While the US Department of Labor’s (DOL’s) recently proposed regulations regarding automatic portability transactions would place the onus of compliance on transfer providers, a number of the provisions would trigger ERISA fiduciary considerations for plan administrators of defined contribution plans that offer these automatic portability transactions, particularly “transfer‑in” plans.
Automatic portability transactions would permit a former employee’s small defined contribution plan account balance that has already been automatically rolled over into an individual retirement plan (such as an IRA) to be automatically transferred to the defined contribution plan of the former employee’s new employer (a transfer-in plan). Throughout the process, the automatic portability transaction provider acts as a fiduciary to the intermediary individual retirement plan.
The proposed regulations were intended to implement the statutory prohibited transaction exemption enacted as part of SECURE 2.0 to allow automatic portability providers to receive compensation for facilitating the transactions, including compensation from the intermediary individual retirement plan.
The key considerations for administrators and fiduciaries are summarized below:
- Disclosure. The plan administrator is required to include a description of the automatic portability program in their summary plan description (SPD), including fees and expenses. While it is the provider’s obligation to ensure that the model description is ready for inclusion in the SPD, the plan administrator bears responsibility under ERISA to ensure that the description is adequate and appropriate.
- Fees. The plan fiduciaries are required to ensure that the portability provider’s fees are not excessive and that its services are prudent to retain. The regulations require the provider to disclose its fees and services pursuant to DOL regulations under ERISA Section 408, including maintenance of a website with a list of participating recordkeepers. However, the plan administrator will always have the duty to ensure that the provider does not charge more than “reasonable” compensation.
- Monitoring. Transfer-in plan administrators must designate a “plan official” who is responsible for monitoring incoming automatic portability transfers, including ensuring the amounts received on behalf of a participant are invested properly. From the plan fiduciary’s perspective, this means amounts received must be invested in accordance with the participant’s current investment election under the transfer-in plan or the plan’s qualified default investment alternative (if no investment directions have been received by the participant).
- Data Protection. While automatic portability providers are required to take steps to protect participant and individual retirement plan data under the proposed regulations, the plan administrator retains its obligations under the DOL’s 2020 cybersecurity guidance to assess the portability provider’s data protection and privacy program and monitor it on an ongoing basis. (Find more information about the DOL’s cybersecurity guidance here.)
In sum, while adopting an automatic portability program may be useful for participants, plan fiduciaries must become acquainted with the final requirements applicable to automatic portability providers to ensure compliance with the plan fiduciaries’ own ongoing obligations under ERISA.
Morgan Lewis lawyers continue to monitor the progress of the proposed regulations. In the meantime, please do not hesitate to reach out to the authors or any member of our employee benefits practice with questions.