The Department of Labor recently released a proposed regulation explaining a new exemption created by the SECURE 2.0 Act that allows specific providers to charge a fee for conducting “automatic portability transactions.” Although Auto-Portability is designed to help workers manage their retirement accounts when changing jobs, it’s crucial for plan sponsors and service providers to understand what Auto-Portability can and cannot do.

What It Is

An Auto-Portability transaction is a rollover from a Safe Harbor IRA to an employer’s retirement plan for an active participant who is given prior notice and has not opted-out of the rollover. These Auto-Portability transactions only apply to Safe Harbor IRA accountholders with balances between $1,000–$7,000 who have been unresponsive or missing.

A few assumptions need to take place to facilitate this transaction. It assumes that the Safe Harbor IRA accountholder is now re-employed and is participating in their new employer’s 401(k) or other defined contribution plan. It also assumes that the new plan has agreed to accept Auto-Portability rollovers and is with a recordkeeper that is in the Auto-Portability network. Lastly, it assumes that automatically moving the monies back to an employer plan is in the best interest of the IRA accountholder versus leaving it in an IRA and avoiding additional handling fees.

How It Works

The rules for automatic rollovers remain the same. Balances $7,000 and under may be rolled over to an IRA if the former employee doesn’t elect a direct distribution or rollover. Balances under $1,000 may also be rolled over based on the plan’s terms. If the plan sponsor follows DOL Safe Harbor rules, they are relieved of fiduciary responsibility when assets are automatically deposited into a Safe Harbor IRA.

After SECURE 2.0, if a Safe Harbor IRA is moved to an Auto-Portability Provider (APP), the APP will search for the account owner through the Auto-Portability network. If the account owner is participating in another employer’s plan within the network, the APP can roll over the IRA to the new plan and collect a fee after proper notice.

Benefits

• Reduces abandoned retirement accounts due to unresponsiveness or outdated contact information.
• Consolidates retirement savings into one account, potentially reducing fees.
• Ensures investments align with the participant’s choices in the new plan or the plan’s default investment.

Considerations

• This service is optional for plan sponsors and recordkeepers.
• Both the recordkeeper and plan sponsor must agree to share data with the Portability Services Network and accept automatic portability rollovers.
• Plan sponsors must prudently select the APP, considering fees, services, benefits, and risks.
• The APP acts as a fiduciary if the account owner does not consent to the rollover, subject to DOL’s proposed regulations.
• Currently, there’s only one APP active due to connectivity barriers across the recordkeeping industry.
• If a plan participant wants to roll over funds to a new employer, a direct distribution or rollover initiated by the accountholder from the Safe Harbor IRA provider would likely be a quicker transfer solution.
• IRALOGIX also believes that if DOL were to permit a Safe Harbor IRA default investment to include a qualified default investment alternative (QDIA) feature and require Safe Harbor IRA providers to offer quality diversification options, Auto-Portability and its expense and complication would not be necessary.

IRALOGIX Opportunities & Solutions

IRALOGIX builds institutional IRAs for its customers where the IRA in most cases is equal to or better than most 401(k) plans. We support innovation in the retirement industry and are exploring ways to participate in reducing abandoned retirement accounts.

IRALOGIX actively attempts to locate missing Safe Harbor IRA owners in order to give complete control to the IRA investor on what they want to do with monies. Additionally, individuals will soon be able to search for their lost retirement accounts, including those rolled over to Safe Harbor IRAs, through the “Retirement Savings Lost and Found” database created under SECURE 2.0 by the DOL/IRS.

Almost one year after the SECURE 2.0 Act passed into law, the IRS is issuing guidance to help employers, IRA owners, and service providers begin implementing some of the changes made by the Act. This guidance, Notice 2024-02, provides information on 12 provisions from SECURE 2.0, including the provision that allows employees to designate SEP or SIMPLE IRA plan contributions as after-tax Roth IRA contributions.

Although the option to treat SEP and SIMPLE IRA contributions as Roth was effective beginning in 2023, a lack of guidance on plan documents, tax issues, and timing has prevented IRA providers from being able to offer these enhanced features to SEP and SIMPLE IRA plans. While this notice provides insight on taxation and certain IRS reporting, much is left to the imagination as to how and when these provisions can be implemented. More detailed guidance is needed in the form of plan documents, IRA documents, model notices and timing, but here’s what we know today: 

Employers have options – Employers are not required to offer a Roth option in their SEP or SIMPLE IRA plan. If they choose to offer it, they can offer Roth treatment just for employee contributions, just for employer contributions, or for both.

Existing IRA documents can be used – The documents used to establish SEP and SIMPLE IRA plans—and the IRAs to hold plan contributions—need to be updated for several major law changes that have occurred since these documents were last published or approved by the IRS. Until the IRS issues new documents or other guidance, existing documents may be used without formal amendment. This clarifies that plan and IRA establishment documents do not need to be updated to allow the new provisions, and Roth contributions made for an employee under a SEP or SIMPLE IRA plan will be deposited into a Roth IRA.

Notice and elections are required – If an employer wants to offer a Roth option, the employer must make a written election. Employers must also give employees the same opportunity to make Roth contribution elections as is given for making pre-tax contribution elections for SIMPLE IRA plans, and SEP plans must provide an “effective opportunity.” These conditions may require additional adoption agreement-type elections for employers and additional notices for employees. Employees must elect in writing to treat contributions as Roth before the contributions are made to the plan. Employers cannot default employees into Roth contributions, such as with an automatic enrollment feature in a SIMPLE IRA plan.

Employee Roth deferrals require payroll changes – If an employee elects to treat their SIMPLE IRA salary deferral as Roth, the employer (or payroll provider) will calculate the deferral amount after calculating payroll taxes. In other words, these contributions are subject to income tax withholding, FICA, and FUTA taxes. Employees must include Roth deferrals in their taxable income for the same year in which the employee would have received the money as wages. These after-tax deferrals will be reported to the employee and the IRS by the employer on Form W-2, Wage and Tax Statement.

Employee Roth treatment of employer contributions is more complicated – If an employee elects to treat employer contributions under a SEP or SIMPLE IRA plan as Roth contributions, the employer will make and deduct the contribution in the same manner as they have historically done. However, a Form 1099-R must be generated to report the amount of employer contributions as a taxable conversion to the employee’s Roth IRA. This reporting will trigger taxation for the employee in the year the contribution is made (regardless of whether the contribution was made for the prior plan year.) Employees must be made aware of this timing distinction for tax planning purposes.

Next steps

The IRS has taken the first step in assisting employers, IRA owners, and service providers with understanding how SEP and SIMPLE Roth contributions may be made. But there are still many unanswered questions, such as whether providers will draft addendums to plan agreements to capture employer elections, the timing for notifying employees of new features and capturing their elections, when the features can be added to existing plans, and whether SIMPLE-Roth assets can be commingled with regular Roth assets.

IRALOGIX is working diligently to ensure our platform and procedures continue to assist our clients in navigating the regulatory framework and new opportunities. We will provide further updates in the months ahead.

In its third attempt to update a 1975 regulation defining when a financial professional is providing fiduciary investment advice to retirement investors, the Department of Labor (DOL) is proposing a new “Retirement Security” rule that would require a uniform standard of conduct for more types of financial transactions and investments, including one-time rollover advice. The DOL believes the existing regulation, established in 1975, should be updated to better protect retirement investors as they rely on the advice of broker-dealers, investment advisers and insurance agents when making complex decisions about managing their retirement savings.

Expanded Reach

Regulatory agencies, like the DOL, FINRA and SEC, have long been concerned that despite the trust and reliance many investors place in financial professionals, some advice providers who are not subject to a “best interest” standard make recommendations that favor their own financial interests rather than the investor’s best interests. Of particular concern are recommendations to roll over a lifetime of retirement plan savings to an IRA with high fees or retail investment pricing or to purchase an annuity. The DOL’s proposal pulls into its definition of fiduciary advice certain investments and transactions it believes are not subject to fiduciary standards under ERISA or other regulators’ rules, including recommendations to distribute or roll over retirement plan savings to an IRA, recommendations on insurance products and other non-securities investments (e.g., bank products, real estate), and advice that broker-dealers render to plan sponsors at a plan level.

A New Fiduciary Status Test

The proposal would replace the 1975 five-part test for determining when investment advice or recommendations trigger ERISA fiduciary status with a new fiduciary status test. A financial professional would be an investment advice fiduciary under ERISA and the Internal Revenue Code if they

1. Make an investment recommendation or provide advice to a retirement investor (plan, plan fiduciary, plan participant or beneficiary, IRA, IRA owner or beneficiary or IRA fiduciary),
2. Receive a fee or other compensation for the advice or recommendation, and
3. Make the recommendation in the context of a professional relationship in which an investor would reasonably expect to receive sound investment recommendations that are in their best interest:
   • The person directly or indirectly (e.g., through or together with any affiliate) has discretion over investment decisions for the retirement investor;
   • The person directly or indirectly (e.g., through or together with any affiliate) makes investment recommendations to investors on a regular basis as part of their business, and the recommendation is provided under circumstances indicating that the recommendation is based on the particular needs or individual circumstances of the retirement investor and may be relied upon by the retirement investor as a basis for investment decisions that are in the retirement investor’s best interest; or
   • The person represents or acknowledges that they are acting as a fiduciary when making investment recommendations.

No “Regular Basis” Requirement

The proposed definition does not include the requirements from the 1975 regulation that a financial professional provide advice to the investor “on a regular basis” or that there be a “mutual agreement, arrangement or understanding” that the advice will serve as a “primary basis for investment decisions.” The DOL states these elements “worked to defeat retirement investors’ legitimate expectations when they received investment advice from trusted advice providers.” As proposed, fiduciary status for a financial professional providing nondiscretionary advice would be based on whether they make investment recommendations as a regular part of their business and make a personalized recommendation to the investor who reasonably believes the advice is being made in their best interest.

The DOL notes that if fiduciary status is applied to a particular recommendation, the proposed rule does not impose an automatic fiduciary obligation to continue to monitor the investment or the retirement investor to ensure the recommendations remain prudent and appropriate for the plan or IRA.

Only Two PTEs Available

Financial professionals who meet the DOL’s definition of investment fiduciary must satisfy the conditions of a prohibited transaction exemption (PTE) to mitigate conflicts of interests and receive payment that would otherwise be prohibited by law. The DOL is proposing amendments to several of its existing PTEs to ensure all retirement investors receive the same standard of care, regardless of the product or service they receive (including PTEs 75-1, 77-4, 80-83, 83-1, 86 84-24-128 and 2020-02). As a result of these amendments, the only exemptions available for receiving conflicted compensation would be PTE 2020-02 for advice with respect to the wide universe of investments recommended to retirement investors, or PTE 84-24 for recommendations by independent insurance agents.

Although PTE 2020-02 is being amended to include more disclosure and documentation requirements, the DOL states the compliance obligations are generally consistent with those set forth in the SEC’s Regulation Best Interest (Reg. BI) and Interpretation of Conduct for Investment Advisers for advice to retail customers on securities. Therefore, broker-dealers and investment advisers that have already adopted compliance with Reg. BI or the fiduciary obligations under the Advisers Act “should be able to adapt easily to comply with the PTE.”

Other changes to PTE 2020-02 include coverage of pure robo-advice, expanded disqualifications from using the PTE, and additions to the retrospective review and self-correction processes to mandate self-reporting and payment of excise taxes.

Next Steps

The DOL and its proposals have a long road ahead before these rules could become effective, including probable legal challenges from affected industries. The first step in the process will be for the DOL to review comments on its proposal, which must be submitted to the DOL by January 2, 2024.

As always, IRALOGIX continues to vigilantly monitor this regulation. Our platform and procedures will continue to assist our clients in navigating these regulatory requirements with minimal disruptions to their operations. We will provide further updates in the months ahead.

NEWS PROVIDED BY Envestnet
06 Nov, 2023, 08:00 ET

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New Managed Accounts Offering Will Enable Asset Management Firms to Offset High Cost of Administering IRA

The IRA Accounts and Servicing will be Powered by Leading Fintech Company, IRALOGIX

CHICAGO and BERWYN, Pa., Nov. 6, 2023 /PRNewswire/ — The retirement groups within Morningstar Investment Management LLC (“Morningstar Retirement”), a subsidiary of investing insights firm Morningstar, Inc. (Nasdaq: MORN), and Envestnet, a leading provider of integrated technology, intelligent data and wealth solutions, are planning to launch a managed accounts service for Individual Retirement Accounts (IRA) powered by IRALOGIX. This new offering will be custodied by Matrix, a subsidiary of Broadridge Inc (NYSE: BR) and will make it easy for individuals—regardless of account balance—to receive personalized investment advice on their IRAs. It combines Envestnet’s fund selection and model portfolio-building capabilities with Morningstar Retirement’s managed accounts methodology, investment engine, and digital delivery platform.

Expected to launch in the first quarter of 2024, the service will be packaged within an IRA serviced by IRALOGIX, which offers low-cost investments by leveraging institutional share classes rather than retail share classes. Morningstar Investment Management’s platform blends those portfolios to design unique portfolios that are aligned with an account holder’s specific profile and situation. It then manages that portfolio for the account holder, adjusting the investment strategy as the person’s situation and investment objectives evolve. The IRA product(s) will also have no minimum account size requirements, making it easier for those with low balances to gain access to personalized advice. IRALOGIX is a leading fintech company in which Morningstar Inc. is an investor.

“We believe the IRA space is ripe for innovation and personalization,” said Brock Johnson, president of Morningstar Retirement. “Nearly 40 percent of U.S. households own an IRA, yet the vast majority do not have an advisor and will never be able to retain an advisor because their balances are too small. With the help of Envestnet Workplace Solutions and IRALOGIX, we aim to advance access to personalized investment advice and institutionally priced investment options in the IRA space. Every account holder should have access to not only a professionally built investment portfolio, but also one highly configured to their specific needs and objectives.”

This service uses the same platform that powers Morningstar Retirement’s traditional managed accounts service, which today brings personalized investment and savings advice to more than 2 million participants in employer-sponsored retirement plans. This latest managed account offering allows for Envestnet to develop the fund-level models that serve as the bedrock for the portfolio-building process within the IRA service.

“This service is a very powerful collaboration that we believe will give asset managers, broker-dealers, recordkeepers, and advisors options to shift the growing cost of administering their IRA programs to a private-labeled offering, while still retaining their existing revenue streams,” said Sean Murray, Head of Envestnet Workplace Solutions. “It is a win for investors. It is a win for asset managers. And it is a win for the wealth and retirement industry.”

The managed IRA solution enables Envestnet to develop model portfolios based on an asset manager’s underlying proprietary funds and delivered through Morningstar Retirement’s managed accounts service.

About Morningstar Retirement

The Morningstar Retirement group within Morningstar Investment Management LLC, a subsidiary of Morningstar, Inc., and a registered investment adviser, offers products designed to help individuals reach their retirement goals. Our products and services also enable industry players to differentiate their services, stay competitive, and reach new markets. We provide some of the industry’s leading off-the-shelf offerings and can collaborate with our clients to design new products from the ground up using our unique data integrations, distribution networks, investment expertise, and methodologies.

About Envestnet

Envestnet is transforming the way financial advice is delivered through an ecosystem of technology, solutions, and intelligence. By establishing the connections between people’s daily financial decisions and long-term financial goals, Envestnet empowers them to make better sense of their finances and live an Intelligent Financial Life™. With more than $5.4 trillion in platform assets—more than 107,000 advisors, 16 of the 20 largest U.S. banks, 47 of the 50 largest wealth management and brokerage firms, more than 500 of the largest RIAs, and thousands of companies, depend on Envestnet technology and services to help drive better outcomes for their businesses and for their clients.

Envestnet refers to the family of operating subsidiaries of the public holding company, Envestnet, Inc. (NYSE: ENV). For more information, please visit www.envestnet.com, and follow us on LinkedIn and X (@ENVintel).

About IRALOGIX

IRALOGIX™ is reshaping the landscape of the $13 trillion IRA marketplace through its state- of-the-art wealth management technology. This innovative platform offers fully paperless, white-label IRA record-keeping solutions, allowing financial institutions to customize their IRA offerings seamlessly. With the flexibility to compete effectively across all segments of the IRA market, regardless of account size. Institutional clients have the freedom to utilize their internal investments and advisory capabilities or opt for top-tier industry providers. By integrating with your market strategy, IRALOGIX streamlines IRA services, empowering business expansion profitably. Explore more about their offerings at www.iralogix.com.

About Broadridge

Broadridge Financial Solutions (NYSE: BR), a global Fintech leader with over $6 billion in revenues, provides the critical infrastructure that powers investing, corporate governance, and communications to enable better financial lives. We deliver technology-driven solutions that drive business transformation for banks, broker-dealers, asset and wealth managers and public companies. Broadridge’s infrastructure serves as a global communications hub enabling corporate governance by linking thousands of public companies and mutual funds to tens of millions of individual and institutional investors around the world. Our technology and operations platforms underpin the daily trading of more than $10 trillion of equities, fixed income and other securities globally. A certified Great Place to Work®, Broadridge is part of the S&P 500® Index, employing over 14,000 associates in 21 countries.

For more information about us, please visit www.broadridge.com.

Envestnet is separate from and not affiliated with either Morningstar, Broadridge, or IRALOGIX. This material should not be construed as a recommendation or endorsement of any particular product, service, individual or firm.

This release refers to products or services that may be in development and not yet available. Accordingly, nothing herein should be construed as a representation or legal agreement by Envestnet to make available specific products or services (including, without limitation, concepts, systems or techniques.)

 

SOURCE Envestnet

The Department of Labor is on the verge of unveiling a forthcoming “Retirement Security” rule. This rule represents a fresh set of regulations aimed at clarifying the circumstances under which non-discretionary investment recommendations by advisors to retirement plans, plan participants, and IRA owners will trigger fiduciary status under ERISA and the Internal Revenue Code.

When an advisor is classified as a fiduciary, they must adhere to rigorous standards of prudence and loyalty. Furthermore, ERISA mandates that fiduciaries abstain from participating in certain “prohibited transactions” that could potentially create conflicts of interest between the fiduciary and the investor. Such conflicts can arise when a fiduciary can boost their compensation by suggesting investments with higher fees or advocating for an IRA rollover.

Over the past decade, the Department of Labor has made multiple efforts to expand the range of advisory services covered by the fiduciary definition to ensure that advice always serves the best interests of retirement savers, including recommendations regarding IRA rollovers. Previous versions of the DOL’s revised ERISA 3(21) fiduciary rule and its interpretation of the “regular basis” component in Prohibited Transaction Exemption (PTE) 2020-02 have been legally contested by industry stakeholders and subsequently invalidated.

Once the new proposed rule is officially published, the Department of Labor will seek input from the industry and conduct hearings before moving forward to finalize the new fiduciary rule by the next summer. The timing is crucial for the DOL to safeguard the final rule from potential repeal if there is a change in the presidential administration following the 2024 election.

While the exact approach adopted by the DOL remains uncertain until the proposal is released and thoroughly assessed, it is anticipated that one-time IRA rollover recommendations will be incorporated into the definition of fiduciary investment advice.

As always, IRALOGIX continues to vigilantly monitor this regulation, and our platform and procedures will persist in assisting our clients in navigating these regulatory requirements with minimal disruptions to their operations.  We will provide further updates in the months ahead.