes a separation rate of 20 percent for workers with
annual household incomes of less than $50,000.\89\ The Department uses
this factor as the separation rate for small balance plans in its
estimations.
---------------------------------------------------------------------------
\88\ Vanguard. ``How America Saves.'' 2023.
\89\ Federal Reserve. ``Economic Well-Being of U.S. Households
in 2022.'' (2023). <a href="https://www.federalreserve.gov/publications/files/2022-report-economic-well-being-us-households-202305.pdf">https://www.federalreserve.gov/publications/files/2022-report-economic-well-being-us-households-202305.pdf</a>.
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The Department is interested in the post-separation behavior of
both the employer/plan sponsor and account owner. A survey conducted by
the Callan Institute in 2022 found that 65 percent of DC plan sponsors
sought to retain assets of both retirees and terminated participants,
with 85 percent seeking to retain assets of retirees and 65 percent
seeking to retain assets of other terminated participants.\90\ This
study also suggests that plan sponsors seek to retain separating
employees' plan assets due to cost efficiencies, although half of the
responding plan sponsors did not have a strategy in place for asset
retention. The Department seeks comment from entities such as plan
sponsors and recordkeepers with information on plan policies and
[[Page 5642]]
participant behavior after job separation related to small balance
accounts.
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\90\ Callan Institute. ``2023 Defined Contribution Trends.''
<a href="https://www.callan.com/research/2023-defined-contribution-trends-survey/">https://www.callan.com/research/2023-defined-contribution-trends-survey/</a>.
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Two recordkeepers servicing 8 million accounts, Alight and
Vanguard, published separate experience studies regarding post-
separation actions in 2023.\91\ These reports have informed the
Department's understanding of the disposition of small balance
accounts. As presented in table 2, the two studies report similar rates
of cashouts. However, the proportion of accounts rolling over and
remaining with the prior employer's plan varied significantly. These
differences may be attributable to differing economic conditions,
differing levels of financial literacy, or by plan design elements
unique to the recordkeeper.
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\91\ Vanguard. ``How America Saves.'' 2023; Alight. ``Universe
Benchmarks Report.'' 2023.
Table 2--Post-Separation Behavior for Small Balance Accounts
[$1,000-$4,999]
--------------------------------------------------------------------------------------------------------------------------------------------------------
Remain in plan
Year published Recordkeeper Accounts Cashout (%) (%) Rollover (%)
--------------------------------------------------------------------------------------------------------------------------------------------------------
2023........................................... Vanguard............................... 5,000,000 34 51 15
2023........................................... Alight................................. 3,000,000 39 28 33
---------------------------------------------------------------------------------------------------------
Behavior Assumptions without Automatic Portability Feature *............................................ 36 42 22
Behavior Assumptions with Automatic Portability Feature (Based on RCH Pilot)............................ 27 42 31
--------------------------------------------------------------------------------------------------------------------------------------------------------
* Weighted average of values from Vanguard and Alight reports. Automatic portability is estimated to decrease cashouts by 25% across eligible accounts,
which increases rollovers by approximately 40%.
The Department developed its estimates related to post-separation
actions using both studies to create weighted averages based on the
number of accounts in each study. Therefore, the Department estimates
that 36 percent of separations will result in a cashout in the absence
of the enhanced automatic portability plan feature provided in this
proposal and statutory exemption. The Department acknowledges that the
experience of these two service providers may not be representative of
the experience for all plan recordkeepers and requests comments or
additional data concerning this assumption.
This proposal would affect plan participants differently depending
on the size of their account balance. As discussed above, under current
law, a separating employee with a DC plan account balance of $7,000 or
less can be ``cashed out'' of the plan by their employer without their
consent. A separating employee with DC plan savings between $1,001 and
$7,000 can only be ``forced out'' of their plan into a Default IRA
through an automatic rollover if they do not provide directions to the
employer after receiving a notice from the plan's administrator.\92\
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\92\ See Code section 401(a)(31)(B) as amended by the SECURE 2.0
Act. Previously, this ``force out'' applied to a separating employee
with DC plan savings between $1,001 and $5,000.
---------------------------------------------------------------------------
Alternatively, this proposal would allow for ``automatic
portability transactions.'' These are transactions in which assets held
in a Default IRA established on behalf of an individual from a
mandatory distribution from an employer-sponsored retirement savings
plan are subsequently transferred to an eligible employer-sponsored
plan in which such individual is an active participant, after such
individual has been given advance notice of the transfer and has not
affirmatively opted out of such transfer. As shown above in table 2,
the Department estimates that the statutory exemption would reduce the
propensity to cash out for separating participants with small accounts
by 25 percent. The basis for this estimate is a pilot study of
automatic portability conducted by RCH which reduced cashout rates for
small balance account holders by approximately 50 percent.\93\ The
specific way the pilot study was implemented, however, suggests that
this finding is larger than we would observe under the statutory
exemption. The pilot study had a selected sample of participants who
had been matched to a current, active account. Participants received a
letter encouraging them to call and speak with someone who would
provide advice or guidance about their options and offer to help them
implement a rollover.
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\93\ Boston Research Technologies. ``Eliminating Friction and
Leaks in America's Defined Contribution System.'' 2013.
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Table 3 shows how the affected accounts are sorted in the
Department's estimation process for year one. For both the baseline and
the post-rule scenario, the first step is to group the accounts based
on whether or not the account belongs to a plan with the automatic
portability feature and accounts subject to a mandatory distribution
requirement. There are 865,736 accounts that are not subject to
mandatory distribution in the baseline because their balances are
between $5,001 and $7,000. These accounts are subject to mandatory
distribution in the post-rule scenario. The assumptions from table 2
are then applied to these groups to estimate the share of small
accounts post-separation being cashed out, remaining in the plan, and
those rolled over.\94\
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\94\ These estimates are calculated as follows: 36% baseline
cashout rate x 25% decline from automatic portability = 9 percentage
points. The estimated post-rule cashout rate is the baseline cashout
rate, 36%, minus 9%, which equals 22%. The estimated post-rule
rollover rate is the baseline rollover rate of 22%, plus the 9%
increase from automatic portability, which equals 31%.
[[Page 5643]]
Table 3--Year One Disposition of Accounts
--------------------------------------------------------------------------------------------------------------------------------------------------------
Baseline \1\ Post-rule
----------------------------------------------------------------------------------------------
Accounts not
Disposition of accounts Accounts subject subject to Accounts subject
to mandatory mandatory Total to mandatory Total
distribution distribution \1\ distribution
--------------------------------------------------------------------------------------------------------------------------------------------------------
Accounts with Balances Below $7,000...................... 4,848,124 865,736 5,713,860 5,713,860 5,713,860
Cashout:
Number of Accounts................................... 1,461,709 311,665 1,773,374 1,722,728 1,722,728
Remain in Plan:
Number of Accounts................................... 2,036,212 363,609 2,399,821 2,399,821 2,399,821
Rollover:
Number of Accounts................................... 1,350,202 190,462 1,540,664 1,591,310 1,591,310
x Estimated Percent of Rollovers Going into Default IRAs. 60% 0% ................. 60% 60%
----------------------------------------------------------------------------------------------
Total Default IRAs....................................... 810,122 0 810,122 954,786 954,786
x Year One Account Coverage by AP Network \2\............ 65% 65% 65% 65% 65%
----------------------------------------------------------------------------------------------
Automatic Portability Feature............................ 526,579 0 526,579 620,611 620,611
No Automatic Portability Feature \3\..................... 283,543 0 283,543 334,175 334,175
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ In the baseline, accounts with assets between $5,001 and $7,000 are not subject to mandatory distribution. In the post-rule scenario, all accounts
with assets below $7,000 are subject to mandatory distribution.
\2\ Coverage by the AP network is expected to expand in the post rule scenario while the baseline is assumed to remain constant. The post rule scenario
is modeled using the following coverage assumptions: A = <WClinton>65%, 72%, 78%, 82%, 84%, 86%, 88%, 89%, 90%, 90%{time} ; where element i = years 1
through 10.
\3\ 35 percent of accounts are not assumed to be covered by the AP network in year one. The percent of accounts not covered by the AP network in
subsequent years may be calculated as 1-Ai.
Finally, the Department estimates the number of default IRA
accounts expected to be generated from the roll over activity in year
one. Research finds that approximately 60 percent of all small account
balance IRA rollovers (default IRAs) are the result of automatic
rollovers of mandatory distributions.\95\ The estimates of accounts
rolling over for the first year described in table 3 are applied to the
60 percent factor to generate the estimated number of affected accounts
expected to roll over into a default IRA. This is the group where the
automatic portability transactions will occur. These calculations
continue into table 4, where the number of Default IRAs is shown over
each of the first ten years, followed by the number of Default IRAs
with automatic portability features, as well as the number that
ultimately result in an automatic portability transaction each year.
---------------------------------------------------------------------------
\95\ Approximately 60% is an estimate of the share of IRAs below
the current mandatory distribution threshold of $5,000, established
from a rollover, that remain fully invested in money market funds
after one year of opening. See Figure 6.8. Investment Company
Institute. ``The IRA Investor Profile: Traditional IRA Investors'
Activity, 2007-2016.'' (2018). Goodman, Mukherjee, and Ramnath,
``Set It and Forget It,'' 2023.
[[Page 5644]]
Table 4--Ten Year Counts of Default IRA and Automatic Portability (AP) Transactions
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Estimation period Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Total
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Baseline (RCH/PSN Operates, $5,000 Distribution Limit)..........................................................................................................................................
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Coverage/Match Factor............................ 65% 65% 65% 65% 65% 65% 65% 65% 65% 65%
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Default IRAs..................................... 810,122 810,122 810,122 810,122 810,122 810,122 810,122 810,122 810,122 810,122 8,101,220
Accounts with AP................................. 526,579 526,579 526,579 526,579 526,579 526,579 526,579 526,579 526,579 526,579 5,265,790
AP Transfers..................................... 337,484 337,484 337,484 337,484 337,484 337,484 337,484 337,484 337,484 337,484 3,374,840
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Post-Rule (RCH/PSN Grows, $7,000 Distribution Limit)............................................................................................................................................
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Coverage/Match Factor............................ 65% 72% 78% 82% 84% 86% 88% 89% 90% 90%
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Default IRAs..................................... 954,786 976,384 994,897 1,007,239 1,013,410 1,019,581 1,025,752 1,028,837 1,031,923 1,031,923 10,084,732
Accounts with AP................................. 620,611 702,996 776,020 825,936 851,264 876,840 902,662 915,665 928,731 928,731 8,329,456
AP Transfers..................................... 397,749 519,606 630,585 699,159 724,418 766,494 809,360 817,864 839,779 824,156 7,029,170
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Differences between the Baseline and Post-Rule:
Default IRAs................................. 144,664 166,262 184,775 197,117 203,288 209,459 215,630 218,715 221,801 221,801 1,983,512
Accounts with AP............................. 94,032 176,417 249,441 299,357 324,685 350,261 376,083 389,086 402,152 402,152 3,063,666
AP Transfers................................. 60,265 182,122 293,101 361,675 386,934 429,010 471,876 480,380 502,295 486,672 3,654,330
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
* The Department estimates that approximately 1.4% of all accounts that are matched for an automatic portability transaction will not be transferred due to account holder opt-out. The coverage/
match rates can not be applied directly to the estimates in the table to obtain other estimates in the table. The drop in Automatic Portability transfers from year 9 to year 10 is a function
of the coverage/match rates being the same in both years in the estimation model.
[[Page 5645]]
5. Benefits
This section describes the benefits of the proposed regulation in
comparison to the baseline before the statutory exemption for automatic
portability transactions was enacted by SECURE 2.0 Act. As previously
stated, RCH/PSN already relies on relief the Department provided in PTE
2019-02, an administrative individual exemption, to provide automatic
portability provider services. In general, the benefits of the proposed
regulation are derived from the removal of the uncertainty associated
with the need to rely on an individual exemption. Moreover, RCH/PSN
will benefit from this proposed regulation because they would not have
to request additional relief from the Department when the five-year
term of PTE 2019-02 expires.
The establishment of a statutory exemption encourages the growth of
the market for automatic portability providers. As previously stated,
the Department assumes that RCH currently represents roughly 65 percent
of the accounts in the system and that they have a success rate of 65
percent in matching accounts in that system. This results in roughly
337,000 automatic portability transfers estimated to occur each year in
the baseline. This is compared to the expansion that results from the
rule where the Department estimates the number of automatic portability
transfers to grow to approximately 825,000 at the end of the estimation
window. This estimate represents automatic portability coverage for
approximately 90 percent of the accounts in the DC system. This is
anticipated to result in $2.8 billion of undiscounted benefits arising
through:
<bullet> An increase in potentially affected accounts due to the
increase in the mandatory distribution threshold from $5,000 to $7,000;
<bullet> Projected account balance appreciation and higher returns;
<bullet> Reduction of duplicative fees; and
<bullet> Consolidation of abandoned accounts.
Retaining assets in retirement accounts and avoiding cashouts is an
objective of the statute and proposed rules. Table 5a shows the value
of assets retained in the retirement accounts through a reduction of
the amount of assets cashed out. The impact of the rule is the
difference in the value of accounts that cashout post-rule relative to
the baseline. This amount is not classified as a benefit. Table 5b
shows each component of the quantified benefit stream measured as
improvements between the baseline scenario and the post proposed rule
scenario. The increase overtime in affected accounts is incorporated
into the values displayed.
[[Page 5646]]
Table 5A--Value of Affected Accounts
[$ in millions]
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Year 1 2 3 4 5 6 7 8 9 10 Total
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Retirement Assets Retained via Cashout Avoidance:
Rule......................................... $5,334 $5,202 $5,086 $5,007 $4,967 $4,926 $4,886 $4,865 $4,844 $4,844 $49,962
-Baseline.................................... 5,461 5,461 5,461 5,461 5,461 5,461 5,461 5,461 5,461 5,461 54,609
----------------------------------------------------------------------------------------------------------------------------------------------
= Assets Retained........................ 127 259 375 454 494 534 575 596 617 617 4,647
Present Value of Assets Retained by Discount
Rate:
3 Percent.................................... 123 244 343 403 426 448 468 470 473 459 3,856
7 Percent.................................... 118 226 306 346 352 356 358 347 335 313 3,059
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Table 5B--Value of Affected Accounts
[$ in millions]
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Year 1 2 3 4 5 6 7 8 9 10 Total
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Value of Reallocation of Assets:
Rule......................................... $29,218 $27,792 $26,380 $24,954 $23,554 $22,267 $21,058 $19,905 $18,839 $17,842 $231,808
-Baseline.................................... 29,249 27,570 26,013 24,569 23,229 21,987 20,835 19,767 18,776 17,857 229,851
----------------------------------------------------------------------------------------------------------------------------------------------
= Benefits............................... -31 222 367 385 325 280 223 139 63 -15 1,957
Value of Duplicated Account Fees:
Rule......................................... 17 39 65 94 125 157 191 225 261 295 1,469
-Baseline.................................... 14 28 43 57 71 85 99 113 128 142 780
----------------------------------------------------------------------------------------------------------------------------------------------
= Benefits............................... 3 10 22 38 54 72 92 112 133 153 689
Value of Abandoned Accounts Consolidated:
Rule......................................... 12 16 19 21 22 23 24 25 25 25 211
-Baseline.................................... 10 10 10 10 10 10 10 10 10 10 101
----------------------------------------------------------------------------------------------------------------------------------------------
= Benefits............................... 2 5 9 11 12 13 14 14 15 15 110
Annual Total:
Rule......................................... 29,247 27,846 26,464 25,069 23,701 22,447 21,273 20,155 19,125 18,162 233,488
-Baseline.................................... 29,273 27,609 26,066 24,636 23,310 22,082 20,944 19,890 18,913 18,009 230,732
----------------------------------------------------------------------------------------------------------------------------------------------
= Benefits............................... -26 237 398 433 390 365 329 265 211 153 2,756
Present Value of Benefits by Discount Rate:
3 Percent.................................... -26 224 364 385 337 306 267 209 162 114 2,342
7 Percent.................................... -25 207 325 331 278 243 205 154 115 78 1,911
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
[[Page 5647]]
Lastly, it should enhance the ability of American workers to
achieve their retirement savings goals by consolidating retirement
funds into fewer accounts and investing assets consistent with their
retirement needs. These benefits are described in more detail in the
following subsections.
5.1. Benefits for Plan Participants
The Department expects that DC plan participants with small account
balances that are subject to the Code's mandatory distribution rules
would benefit from increased access to automatic portability
transactions in several ways. First, their retirement account balances
would be consolidated in their new employer's plan, which would reduce
participants' exposure to duplicative fees. Second, the incidence of
missing participants and abandoned accounts would decrease as a result
of the automatic portability providers matching a Default IRA with an
individual's account in their new employer's plan. Third, moving assets
from a Default IRA to a DC plan would likely provide greater investment
returns, on average, as the assets are reallocated from being invested
in money market funds to target date funds and other, more diversified
investments.
5.1.1. Account Consolidation
One potential outcome of a highly mobile labor force (one in which
employees change jobs frequently) is the proliferation of retirement
accounts. Data from the Federal Reserve indicates that approximately 20
percent of employees with a DC plan account and household incomes below
$50,000 changed jobs in the past year.\96\ As participants change jobs,
mandatory distributions into a Default IRAs can result in individuals
owning several retirement accounts.\97\ Once potential outcome of
multiple accounts is individuals paying management or recordkeeping
fees for several accounts. GAO reported a median annual record-keeping
flat fee of $42 per account. Although modest, this fee can contribute
to an erosion of accumulated retirement assets, especially if applied
to multiple, small-balance accounts.\98\ Thus, each account
consolidation provides a benefit to participants equal to the value of
any associated fees or expenses arising from maintaining an additional
retirement account that would be eliminated through consolidation net
of the transfer fee discussed in section 6.4 of the Costs section
below. Accordingly, the Department estimates that over the 10-year
estimation window, account consolidations will total approximately 3.7
million additional accounts when compared to the baseline, yielding
approximately $689 million in undiscounted benefits for participants
accruing from the reduction of duplicative fees for multiple accounts
over the 10-year estimation period.\99\
---------------------------------------------------------------------------
\96\ Federal Reserve. ``Economic Well-Being of U.S. Households
in 2022.'' (2023). <a href="https://www.federalreserve.gov/publications/files/2022-report-economic-well-being-us-households-202305.pdf">https://www.federalreserve.gov/publications/files/2022-report-economic-well-being-us-households-202305.pdf</a>.
\97\ Employee Benefit Research Institute. ``EBRI IRA Database:
IRA Balances, Contributions, Rollovers, Withdrawals, and Asset
Allocation, 2017 Update.'' (2020).
\98\ Government Accountability Office. ``401(k) Plans: Greater
Protections Needed for Forced Transfers and Inactive Accounts.''
(2014).
\99\ The estimate is calculated as follows: 3,654,330 account
consolidations x $42 = $153,481,860 in benefits. $153,481,860 x
average of 4.5 years receiving benefit per account = $689,003,322 in
total benefits. At a discount rate of 3 percent, this results in
$552,051,586 in total benefits. At a discount rate of 7 percent,
this results in $417,450,008 in total benefits.
---------------------------------------------------------------------------
5.1.2. Missing Participants and Abandoned Accounts
Another consequence of the proliferation of small-balance accounts
is the potential for a high volume of retirement assets that are
``abandoned'' by participants. Over time, DC plan account holders that
have separated from their employers may become disconnected from their
retirement assets as a result of mandatory distributions into Default
IRAs. Abandonment of these accounts may be attributable to any number
of reasons but are often the result of participants that are missing
(cannot be found by the plan provider), unresponsive (failing to
respond to communications from the plan provider), or unaware that an
account has been established on their behalf. Goodman, Mukherjee, and
Ramnath (2023) found that 0.4 percent of retirement-aged IRA owners
abandoned their IRAs, amounting to $66 million (in 2016 dollars).\100\
Because this figure only relates to retirees, it represents only a
fraction of the assets that exist in abandoned IRAs for the larger pool
of IRA owners of all ages; a portion of these IRA owners would have
been impacted by mandatory distributions. The Department estimates that
1.0 percent of Default IRA owners will abandon their IRAs, which is
consistent with Goodman, Mukherjee, and Ramnath (2023).\101\ It seems
likely that IRA owners who experienced force-outs may have higher
abandonment rates than other IRA owners. Owners who experienced force-
outs allowed themselves to be defaulted into an IRA instead of taking
action to perform a rollover or obtain a cashout, indicating they may
have a tendency to be unaware or passive, characteristics that may
increase the likelihood of abandonment. From FY 2017 through FY 2023,
EBSA benefit advisors have located 4,732 participants through a joint
initiative with the Pension Benefit Guaranty Corporation (PBGC) to
connect individuals with retirement benefits valued at $227.6 million.
---------------------------------------------------------------------------
\100\ In this study, account abandonment is proxied by a failure
to claim the account over ten years after a legal requirement to do
so; specifically, the required minimum distribution requirement.
Goodman, Mukherjee, and Ramnath, ``Set It and Forget It,'' 2023.
\101\ Id.
---------------------------------------------------------------------------
Given the threshold for mandatory distributions increases to $7,000
in 2024 while the adoption of auto-enrollment policies by plan sponsors
continues to expand, there will be an increased number of potential
Default IRAs, and, as a result, the number of accounts that might be
abandoned or have missing participants will also increase.\102\
However, over time the Department estimates a minimum of approximately
37,000 accounts will be saved from abandonment with the statutory
exemption over the 10-year estimation period (1.0 percent of the
approximately 3.6 million accounts that will be consolidated through
automatic portability transactions when compared to the baseline). The
Department further estimates the consolidation of abandoned accounts
would provide approximately $109.6 million in undiscounted benefits for
participants over the 10-year estimation window when compared to the
baseline.\103\ The Department requests comment on these estimates.
---------------------------------------------------------------------------
\102\ Id.
\103\ The estimate is calculated as follows: 3,654,330 account
consolidations from automatic portability transactions x 1% of
retirement accounts that are abandoned = 36,544 abandoned accounts
consolidated. 36,544 accounts x $3,000 average account balance for
Default IRAs = $109,632,000. At a discount rate of 3 percent, this
results in $90,685,800 in total benefits. At a discount rate of 7
percent, this results in $71,592,717 in total benefits.
---------------------------------------------------------------------------
5.1.3. Improve Asset Allocation
Upon job separation, some employees with small-balance accounts
between $1,001 and $7,000 (in 2024) \104\ can be forced out of their
previous employer's plan by a mandatory distribution of
[[Page 5648]]
their accumulated retirement assets that is automatically rolled over
to a Default IRA.\105\ The Department has issued regulations providing
a safe harbor that requires the employee's former employer to invest
amounts held in a Default IRA in an investment product that preserves
principal and provides a reasonable rate of return.\106\ In practice,
many plans seek to implement the safe harbor by investing in money
markets funds; however, the tradeoff for relative safety is potential
returns. A 2014 GAO study reported that the average return for money
market funds in the preceding 10 years was 1.5 percent, considerably
lower than the average 6.3 percent return for target date funds common
among 401(k) plans.\107\ Moreover, few participants take action to
reallocate these default investments away from money market funds.\108\
---------------------------------------------------------------------------
\104\ See Code section 411(a)(11)(D) for circumstances where the
amount of a distribution may be greater than $5,000 ($7,000
beginning in 2024) if a participant made a previous roll-in to a
plan from an individual retirement plan. In such circumstances, the
roll-in funds are not considered in determining the $5,000 vested
accrued balance, so a larger amount of assets could be subject to a
mandatory distribution under the terms of the plan.''
\105\ Code section 401(a)(31)(B); see SECURE 2.0 Act, Sec. 304,
Updating Dollar Limit for Mandatory Distributions.
\106\ 29 CFR 2550.404a-2(c)(3)(i).
\107\ Government Accountability Office (GAO). ``401(k) Plans:
Greater Protections Needed for Forced Transfers and Inactive
Accounts.'' (2014).
\108\ Goodman, Mukherjee, and Ramnath, ``Set It and Forget It,''
2023. Investment Company Institute. ``The IRA Investor Profile.''
2018. 80% is an estimate of the share of IRAs below the current
mandatory distribution threshold of $5,000, established from a
rollover, that remain fully invested in money market funds after one
year of opening. See Figure A.2 in the Appendix.
---------------------------------------------------------------------------
The difference in the average rate of return between these two
typical investment strategies could have a substantial impact on the
value of retirement assets for investors with small-balance accounts,
which are susceptible to capital erosion from fees and inflation. GAO
projected investment outcomes over 30 years and found that an initial
balance of $1,000 was estimated to be valued at over $2,700 under the
average returns for target-date funds (6.3 percent) but $0 under the
average returns for money market funds (1.5 percent), largely as a
result of account fees outweighing minimal returns.\109\ This suggests
that assets transferred into Default IRA accounts, which are typically
invested in low-risk money market funds, could be better preserved and
invested elsewhere.\110\ Consolidating these assets in a DC plan could
improve the asset allocation of, and potentially better preserve,
retirement assets for many retirement investors.
---------------------------------------------------------------------------
\109\ Government Accountability Office (GAO). ``401(k) Plans:
Greater Protections Needed for Forced Transfers and Inactive
Accounts.'' (2014).
\110\ Id.
---------------------------------------------------------------------------
As presented in table 4 of the Affected Entities section, the
Department estimates that just over 10 million Default IRAs will be
created in the ten-year estimation period, compared to 8.1 million in
the baseline, a change of approximately 2.0 million accounts. Of these
10 million Default IRAs, 8.3 million are assumed to be in the automatic
portability network under the rule (compared with 5.3 million at the
baseline). The results are that 7.1 million accounts will be moved into
a new employer's DC plan via automatic portability, compared with 3.4
million in the baseline, an improvement of 3.7 million between the two
scenarios. This results in an asset allocation with a more favorable
return for account owners.
Similar to the GAO analysis, the Department utilized updated data
covering the 15 most recent years to estimate the returns to money
market funds characteristic of Default IRAs and for target-date funds
(TDFs) typical of DC plans, further supporting an analysis of how the
change in asset allocation might potentially alter investment outcomes
as a result of automatic portability transactions. Returns to money
market funds from 2008 to 2022 averaged 0.7 percent, while returns to
TDFs averaged 8.1 percent over the same period.
The Department estimates that this reallocation of assets from
Default IRAs to DC plans would result in approximately $2.0 billion in
additional benefits when compared to the baseline value.\111\
---------------------------------------------------------------------------
\111\ Returns from DC plans are estimated using an asset
distribution characteristic of typical default investments for TDFs,
80% stocks (S&P 500 annual returns) and 20% bonds (Baa Corporate
returns). Returns for Default IRAs are estimated using an asset
distribution characteristic of typical default investments for
Default IRAs, 98% Treasury Bills and 2% Treasury Bonds. NYU Stern
School of Business. Historical Returns on Stock, Bonds, and T-Bills:
1928-2022. Accessed: https://pages.stern.nyu.edu/~adamodar/
New_Home_Page/data.html. At a discount rate of 3 percent, this
results in $1,699,169,773 in benefits. At a discount rate of 7
percent, this results in $1,422,157,975 in benefits.
---------------------------------------------------------------------------
5.1.4. Reduced Participant Benefits Because More Participants Are
Subject to Mandatory Distributions
The increase in the mandatory distribution threshold from $5,000 to
$7,000 means that some separating participants will have fewer choices
about how to deal with their account. This reduces the net benefits for
those plan participants. Prior to the passage of the SECURE 2.0 Act,
many separating participants in this account balance range would have
left their account in their former employer's plan, but some of those
participants would now be subject to a mandatory distribution into a
Default IRA. If the account assets end up in a Default IRA, the
Department expects that the participant would generally be worse off
than in their former employer's plan because the assets would be
subject to little or no growth given that they typically would be
invested in money market funds and subject to relatively high fees.
Other separating participants in the $5,000 to $7,000 range may end up
being rolled into a new employer's plan; they would be better or worse
off depending on how the services, products, and fees in the new
employer's plan compared to the former employer's plan and depending on
how long the assets lingered in the Default IRA before being rolled
over into the new employer's plan. Overall, the affected participants
would be worse off on average.
5.2. Benefits for Plans, Automatic Portability Providers, and Other
Service Providers
The estimated benefits for participants that are described in the
preceding subsection result from the predictability the proposed rule
provides to the marketplace. This predictability is intended to
encourage the growth and efficiency of the automatic portability
market. RCH/PSN will no longer need an administrative individual
exemption or to apply to the Department for additional relief when the
term PTE 2019-02 expires in 2024. For the same reason, the proposed
rule removes barriers to entry for potential future automatic
portability providers. The proposed rule will bring increased certainty
to the robust network of entities involved in automatic portability
arrangements, consisting of the automatic portability provider(s),
recordkeepers, plans and plan sponsors, and plan participants and
Default IRA owners, which will increase the reach, efficiency, and
long-term viability of automatic portability transactions.
5.3. Benefits for Financial Institutions
Financial institutions would benefit from more assets being kept in
consolidated, retirement savings accounts and being invested rather
than being cashed out because the financial institutions would earn
more fees. Cashouts from small balance accounts are typically taken as
cash and spent. The loss of retirement assets associated with cashing
out small balance accounts and Default IRAs will be considerably
curtailed with the adoption of automatic portability programs by plans
sponsors and recordkeepers. At job separation, a small balance account
holder (who has an account with $5,000 or less, or beginning in 2024,
an account with $7,000 or less) can be forced out of their former
employer's retirement plan.
[[Page 5649]]
While a rollover may result in procedural or paperwork burdens for the
participant, a cashout is often the most straightforward option.
Automatic portability programs, however, have the potential to reduce
such burdens for participants, resulting in a higher volume of
rollovers and fewer cashouts. Because cashouts are negatively
correlated with the size of account balances (i.e., small account
balances are more likely to be cashed out), the likelihood of cashouts
at future job separations is expected to decrease as more assets remain
in an individual's DC plan account, compounding the benefits of
automatic portability transactions over time.
Table 6--Accounting Statement
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Benefits:
Non-Quantified:
<bullet> Increased mandatory distribution threshold leads to cost savings for plans but reduced benefits
for separating participants.
<bullet> Increased ease of retirement planning due to account consolidation.
----------------------------------------------------------------------------------------------------------------
Estimate Year dollar Discount rate Period covered
(primary) (%)
----------------------------------------------------------------------------------------------------------------
Annualized Monetized ($ Millions/Year).......... $191.12 2023 7 2024-2033
234.19 2023 3 2024-2033
Costs:
Annualized Monetized ($ Millions/Year)...... $1.21 2023 7 2024-2033
1.42 2023 3 2024-2033
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Transfers:
Non-Quantified:
<bullet> Requiring automatic portability providers to offer the same terms to any plan will ensure
sponsors not be restricted from engaging with more than one provider. This reduces barriers to entry,
which is a transfer to providers entering the market, and encourages lower fees, which is a transfer to
participants.
<bullet> Increasing the mandatory distribution threshold will reduce participant choice in how they
handle their accounts. Conversely, this will give sponsors increased latitude in how they handle
accounts. No longer having to administer small accounts is a transfer from participants to sponsors.
<bullet> Decreasing the number of Default IRA accounts will affect financial institutions that service
these accounts. This will represent a transfer to institutions that service employer plans.
----------------------------------------------------------------------------------------------------------------
Annualized Monetized ($ Millions/Year).......... 52.00 2023 7 2024-2033
65.55 2023 3 2024-2033
----------------------------------------------------------------------------------------------------------------
6. Costs
This analysis estimates the changes to cost burdens associated with
the provision of automatic portability services under the proposed rule
when compared to a baseline where the automatic portability provider
operates under PTE 2019-02. The costs presented can be generally
grouped into two categories: start-up and ongoing. The start-up costs
are associated with updating processes or documents to bring existing
practices into compliance with the proposed rule where there is a
difference between operations under the PTE when compared to the
proposed rule. The ongoing costs generally represent costs incurred due
to both the increase in the threshold from $5,000 to $7,000 which is
expected to create more default IRA accounts which is the group that
automatic portability transactions occur within, and the growth of the
automatic portability system which is assumed to result from the
proposed rule. Over the first 10 years, the Department estimates an
undiscounted cost of approximately $16,206,196, annualized to
$1,620,620.\112\ The undiscounted stream of estimated costs is
presented in table 7 below.
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\112\ Using a 3 percent discount rate results in a cost savings
of approximately $14,160,023, annualized to $1,416,002. Using a 7
percent discount rate results in a cost savings of approximately
$12,073,029, annualized to $1,207,303.
Table 7--Estimated Costs Associated With Rule
[$ in thousands]
--------------------------------------------------------------------------------------------------------------------------------------------------------
Year 1 2 3 4 5 6 7 8 9 10 Total
--------------------------------------------------------------------------------------------------------------------------------------------------------
Materials and Postage.......... $2 $3 $9 $14 $16 $19 $21 $22 $24 $23 $154
Labor Costs.................... 6,206 88 572 895 1,041 1,226 1,415 1,483 1,580 1,547 16,052
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Total All Cost............. 6,208 90 581 909 1,057 1,245 1,436 1,505 1,604 1,570 16,206
Present Value of Total Cost:
3 Percent.................. 6,027 85 532 808 912 1,042 1,168 1,188 1,229 1,168 14,160
7 Percent.................. 5,802 79 474 693 754 829 894 876 872 798 12,073
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[…truncated; see source link]Indexed from Federal Register on January 29, 2024.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.