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- Reduces abandoned retirement accounts due to unresponsiveness or outdated contact information.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.