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.