DOL Issues Final Prohibited Transaction Exemption for Auto-Portability

Now that participants’ small balances may be automatically transferred to their new 401(k) account, Retirement Clearinghouse expects to see a lot of business.

The Department of Labor (DOL) this week issued its final prohibited transaction exemption (PTE) for automatic portability. This action has removed the requirement that participants consent to have their small balance of $5,000 or less in a safe harbor individual retirement account (IRA) automatically rolled into their new employer’s retirement plan.

Last November, the DOL had issued its advisory opinion on auto-portability, offering a safe harbor for plan sponsors and recordkeepers that pursued this course of action, by its naming Retirement Clearinghouse as the fiduciary. However, participants still needed to give their consent, says Spencer Williams, founder, president and CEO of Retirement Clearinghouse. “Sponsors and recordkeepers were in a ‘wait-and-see’ limbo, because that advisory opinion was only half the loaf.”

Williams says he thinks the DOL decided to make the concessions it did “because our program is highly automatic, and it’s clearly in the best interest of participants to have an old account sitting in a safe harbor IRA moved to their new 401(k) plan.”

To date, Retirement Clearinghouse has a pilot program with one U.S. employer that has 250,000 employees. His company matched its records of those employees against the couple hundred thousand small-balance IRAs for which it is the recordkeeper, Williams says. It found 6,500 matches where participants had both accounts, and, of those, 1,300 gave Retirement Clearinghouse their consent to have their small IRA balance moved into their 401(k) plan.

With both the advisory opinion and the exemption now in hand, Williams says, “We see the market finally opening up.” He estimates that there are 5.5 million instances annually of a small balance being rolled from an employer’s 401(k) plan into an IRA. It is his company’s intention to now reach out to plan sponsors and recordkeepers to gain that business, thereby helping to prevent plan leakage and solve the problem of missing participants, Williams says.

Retirement Clearinghouse calculates that auto-portability could cut back on cash-outs of small accounts by two-thirds, saving $784 billion in retirement savings.

“Defined contribution plan sponsors across the country now have the established guardrails they need to safely adopt auto-portability,” he adds. “The regulatory framework established by the auto-portability advisory opinion and the final exemption provide legal protections for plan sponsors to help small-balance participants preserve their retirement savings by enhancing their plan services to include auto-portability as their new default process when their participants change jobs.”

Williams says he is very encouraged by the DOL’s PTE and that he has been working on this issue for five years. “We are very passionate about creating a new benefit for participants and solving the leakage issue.” He says it is feasible that other companies could move into this space but that, to date, he is unaware of any competitors.

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Trend of Excessive Fee Suits Against Smaller Plans Continues

When the wave of excessive fee cases began against retirement plan sponsors, most targeted large or mega plans, based on assets. However, a new case against TriHealth Inc. continues a trend of targeting smaller plans.

A class-action lawsuit has been filed against TriHealth Inc. regarding administrative and investment fees in the TriHealth Inc. Retirement Plan.

The complaint states, “for every year between 2013 and 2017, the administrative fees charged to plan participants is greater than 90% of its comparator [, or peers’,] fees when fees are calculated as cost per participant or when fees are calculated as a percent of total assets.”

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By way of a commercially available program that the lawsuit says is commonly used by financial advisers and retirement plan fiduciaries to benchmark costs, the complaint shows that in 2017, for example, TriHealth’s plan carried a cost of 86 basis points (bps) per participant. This compares with the mean of 44 bps across 27 peer plans. As a total of plan assets, in 2017, TriHealth’s plan cost 86 bps compared with a mean of 41 bps.

“The total difference from 2013 to 2017 between TriHealth’ fees and the average of its comparators based on total number of participants is $7,001,443. The total difference from 2013 to 2017 between TriHealth’s fees and the average of its comparators based on plan asset size is $7,210,002,” the complaint states. TriHealth’s plan was benchmarked against peer plans with an asset range of $250 million to $500 million.

According to the complaint, the plaintiffs—participants in the plan—had no knowledge of how the fees charged to and paid by TriHealth plan participants stood up against any of TriHealth’s comparators.

The lawsuit also claims TriHealth plan’s fees were excessive when held up against other comparable mutual funds not offered by the plan. “By selecting and retaining the plan’s excessive cost investments while failing to adequately investigate the use of superior, lower-cost mutual funds from other fund companies that were readily available to the plan or foregoing those alternatives without any prudent reason for doing so, TriHealth caused plan participants to lose millions of dollars of their retirement savings through excessive fees,” it alleges.

TriHealth is accused of failing to employ a prudent and loyal process by not critically or objectively evaluating the cost and performance of the plan’s investments and fees in comparison with other investment options. “TriHealth selected and retained for years as plan investment options mutual funds with high expenses relative to other investment options that were readily available to the plan at all relevant times,” the complaint states.

Among other things, the lawsuit asks for an order that requires TriHealth to make good to the plan all losses resulting from each breach of fiduciary duty and to otherwise restore the plan to the position it would have occupied but for those breaches. It also requests an order to remove the fiduciaries who are accused.

When the wave of excessive fee cases began against retirement plan sponsors, most targeted large or mega plans, based on assets. However, in recent years a number of cases have been filed against so-called “small” plans. For example, the Greystar 401(k) Plan, with less than $250 million in assets, was the target of a complaint filed earlier this year. Similarly, fiduciaries of the approximately $500 million 401(k) program offered by Pioneer Natural Resources USA settled a lawsuit that was filed a year ago.

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