Automatic Portability Transaction Regulations

Federal RegisterJan 29, 2024

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DEPARTMENT OF LABOR

Employee Benefits Security Administration

29 CFR Part 2550

RIN 1210-AC21

Automatic Portability Transaction Regulations

AGENCY:

Employee Benefits Security Administration (EBSA), Labor.

ACTION:

Notice of proposed rulemaking.

SUMMARY:

This document contains a proposed rule that would implement the statutory prohibited transaction exemption under section 4975 of the Internal Revenue Code (Code) for certain automatic portability transactions. Section 120 of the SECURE 2.0 Act of 2022 amended Code section 4975 to add a statutory exemption for the receipt of fees and compensation by an automatic portability provider for services provided in connection with an automatic portability transaction. Specifically, Code section 4975(d)(25) provides prohibited transaction relief if the conditions set forth in Code section 4975(f)(12) are met. The Department of Labor is proposing this regulation because, with certain exceptions not relevant here, section 102 of Reorganization Plan No. 4 of 1978 transfers the authority of the Secretary of the Treasury to issue certain regulations, rulings, opinions, and exemptions under Code section 4975 to the Secretary of Labor. Consistent with this transfer of authority, Congress authorized and directed the Department of Labor to issue regulations under Code section 4975 to implement provisions of section 120 of the SECURE 2.0 Act.

DATES:

Comments on these proposed rules are due on March 29, 2024.

ADDRESSES:

EBSA encourages interested persons to submit their comments on these proposed rules online. You may submit comments, identified by RIN 1210-AC21, by either of the following methods:

Federal eRulemaking Portal: www.regulations.gov.

Follow the instructions for submitting comments.

Mail:

Office of Regulations and Interpretations, Employee Benefits Security Administration, Room N-5655, U.S. Department of Labor, 200 Constitution Avenue NW, Washington, DC 20210, Attn: Automatic Portability Regulations RIN 1210-AC21.

Instructions:

All submissions must include the agency name and Regulatory Identifier Number RIN 1210-AC21 for this rulemaking. If you submit comments online, do not submit paper copies. All comments received will be posted without change on

www.regulations.gov

and

www.dol.gov/agencies/ebsa

and will be made available for public inspection at the Public Disclosure Room, N-1513, Employee Benefits Security Administration, U.S. Department of Labor, 200 Constitution Avenue NW, Washington, DC 20210.

Warning:

Do not include any personally identifiable or confidential business information in your comment that you do not want publicly disclosed. Comments are public records that are posted online as received and can be retrieved by most internet search engines.

Docket:

Go to the Federal eRulemaking Portal at

https://www.regulations.gov

for access to the rulemaking docket, including any background documents and the plain-language summary of the proposed rule of not more than 100 words in length required by the Providing Accountability Through Transparency Act of 2023.

FOR FURTHER INFORMATION CONTACT:

Scott Ness, Office of Regulations and Interpretations, Employee Benefits Security Administration, (202) 693-8500 or Joseph Brennan, Office of Exemption Determinations, Employee Benefits Security Administration, (202) 693-8456. These are not toll-free numbers.

SUPPLEMENTARY INFORMATION:

A. Background Regarding Automatic Portability Transactions

Section 120 of the SECURE 2.0 Act of 2022 (SECURE 2.0 Act)

amended Internal Revenue Code (Code) section 4975 to add a statutory prohibited transaction exemption for the receipt of fees and compensation by an “automatic portability provider” for services provided in connection with an “automatic portability transaction.” Specifically, Code section 4975(d)(25) provides prohibited transaction relief if the conditions set forth in Code section 4975(f)(12) are met. In the retirement plan context, portability refers to the process of transferring workers' retirement savings from one tax-advantaged plan or account to another when their covered service with an employer terminates (

e.g.,

from a traditional 401(k) plan account to a traditional individual retirement plan—such as an individual retirement account or annuity described in Code section 408(a) or (b) (IRA)—or from a Roth 401(k) plan account to a Roth IRA. As described in more detail below, the term “automatic portability transaction” means a transaction in which mandatory distributions pursuant to Code section 401(a)(31)(B)(i) from an employer-sponsored retirement plan to an IRA established on behalf of an individual are subsequently transferred to an eligible employer-sponsored plan in which such individual is an active participant, after such individual has been given advance notice of the transfer and has not affirmatively opted out of such transfer. According to the most recent Department of Labor (Department) annual report (Form 5500) data, there are an estimated 635,000 defined contribution plans, covering an estimated 86.6 million participants with account balances totaling $9.3 trillion in assets.

With the proliferation of these accounts, there is a particular need for this type of automatic portability solution to help ensure participants remain connected to their retirement savings when they change jobs.

Public Law 117-328, Dec. 29, 2022, Division T.

2021 Form 5500 Data, U.S. Department of Labor.

Although the Department believes this body of plans is the one primarily relevant for purposes of the application of the statutory exemption, the Department notes that additional defined contribution plans that do not file a Form 5500 or Form 5500-SF and certain defined benefit plans are eligible to make mandatory distributions.

See

the regulatory impact analysis sections in this document for a discussion of the plans and participants impacted by this proposed regulation.

1. Mandatory Distributions of Small Account Balances

Under the Code, qualified retirement plans are permitted to include provisions requiring an immediate distribution to a separating participant without the participant's consent if the present value of the participant's vested accrued benefit does not exceed $5,000

(for distributions made after December 31, 2023, the $5,000 threshold is increased to $7,000).

These transactions are generally referred to as “mandatory distributions.”

Code sections 411(a)(11) and 417(e).

See

Code section 411(a)(11)(D) for circumstances where the amount of a distribution may be greater than $5,000 if a participant made a previous roll-in to a plan from an IRA. In such circumstances, the roll-in funds are not considered in determining the $5,000 vested accrued balance, so a larger amount of assets could be subject to a mandatory distribution under the terms of the plan.

See

SECURE 2.0 Act Sec. 304, updating dollar limit for mandatory distributions.

Code section 401(a)(31)(B) provides that a trust will not constitute a qualified trust unless the plan of which the trust is a part provides that: (1) if a mandatory distribution of more than $1,000 is to be made; and (2) the participant does not elect to have such distribution paid directly to an eligible

retirement plan or to receive the distribution directly, then (3) the plan administrator must transfer such distribution to an IRA of a designated trustee or issuer.

These distributions are referred to as “automatic rollovers of mandatory distributions.” Code section 401(a)(31)(B)(i) requires the plan administrator to notify the participant in writing, either separately or as part of the notice required under Code section 402(f), that the participant may transfer the distribution to another IRA.

Code section 402(f)(1)(A) requires plan administrators to provide a participant with a written notice within a reasonable period of time before making an automatic rollover of a mandatory distribution explaining, among other things, the following: (1) the Code provisions under which the participant may elect to have the distribution transferred directly to an eligible retirement plan and that if an election is not made, such automatic rollover of a mandatory distribution is subject to the provisions of Code section 401(a)(31)(B); (2) the provision requiring income tax withholding if the distribution is not directly transferred to an eligible retirement plan; and (3) the provisions under which the distribution will not be taxed if the participant transfers the distribution amount (including amounts withheld under Code section 3405) to an eligible retirement plan within 60 days of receipt.

Code section 401(a)(31)(B)(i) requires the transfer be made to an “individual retirement plan,” defined by Code section 7701(a)(37) as an individual retirement account described in Code section 408(a) and an individual retirement annuity described in Code section 408(b). See IRS Notice 2005-5, 2005-1 C.B. 337, regarding the applicability of Code section 401(a)(31)(B) to retirement plans under Code sections 401(a), 401(k), 403(a), 403(b), and 457(b) (

https://www.irs.gov/irb/2005-03_IRB

;Code section 401(a)(31)(B)(i).

See

29 CFR 2550.404a-2; Code section 401(a)(31)(B)(i); and Code section 402(f).

The Secretary of Labor (the Secretary) issued regulations in 2004 providing safe harbors for such automatic rollovers of mandatory distributions from a plan subject to Title I of the Employee Retirement Income Security Act (ERISA) which provide that (1) a plan administrator's designation of an IRA to receive the automatic rollover and (2) the initial investment choice for the rolled-over funds will be deemed to satisfy the fiduciary responsibility provisions of ERISA section 404(a) if the safe harbor requirements are met.

Specifically, plan administrators complying with the Department's fiduciary safe harbor regulations must invest the former participant's assets in an investment product designed to preserve principal and provide a reasonable rate of return.

An IRA established pursuant to Code section 401(a)(31)(B) and/or in compliance with the Department's regulation is commonly referred to respectively as a “Default IRA” or “Safe Harbor IRA.”

See

69 FR 58017 (Sep. 28, 2004).

29 CFR 2550.404a-2(c)(3)(i).

2. Automatic Portability Transactions

An automatic portability transaction as defined in Code section 4975(f)(12)(A)(i) builds on the portability concept and is part of a larger framework for facilitating the movement of assets from one tax-favored retirement plan to another. The overall terms and details of an automatic portability framework would generally be memorialized in contracts with recordkeepers, plan sponsors, and the automatic portability provider. A comprehensive automatic portability framework includes three key components. First, there is a “transfer-out” plan that initiates a mandatory distribution. Second, there is an IRA established in accordance with Code Section 401(a)(31)(B) (a Default IRA) to receive (via a rollover) and hold the distributed funds.

Third, there is a “transfer-in” plan that receives the roll-in distribution from the Default IRA when an IRA owner is matched with an account in an eligible employer-sponsored plan at a new employer.

This may be, but is not necessarily, a Safe Harbor IRA established in accordance with the Department's regulations at 29 CFR 2550.404a-2 because all Safe Harbor IRAs are generally Default IRAs, but not all Default IRAs are Safe Harbor IRAs.

To roll in funds from an IRA to the transfer-in plan, the transfer-in plan must permit such roll-ins. Additionally, an automatic portability provider must have access to records for the Default IRA and transfer-in plan sufficient to make a match. The general concept of “locate, match, and transfer” involves making queries of cooperating recordkeepers' systems to determine if a Default IRA owner has become a participant in an employer-sponsored retirement plan through re-employment (

i.e.,

the transfer-in plan).

If the individual is matched with an account in the transfer-in plan, the automatic portability transaction is designed for the automatic portability provider to roll the individual's IRA assets into the individual's account in the transfer-in plan. Automatic portability transactions may be particularly important and helpful to workers who have lost contact with their retirement plans when they change jobs, cannot be located because the plan does not have updated address information or other contact information for separated employees, or refuse to respond to plan communications about their retirement account. When an automatic portability provider transfers funds from the transfer-out plan to a Default IRA without a participant's active involvement, the risk of funds becoming lost or difficult to locate increases. Therefore, automatic portability transactions are intended to benefit participants and IRA owners that are unresponsive or considered missing.

The concept of “locate, match, and transfer” is discussed in more detail below.

The Department notes that Code section 4975(f)(12) defines an automatic portability transaction with respect to an individual that has not affirmatively consented to the transfer. An individual who affirmatively consents may still have IRA assets rolled into a new plan through the same mechanisms, although it would not technically fall within the statutory definition.

3. Current DOL Individual Prohibited Transaction Exemption for Automatic Portability Transactions

When an automatic portability provider transfers assets from an IRA to a new employer's plan without the IRA owner's affirmative consent, the automatic portability provider is exercising fiduciary discretion for purposes of the prohibited transaction provisions of the Code.

The assessment of a fee against the IRA, in turn, implicates the prohibited transaction provisions in Code section 4975(c)(1). The Department first issued guidance regarding an automatic portability transaction before the enactment of the SECURE 2.0 Act. Retirement Clearinghouse (RCH) approached the Department in 2018 for sub-regulatory guidance and prohibited transaction exemptive relief regarding its multi-part automatic portability framework (the RCH Program). In response, the Department issued Advisory Opinion 2018-01A (AO 2018-01A)

and an administrative prohibited transaction exemption (PTE 2019-02)

in connection with the RCH Program. AO 2018-01A concerned the status of certain parties involved in the RCH Program as “fiduciaries” within the meaning of ERISA section 3(21)(A) and Code section 4975(e)(3).

In AO 2018-01A, the Department stated that plan sponsors exercise discretion in their fiduciary capacity and would be

subject to the general fiduciary standards of ERISA when deciding whether to participate in the RCH Program. The advisory opinion further explained that, without the individual's affirmative consent, RCH acted as a fiduciary within the meaning of Code section 4975(e)(3) in deciding whether to transfer the assets from an individual's Default IRA to the individual's new employer plan.

Furthermore, the Department indicated that an individual's failure to respond to RCH's communications about a default transfer of the assets in the individual's account to the new employer's plan is not tantamount to affirmative consent by the individual to the default transfer and does not relieve RCH from fiduciary status and related responsibilities.

See the discussion of AO 2018-01A, below.

Available at:

https://www.dol.gov/sites/dolgov/files/EBSA/about-ebsa/our-activities/resource-center/advisory-opinions/2018-01a.pdf.

See

83 FR 55741 (Nov. 7, 2018) (proposed exemption) and 84 FR 37337 (July 31, 2019) (granted exemption).

AO 2018-01A (Nov. 18, 2018).

Id.

at 5.

Id.

at 5-6.

The Department additionally stated in AO 2018-01A that, unlike the Department's automatic safe harbor regulations,

which pertain to the automatic rollover of an individual's retirement plan mandatory distribution into an IRA, no similar statutory or regulatory provision provides relief from fiduciary responsibility for the “default” transfer of assets from the Default IRA to a new employer's plan.

Therefore, it was necessary for RCH to receive a prohibited transaction exemption from the Department in order for RCH to receive a fee or other compensation when it exercised fiduciary authority to make the default transfer of assets from the Default IRA to a new employer's plan.

At RCH's request, the Department issued PTE 2019-02, an administrative exemption that provides such prohibited transaction relief for RCH.

Due to the novelty of the RCH Program, the Department limited the relief provided in PTE 2019-02 to a five-year term, which expires on July 31, 2024. To receive prohibited transaction relief beyond the five-year term, RCH would need to submit an additional individual administrative exemption request to the Department.

29 CFR 2550.404a-2 and 2550.404a-3.

Id.

at 6. The Department notes that Code section 4975(f)(12) applies only to transfers made under Code section 401(a)(31)(B)(i), so the fiduciary relief provided in 29 CFR 404a-3 is not applicable to transactions covered by 4975(d)(25).

AO 2018-01A addressed the fiduciary status of an automatic portability provider but did not address whether a prohibited transaction would occur.

84 FR 37337.

B. Overview of the SECURE 2.0 Act Statutory Exemption for Automatic Portability Transactions

Section 120 of the SECURE 2.0 Act added a statutory exemption in Code section 4975 that allows an automatic portability provider to receive a fee in connection with executing an automatic portability transaction that largely mirrors the relief the Department granted RCH in PTE 2019-02. The availability of the statutory exemption to all automatic portability providers that meet its requirements generally eliminates the need for RCH, and other automatic portability providers, to request an administrative PTE for relief similar to the relief the Department granted in PTE 2019-02. Specifically, the statutory exemption in Code section 4975(d)(25) provides a conditional prohibited transaction exemption from the restrictions in Code sections 4975(c)(1)(D) and (E) for an automatic portability provider to receive fees and compensation for services provided “

in connection with an automatic portability transaction

” if the conditions set forth in Code section 4975(f)(12) are met.

Emphasis added.

Code section 4975(f)(12)(A)(i) generally defines an automatic portability transaction as a transfer of assets from a Default IRA

to a transfer-in plan after the IRA owner has been given advance notice of the transfer and has not affirmatively opted out. The “transfer-in” plan covered by the definition is any employer-sponsored retirement plan (other than a defined benefit plan) that is: a qualified trust, an annuity plan described in Code section 403(a), an eligible deferred compensation plan described in Code section 457(b) which is maintained by an eligible employer described in Code section 457(e)(1)(A), or an annuity contract described in Code section 403(b).

The statutory definition specifically references “an individual retirement plan which is established on behalf of an individual and to which amounts were transferred under section 401(a)(31)(B)(i).”

These are plans described in clause (iii), (iv), (v), or (vi) of Code section 402(c)(8)(B).

Notably, the SECURE 2.0 Act amendment to the Code does not specifically include any references to a transfer-out plan (

i.e.,

the plan engaging in the mandatory distribution and automatic rollover). As discussed above, the existence of a transfer-out plan is a necessary precursor to an automatic portability transaction, but the transfer-out transaction is already governed by mandatory distribution and automatic rollover provisions in the Code that are discussed above, and the Department already has provided conditional fiduciary and prohibited transaction relief for such transactions under its automatic rollover safe harbor regulations.

Similarly, the general fiduciary principles regarding an individual's default investments in the transfer-in plan and the Department's regulations on qualified default investment alternatives will govern the transfer-in plan sponsor's responsibilities once the assets are transferred from the individual Default IRA into the transfer-in plan.

29 CFR 2550.404a-2.

29 CFR 2550.404c-5.

As noted, Code section 4975(d)(25) provides prohibited transaction relief if the conditions set forth in Code section 4975(f)(12) are met. Specifically, Code section 4975(f)(12) and this proposed regulation require:

• the automatic portability provider to acknowledge its fiduciary status with respect to the IRA;

• that the automatic portability provider's fees do not exceed reasonable compensation;

• restrictions to be placed on an automatic portability provider's use of plan participant and IRA owner data;

• participation in the program to be available on the same terms for all eligible transfer-in plans;

• the automatic portability provider to conduct at least monthly searches for transfer-in plan accounts;

• the automatic portability provider to timely execute automatic portability transactions;

• the automatic portability provider's discretion to affect the timing or amount of the transfer pursuant to an automatic portability transaction to be limited; and

• the automatic portability provider to retain records demonstrating it is complying with the exemption conditions, conducting an annual audit, and maintaining a website with a list of participating recordkeepers and the automatic portability provider's fees.

Section 120 of the SECURE 2.0 Act also provides that, not later than 12 months after the date of its enactment, the Secretary shall issue such guidance as may be necessary to carry out the purposes of the amendments made by section 120, including regulations or other guidance which:

1. Require an automatic portability provider to provide a notice to individuals on whose behalf the default IRA is established in advance of the pre-transaction notice;

2. Require an automatic portability provider to disclose to a responsible plan fiduciary information about the

provider's fees, compensation, and services as required of covered service providers pursuant to DOL regulations under ERISA section 408 (

i.e.,

29 CFR 2550.408b-2(c));

3. Require plans involved in the automatic portability transaction to fully disclose fees related to an automatic portability transaction in its summary plan description or summary of material modifications;

4. Require plans involved in the automatic portability transaction to invest amounts received on behalf of a participant pursuant to an automatic portability transaction in the participant's current investment election under the plan or, if no election is made or permitted, in the plan's qualified default investment alternative under the Department's Qualified Default Investment Alternative (QDIA) regulations (

i.e.,

29 CFR 2550.404c-5) or another investment selected by a fiduciary with respect to such plan;

5. Prohibit or restrict the receipt or payment of third-party compensation (other than a direct fee paid by a plan sponsor which is in lieu of a fee imposed on an IRA owner) by an automatic portability provider in connection with an automatic portability transaction;

6. Prohibit exculpatory provisions in an automatic portability provider's contracts or communications with individuals disclaiming or limiting liability in the event that an automatic portability transaction results in an improper transfer;

7. Require an automatic portability provider to take actions necessary to reasonably ensure that participant and beneficiary data is current and accurate;

8. Limit the automatic portability provider's use of data related to automatic portability transactions for any purpose other than the execution of such transactions or locating missing participants, except as permitted by the Secretary;

9. Provide for corrections procedures in the event an auditor determines the automatic portability provider was not in compliance with the statute and related regulations, including deadlines, supplemental audits, and corrective actions which may include a temporary prohibition from relying on the statutory exemption;

10. Ensure that participants and beneficiaries receive all the required notices and disclosures; and

11. Make clear that the statutory exemption applies solely to the automatic portability transactions described in the statutory exemption, and, to the extent the Secretary deems necessary or advisable, specify how the application of the exemption relates to or coordinates with other statutory provisions, regulations, and administrative guidance.

See

Public Law 117-328, Dec. 29, 2022, Division T, Sec. 120(c).

Some interested stakeholders have communicated to the Department that they have already developed products and established procedures for an automatic portability service and that they do not believe any further guidance from the Department is necessary to effectuate the purpose of section 120 of the SECURE 2.0 Act. However, the Department believes that regulations, as compared to some other form of guidance, are needed to implement section 120(c) of the SECURE 2.0 Act in a manner that addresses and reinforces the consumer protections in the above list of statutory conditions and requirements. Furthermore, the Department believes that these proposed regulations will provide a broader cross-section of interested and affected entities with the opportunity to formally comment on the proposal, whether implementing regulations are necessary, and whether elements of the proposed requirements should be modified or eliminated to best support Congress' intent in passing the new statutory exemption.

C. Prospective Effect of Implementing Regulations and Interim Interpretive Policy

The Department is proposing that any final rule adopted based on this proposal would be effective 60 days after publication in the

Federal Register

and that the requirements of the final rule would have prospective applicability. The Department specifically solicits comments on whether there should be some delayed applicability date to allow for automatic portability providers and plan fiduciaries to make any changes to automatic portability programs or related contracts or arrangements that may be needed or desired in light of the final rule. This approach is intended to make it clear the statutory exemption is available in accordance with the effective date of the SECURE 2.0 Act while acknowledging that there may be a need to transition contracts or arrangements to meet specific requirements of the final rule.

As noted above, section 120 of the SECURE 2.0 Act directed the Secretary to issue such guidance as may be necessary to carry out the purposes of the amendments made by section 120 no later than 12 months after the date of the enactment of the Act. Compliance with the conditions and requirements in Code sections 4975(d)(25) and 4975(f)(12) is an independent statutory obligation for parties seeking their prohibited transaction relief that is not dependent upon the issuance of regulations or guidance by the Department. For the period from publication of this proposed regulation until after the Department issues a final regulation or other applicable administrative guidance, automatic portability providers and plan fiduciaries are expected to comply with the requirements of Code sections 4975(f)(12) and 4975(d)(25) using a good faith, reasonable interpretation of the law taking into account the list of consumer protection conditions and requirements in section 120(c) of the SECURE 2.0 Act.

During that period, to the extent an automatic portability provider or plan fiduciary believes there is some uncertainty regarding whether the automatic portability program or the parties' conduct in connection with the program complies with the statutory provisions, the Department expects that the provider or fiduciary will strictly adhere to the requirements in Code section 4975(f)(12) and act in a manner that furthers the financial interests of the affected plan, plan participant, or IRA owner taking into account the consumer protection conditions and requirements listed in section 120(c) of the SECURE 2.0 Act.

The Department expects to issue a final rule before the first annual audit would be required pursuant to the requirement in Code section 4975(f)(12)(B)(xi)(II) under which an automatic portability provider must “conduct an annual audit, in accordance with regulations promulgated by the Secretary of Labor, of automatic portability transactions occurring during the calendar year to demonstrate compliance with this paragraph and any regulations thereunder and identify any instances of noncompliance therewith, and shall submit such audit annually to the Secretary of Labor, in such form and manner as specified by such Secretary.” However, because a final rule may be published part way through the first audit period, the Department specifically solicits comments on whether the final rule should provide an alternative pursuant to which the submission of the annual audit for the first year could be delayed and submitted together with the audit for the second year.

See,

for comparison, 29 CFR 2520.104-50—Short plan years, deferral of accountant's examination and report. The Department also requests comment on whether certain aspects of this proposal that would be subject to audit review should have a specific delayed effective date because the aspect of the proposal may take additional time for an automatic portability provider to fully implement.

D. Overview of the Proposed Regulation

Certain provisions of ERISA Title I, such as the provisions on prohibited transactions, have parallel provisions enacted in Title II of ERISA and codified in the Code. When ERISA was passed,

regulatory authority over Title I resided with the Secretary of Labor while regulatory authority over Title II resided with the Secretary of the Treasury. To rationalize the administration and interpretation of these parallel provisions, Reorganization Plan No. 4 of 1978, 5 U.S.C. App., divided the interpretive and rulemaking authority between the Secretaries of Labor and of the Treasury, so that, in general, the agency with regulatory and interpretive responsibility for a given provision of ERISA Title I would also have regulatory and interpretive responsibility for the parallel provision in the Code. Among the sections transferred to the Department were certain of the prohibited transaction provisions (including exemptions) in Code section 4975. Title I's prohibited transaction rules, 29 U.S.C. 1106-1108, apply to Title I-covered plans, and the Code's corresponding prohibited transaction rules, 26 U.S.C. 4975, apply both to Title I-covered pension plans that are tax-qualified pension plans, as well as other specified tax-advantaged arrangements, including IRAs.

Although the new automatic portability transaction prohibited transaction exemption appears only in Code section 4975 and directly pertains to transactions involving IRAs, the Secretary of Labor still retains regulatory authority over certain prohibited transaction provisions under Code section 4975, as provided in Reorganization Plan No. 4 of 1978. Consistent with that authority, section 120 of the SECURE 2.0 Act directs the Secretary of Labor to issue regulations and guidance related to the new statutory exemption for automatic portability transactions.

Therefore, the proposed regulation would add a new § 2550.4975f-12 to the Department's fiduciary regulations at 29 CFR part 2550. The proposed regulation tracks the requirements under Code section 4975(f)(12) that must be satisfied in order for the automatic portability transaction to be covered by the statutory prohibited transaction exemption in Code section 4975(d)(25). Paragraph (a) describes the general scope of the statutory exemption and regulation. Paragraph (b) sets forth the conditions an automatic portability provider must satisfy for a transaction to qualify as an “automatic portability transaction” and for the exemption to apply. Paragraph (c) sets forth proposed annual audit and correction procedure requirements. Paragraph (d) sets forth website requirements that must be met for automatic portability providers to satisfy the statutory exemption and proposed regulation. Paragraph (e) describes prohibitions on the automatic portability provider's use of exculpatory provisions in contracts or communications disclaiming or limiting their liability in the event an improper transfer of assets in connection with an automatic portability transaction occurs. Paragraph (f) sets forth the record retention requirement automatic portability providers must meet to satisfy the statutory exemption and proposed regulation. Paragraph (g) defines certain terms used in the proposed regulation.

1. Scope of Prohibited Transaction Relief

The relief provided by Code section 4975(d)(25) and the proposed exemption is limited to Code sections 4975(c)(1)(D) and (E) for the receipt of fees and compensation by an automatic portability provider for services provided in connection with an automatic portability transaction and Code section 4975(c)(1)(F) for the receipt of fees by an automatic portability provider from a plan sponsor in lieu of fees imposed on an IRA owner. Neither the statutory exemption in Code section 4975(d)(25) nor the proposed regulation contains an exemption for other acts described in Code section 4975(c)(1)(D) and (E) (relating to the transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a plan and to fiduciaries dealing with the income or assets of plans in their own interest or for their own account) that are not in connection with the automatic portability transaction. Additionally, neither the statutory exemption in Code section 4975(d)(25) nor the proposed regulation contains an exemption for acts described in Code section 4975(c)(1)(F) (relating to fiduciaries receiving consideration for their own personal account from any party dealing with a plan in connection with a transaction involving the income or assets of the plan) except for the limited relief for a fee paid by a plan sponsor, noted above. Such acts described in Code sections 4975(c)(1)(D), (E), and (F) are separate transactions not described in Code section 4975(d)(25). Further, neither the statutory exemption in Code section 4975(d)(25) nor this proposed regulation contains an exemption from other provisions of the Code, such as section 401, or other provisions of law which may impose requirements or restrictions relating to the transactions that are exempt under Code section 4975(d)(25). As defined in Code section 4975(f)(12)(A)(ii) and in this proposed regulation, an automatic portability provider is a person, other than an individual, who executes the automatic portability transaction on the same terms to all transfer-in plans and Default IRAs that use the provider.

The Department interprets the “in connection with” language from Code section 4975(d)(25) to include only those services and related fees and compensation that would not otherwise occur or be incurred if not for the automatic portability transaction or anticipation of a future automatic portability transaction. The Department requests comments on whether additional specificity regarding the types of services that are covered by Code section 4975(d)(25) should be included, for example, by a definition added to the regulations that identifies the types of services. Further, if a commenter believes more specificity would be helpful, the Department requests that the commenter include a proposed definition, list, or other identification of the services that should be covered.

2. Acknowledgment of Fiduciary Status

Code section 4975(f)(12)(B)(i) and this proposed regulation requires an automatic portability provider to acknowledge that it is a fiduciary with respect to the IRA in an automatic portability transaction.

Pursuant to the statutory text authorizing the Secretary to specify the time and format of such an acknowledgment, paragraph (b)(1) of this proposed regulation requires the automatic portability provider to acknowledge in writing that it is a fiduciary as defined in Code section 4975(e)(3) upon being engaged by a plan fiduciary, as well as in the required notices and disclosures, described below, to plan participants and IRA owners. This fiduciary acknowledgement is designed to ensure that the fiduciary nature of the relationship is clear to the automatic portability provider and responsible plan fiduciaries as well as to affected participants and IRA owners.

The automatic portability provider's acknowledgment of its fiduciary status may include a description of the scope of the fiduciary status of the automatic portability provider and may explain that, consistent with Code section 4975(e)(3), the automatic portability provider is not a fiduciary under the Code's definition with respect to any

assets or administration of the plan or IRA with respect to which the automatic portability provider does not (1) have any discretionary authority, discretionary control, or discretionary responsibility (2) exercise any authority or control, and (3) render investment advice for a fee or other compensation, nor have any authority or responsibility to render such investment advice. The Department notes that it is possible that the automatic portability provider may have fiduciary status under other laws,

e.g.,

the Federal securities laws. The acknowledgment required by the exemption does not reach such status but the Department notes that the acknowledgment required by the exemption should not be presented in a way that misinforms or misleads individuals regarding potential fiduciary status under such other laws.

As described in Code section 4975(f)(12)(A)(i)(I).

This is generally when an individual fails to respond to notices and the automatic portability provider directs the transfer of assets and assesses fees.

See

AO 2018-01 for a more detailed description of fiduciary status in automatic portability arrangements.

3. Fees

(a) Reasonable Compensation

Subject to two exceptions described below, Code section 4975(f)(12)(B)(ii)(I) and this proposed regulation permit an automatic portability provider to receive fees and compensation for services provided in connection with the automatic portability transaction, provided that the fees and compensation do not exceed reasonable compensation. The proposed regulations incorporate the existing standard regarding reasonable compensation for the provision of services found at 26 CFR 54.4975-6(e).

(b) Fee and Compensation Disclosure Requirement

This proposed regulation mirrors the statutory text by requiring the automatic portability provider to disclose to a responsible plan fiduciary of the transfer-in plan the information that a service provider to the plan would be required to disclose under 29 CFR 2550.408b-2(c). For purposes of this requirement, the disclosures would relate to the automatic portability provider's services as an automatic portability provider and not other services that may be provided. For purposes of this disclosure requirement, the automatic portability provider will be considered to be a “covered service provider” under 2550.408b-2(c)(1)(iii)(A) and (B) providing services as a fiduciary and as a recordkeeper. Since the automatic portability provider would generally be precluded from receiving third-party compensation under other provisions of the proposal, the Department does not believe the provisions of 2550.408b-2(c) related to a covered service provider under 2550.408b-2(c)(1)(iii)(C)—“other services for indirect compensation”—would be relevant. The Department seeks comments on whether there are particular compliance issues under 2550.408b-2(c) for automatic portability providers that the Department should specifically address in a final rule.

(c) Prohibition of Fees for Automatic Portability Transactions Involving a Plan of the Automatic Portability Provider or Its Affiliates

The statute prohibits an automatic portability provider from receiving any fees or compensation in connection with an automatic portability transaction involving a plan which is sponsored or maintained by the automatic portability provider. In other words, the automatic portability provider may execute such transactions, but it may not receive fees for doing so. In the Department's view, the statutory reference to the automatic portability provider in this circumstance should be read to include any affiliates of the automatic portability provider. Accordingly, paragraph (b)(2)(iv) of the proposed regulation mirrors the statutory provision by prohibiting an automatic portability provider from receiving any fees or compensation in connection with an automatic portability transaction involving a plan that is sponsored or maintained by the automatic portability provider but includes plans maintained by any of the automatic portability provider's affiliates.

(d) Prohibition on Receipt of Third-Party Compensation in Connection With Automatic Portability Transactions

Section 120(c)(5) of the SECURE 2.0 Act provides the Secretary with the regulatory authority to prohibit or restrict the receipt or payment of third-party compensation (other than a direct fee paid by a plan sponsor that is in lieu of a fee imposed on an IRA owner) by an automatic portability provider in connection with an automatic portability transaction. The proposed regulation includes text that mirrors the statutory text allowing a direct fee to be paid by a plan sponsor if it is in lieu of a fee imposed on an IRA owner. The proposed regulation includes one exception to the general restriction on third-party compensation. Specifically, under the proposal, an automatic portability provider would be able to share a portion of its fee or compensation with another automatic portability provider as long as the overall fee paid, directly or indirectly, by the plan or IRA does not increase as compared to the fees disclosed in the description provided to the plan administrator and in the initial enrollment notice provided to the IRA owner.

The third-party compensation restriction in the proposed regulation is limited to fees and compensation in connection with the automatic portability transaction and would not prevent an automatic portability provider from receiving fees for services provided to an IRA or employer-sponsored retirement plan that are in addition to services provided in connection with the automatic portability transaction. However, the prohibited transaction relief provided in Code section 4975(d)(25) applies only to fees and compensation received in connection with the automatic portability transaction. The automatic portability provider would need to rely upon other statutory or administrative exemptions if it receives fees for providing additional services that involve prohibited transactions.

4. Data Usage and Protection

Code section 4975(f)(12)(B)(iii) prohibits an automatic portability provider from using data it obtains in connection with automatic portability transactions for any purpose other than to execute the automatic portability transactions or locate missing participants as part of its automatic portability service, except as permitted by the Secretary. The automatic portability provider is specifically prohibited by the statute from marketing or selling data relating to the IRA or to the plan participants. Paragraph (b)(3) of the proposed regulation parallels the statutory language by not permitting the use of data for any purpose other than the execution of automatic portability transactions or locating missing participants. For purposes of the restriction on marketing or selling IRA data, the Department interprets this to include specific data regarding the IRA owner. The Department is not proposing any exceptions to this restriction. However, the Department welcomes comments on whether the regulations should permit use of data for other purposes, and, if it should, what those other purposes would be, whether allowing use of data for those purposes would provide a benefit to IRA owners and plan participants, and what regulatory protections should be applied to that use of the data.

In support of the obligation to limit use of data, the proposed regulation provides that the automatic portability provider must take steps that a prudent fiduciary would take to safeguard plan participant and IRA data in its

possession or under its control.

The proposal further would require, if data were improperly accessed, that the automatic portability provider take appropriate remedial actions to safeguard the data based on the sensitivity of the accessed data and the nature and severity of the breach. The Department seeks comment on whether the regulation should include specific data security requirements, such as a requirement to carry insurance to cover data breaches.

See generally

Cybersecurity Program Best Practices at

https://www.dol.gov/sites/dolgov/files/ebsa/key-topics/retirement-benefits/cybersecurity/best-practices.pdf;

Online Security Tips at

https://www.dol.gov/sites/dolgov/files/ebsa/key-topics/retirement-benefits/cybersecurity/online-security-tips.pdf;

and Tips for Hiring a Service Provider with Strong Cybersecurity Practices at

https://www.dol.gov/sites/dolgov/files/ebsa/key-topics/retirement-benefits/cybersecurity/tips-for-hiring-a-service-provider-with-strong-security-practices.pdf.

5. Open Participation

Paragraph (b)(4) of this proposed regulation parallels Code section 4975(f)(12)(B)(iv) by requiring as a condition of the availability of the exemption that the automatic portability provider offer automatic portability transactions on the same terms to any transfer-in plan. This proposed requirement does not mean that fees can never change. Rather, at any given time, the fees paid for automatic portability transactions should be the same for any transfer-in plan that engages the automatic portability provider.

Based on the general regulatory authority granted to the Secretary in section 120(c) of the SECURE 2.0 Act, the Department is also proposing that open participation would require that the automatic portability provider not restrict or limit the ability of an employer-sponsored retirement plan, IRA provider (including trustees under Code section 408(a), custodians under Code section 408(h), or issuers under Code section 408(b)), or recordkeeper to engage other automatic portability providers to execute automatic portability transactions. In proposing this requirement, the Department recognizes that numerous service providers that have existing systems for automatic rollovers of mandatory distributions may want to supplement their services with automatic portability transaction features. Plan fiduciaries or service providers may determine that there are cost-effective ways to integrate services of more than one automatic portability provider to increase the likelihood of successfully locating participant funds for transfer into the transfer-in plan.

6. Notices

(a) Notice to the Department

The Department has an obligation under the statute to monitor and enforce the audit reporting requirements for automatic portability providers relying on the exemption, including deadlines for submitting the audit report to the Department. Accordingly, under the proposed regulation, within 90 calendar days of the date that the automatic portability provider begins operating an automatic portability transaction program that is intended to rely on prohibited transaction relief provided by section 4975(d)(25), the automatic portability provider must notify the Secretary at

auto-portability@dol.gov

that it is operating as an automatic portability provider in accordance with Code section 4975(d)(25). The automatic portability provider must report the legal name of each business entity relying upon the exemption and any name (

e.g.,

trade or Doing Business As (DBA) name) under which the business entity may be operating. This notification needs to be updated to report a change to the legal or operating name(s) of the automatic portability provider that is relying upon the exemption. The automatic portability provider will have 90 calendar days to report a change to the legal or operating name. The automatic portability provider may also notify the Department if it is no longer operating in reliance upon the exemption. The notification requirement will allow the Department to monitor and enforce the audit report requirements.

(b) Model Description of Automatic Portability Program for Use in Summary Plan Descriptions by Transfer-Out and Transfer-In Plans

In the Department's view, to comply with the summary plan description (SPD) content requirements in 29 CFR 2510.102-2 that the SPD “shall be sufficiently comprehensive to apprise the plan's participants and beneficiaries of their rights and obligations under the plan,” participating transfer-out plans and transfer-in plans subject to ERISA's SPD requirements must include a description of the automatic portability program in the plan's SPD. Further, section 120(c)(3) of the SECURE 2.0 Act provides the Secretary with authority to require a transfer-in plan to fully disclose fees related to an automatic portability transaction in its SPD or summary of material modifications (SMM) to the extent an SMM is used to fulfill this SPD disclosure requirement.

The Department's existing regulatory safe harbors for automatic rollovers by the transfer-out plan already require plan administrators for ERISA Title I plans to provide participants with an SPD or SMM that describes the plan's automatic rollover provisions. The SPD or SMM also must include: (1) an explanation that the mandatory distribution will be invested in an investment product designed to preserve principal and provide a reasonable rate of return and liquidity; (2) a statement indicating how fees and expenses attendant to the IRA will be allocated (

i.e.,

the extent to which expenses will be borne by the IRA owner alone or shared with the distributing plan or plan sponsor); (3) the name, address and phone number of a plan contact (to the extent not otherwise provided in the SPD or SMM) for further information concerning the plan's automatic rollover provisions; and (4) the IRA provider and the fees and expenses attendant to the IRA.

The Department proposes a requirement that the automatic portability provider provide the administrator of participating plans with a description of the automatic portability program, including fees and expenses, that the administrator could use in fulfilling its SPD obligations, as relevant. The Department requests comments on whether the final rule should set forth specific content requirements for an automatic portability provider model notice.

This proposed regulation specifies two notices an automatic portability provider is required to send to IRA owners before an automatic portability transaction is executed and one notice after the automatic portability transaction is executed, as described below.

i. Initial Enrollment Notice

Section 120(c)(1) of the SECURE 2.0 Act authorizes the Secretary to require the automatic portability provider to provide a notice to IRA owners in advance of the pre-transaction notice specified in Code section 4975(f)(12)(B)(v). Consistent with this authority, this proposed regulation includes a requirement that an automatic portability provider provide an “initial enrollment notice” to the IRA owner no later than 15 calendar days after the IRA is enrolled in an arrangement that includes an automatic portability transaction component. The Department assumes that the date of enrollment will generally be the date that an IRA is established in connection with a mandatory distribution. However, for IRAs that were established

prior to the existence of the new statutory exemption, or established and then later added into an automatic portability arrangement, the enrollment date may be a later date (

e.g.,

when the IRA provider begins acting as an automatic portability provider or engages an automatic portability provider to begin including the IRA in a locate-and-match service).

The Department requests comments regarding the 15-calendar-day timeframe for sending the initial enrollment notice, particularly if the automatic portability provider is not the provider of the IRA. In this regard, the Department requests comments about the process by which IRAs that are not established with or provided by the automatic portability provider would engage an automatic portability provider and how the automatic portability provider would ensure that such a notice would be provided.

The Department proposes that the initial enrollment notice would include a variety of information regarding the nature of the automatic portability transaction and additional aspects of the IRA arrangement that are required to be included in the pre-transaction notice, discussed below. The Department anticipates that this notice requirement could be satisfied by including the information specified in proposed paragraph (b)(5)(iv) in the notice required under Code section 401(a)(31)(B) upon the establishment of a Default IRA.

ii. Pre-Transaction Notice

Paragraph (b)(5)(iv) of the proposed regulation incorporates the statutory provisions of Code section 4975(f)(12)(B)(v) requiring the automatic portability provider to provide a pre-transaction notice to the IRA owner at least 60 days before an automatic portability transaction occurs with information describing the automatic portability transaction, fees to be received in connection with the transaction, the right to elect not to participate in an automatic portability transaction, distribution options, deadlines for making elections, a telephone number for the automatic portability provider, and the right to and procedures for designating a beneficiary.

The proposed regulation provides additional clarification regarding the timing of the pre-transaction notice by requiring that the notice be sent no earlier than 90 days in advance of the automatic portability transaction. This is intended to ensure that the notice is sent sufficiently close to the actual execution of the automatic portability transaction so that the assets of the IRA do not remain there for an unreasonable period waiting to be rolled-in to the transfer-in plan.

The Department seeks comments on the proposed pre-transaction notice and whether additional information should be required. The Department is particularly interested in comments regarding whether specific information should be provided to the IRA owner explaining the significance of transferring assets into an employer-sponsored plan as opposed to retaining those assets in an IRA, as well as any plain language examples to help the IRA owner better understand the various aspects of an automatic portability arrangement. Relatedly, the Department requests comment on whether model disclosures or model language for the pre-transaction notice would be helpful and encourages commenters who support a model disclosure or model language, model charts, or other formats submit suggestions for the model language, chart or format they believe would help ensure readability and accessibility for the target audience. The Department also requests comment on whether a final rule should specify a minimum amount of time that the IRA owner has to make an election to opt out of the automatic portability transaction,

e.g.,

no sooner than 10 days before the anticipated execution of the automatic portability transaction identified in the pre-transaction notice.

iii. Post-Transaction Notice

This post-transaction notice, which would occur after a transfer-in plan receives an individual's IRA funds, is the last notice that the automatic portability provider would be required to provide to the IRA owner or plan participant. Paragraph (b)(5)(v) of this proposed regulation incorporates the statutory requirements in 4975(f)(12)(B)(vi). The statute requires that no later than three business days after the completion of an automatic portability transaction, the automatic portability provider shall provide notice to the IRA owner of the actions taken by the automatic portability provider with respect to the IRA. The statute also requires the notice to include all relevant information regarding the location and amount of any transferred assets, a statement of fees charged against the IRA or transfer-in plan account in connection with the transfer, and a contact phone number for the automatic portability provider.

The proposed regulation provides some minor clarifying language intended to explain the Department's view regarding the information needed to satisfy the statutory language. For instance, the proposed regulation adds that (1) a description of the actions taken by the automatic portability provider specifically includes that the individual was matched with an account in a new employer plan, (2) relevant information regarding the amount of transferred assets includes the name of the employer and name of the plan where the assets were transferred, and (3) the telephone number required by the statutory text is a customer service telephone number.

The Department requests comment on whether model disclosures or model language for the post-transaction notice would be helpful and encourages commenters to submit language or formats they believe would help ensure readability and accessibility for the target audience.

(d) Consolidation of Automatic Portability Provider Notices With Other Disclosures

The Department understands that an automatic portability provider may also be the designated provider of Default IRAs for a transfer-out plan and may be providing notices required by the Code and/or the Department's Safe Harbor Regulation. To the extent that the automatic portability provider has been engaged to provide notices to participants in connection with mandatory distributions on behalf of employer-sponsored plans, the notices and disclosures to individuals required by the statutory exemption and this proposed regulation would not have to be provided separately. However, the automatic portability provider should take care to ensure that the information required by the notice provisions to individuals in this proposed regulation is clearly displayed to reduce possible confusion with other provided information.

(e) Accessibility of Disclosures to Participants and IRA Owners

Paragraph (b)(5)(vi) of this proposed regulation parallels the statutory text of Code section 4975(f)(12)(B)(vii) by requiring all required notices to participants and IRA owners to be written in a manner calculated to be understood by the average person and not include inaccurate or misleading statements. The proposed regulation includes provisions intended to clarify and explain this requirement. In the Department's view, the idea of an “average person” in the context of understanding the notices under the exemption should be read as the average person receiving the notices rather than an abstract concept of an average person at large. Accordingly, the proposed

regulation speaks in terms of the average intended recipient of the notices. The proposal also specifies that the disclosures must be accurate, not misleading,

and sufficiently comprehensive to apprise the individual of their rights and obligations under the automatic portability program, must not be formatted to have the effect of misleading, misinforming, or failing to inform the recipient, and be written in a culturally and linguistically appropriate manner (see discussion below). In fulfilling these requirements, the proposed regulation requires the automatic portability provider to exercise considered judgment and discretion by taking into account such factors as the level of comprehension and education of the typical intended recipient and the complexity of the terms of the program. Consideration of these factors will usually require the limitation or elimination of technical jargon and of long, complex sentences, the use of clarifying examples and illustrations, the use of clear cross references, and a table of contents. These proposed requirements are modeled on the Department's regulation governing the style and format of SPDs that plan administrators are required to provide plan participants and beneficiaries.

The Department would consider it misleading, for example, for the automatic portability provider to include in notices to individuals any exculpatory clauses or indemnification provisions that are not permitted under this proposed regulation or by applicable law.

29 CFR 2520.102-2.

(f) Culturally and Linguistically Appropriate Standards for Required Notices and Disclosures to Participants and IRA Owners

The proposed regulation would require that notices and disclosures to participants and IRA owners be provided in a culturally and linguistically appropriate manner in certain situations. The proposal essentially adopts the ACA standard for group health benefit notices.

Specifically, if the address of a recipient of a required notice or disclosure is in a county where 10 percent or more of the population is literate only in the same non-English language, the notice or disclosure must include a prominent statement in the relevant non-English language about the availability of language services. The automatic portability provider would also be required to provide a verbal customer assistance process in the non-English language and provide written notices in the non-English language upon request.

See, e.g.,

29 CFR 2590.715-2715 and 2590.715-2719(e).

(g) Ensuring Participants and IRA Owners Receive Notices

Section 120(c)(10) of the SECURE 2.0 Act authorizes the Secretary to issue regulations to ensure that the participants and IRA owners, “in fact, receive all required notices and disclosures.” Furthermore, Section 120(c)(7) of the SECURE 2.0 Act grants the Secretary regulatory authority to require the automatic portability provider “to take actions necessary to reasonably ensure that participant and beneficiary data is current and accurate.” To this end, paragraph (b)(5)(vii) of the proposed regulation would require the automatic portability provider to adopt and implement prudent policies and procedures to ensure that it obtains individual participant and IRA owner data necessary to effectively administer the automatic portability program and that the participant and IRA owner data in its possession or control is current and accurate. The proposed regulation also specifies that notices and disclosures to participants and IRA owners must be made using methods that satisfy the disclosure requirements in 29 CFR 2520.104b-1(b). The regulation at 29 CFR 2520.104b-1(b) provides a general standard that covered materials shall be furnished using “measures reasonably calculated to ensure actual receipt of the material by plan participants, beneficiaries and other specified individuals.” The Department requests comments on how an automatic portability provider would handle undeliverable mail and whether specific additional regulatory protections should be established for individuals with respect to whom the automatic portability provider has received returned mail. The Department also invites comments on whether the regulation should specifically address electronic disclosure of notices and disclosures under the exemption, including how to deal with undeliverable electronic notices.

7. Frequency of Searches

The proposed regulation parallels the Code section 4975(f)(12)(B)(viii) requirement that the automatic portability provider query on at least a monthly basis whether any individual with an IRA has an account in a transfer-in plan. The Department believes that verification of the information used in connection with performing searches is important to carrying out the purposes of the statutory exemption. Accordingly, under the proposal, the automatic portability provider must perform ongoing participant address validation searches via automated checks of (1) National Change of Address records, (2) two separate commercial locator databases, and (3) any internal databases maintained by the automatic portability provider. If a valid address is not obtained from the automated checks, the automatic portability provider must also perform a manual internet-based search. The proposal would require these verification steps to be performed at least twice in the first year an account is entered into the automatic portability provider system and once a year thereafter. The Department invites comments on whether additional or different verification steps should be required and on whether a final regulation should specifically list other information to be used in the searches that may aid in validating a match, for example, beneficiary information. In the Department's view, the statutory exemption's description of the search requirement envisions the automatic portability provider taking reasonable steps to verify the accuracy of the information used for conducting the required searches.

The Department requests comment on whether the final regulations should permit the query to be performed by a partnering recordkeeper in addition to the automatic portability provider and how the automatic portability provider would share information with recordkeepers for purposes of running the query. If the Department permits this under the final regulations, the Department anticipates that the ultimate obligation to ensure the required searches are performed would remain with the automatic portability provider. The Department also requests comment on whether there should be specific parameters or obligations for partnering recordkeepers if they are permitted to run the queries. Finally, if any commenter believes partnering recordkeepers should be permitted to run queries, the Department requests any additional information that would support the need and rationale for permitting this under a final regulation.

8. Monitoring Transfers

The Department believes proper monitoring of automatic portability transactions by the transfer-in plan is also critical to ensuring the successful execution of the transactions, and, accordingly, the proposal includes a monitoring requirement. The Department believes general prudence obligations would require such monitoring but is including this

requirement in the proposed regulation pursuant to the general regulatory authority provided to the Department in section 120(c) of the SECURE 2.0 Act and the authority transferred to the Secretary under section 102 of Reorganization Plan No. 4 of 1978. Paragraph (b)(7) of the proposed regulation requires that the automatic portability provider ensure that each transfer-in plan for whom the automatic portability provider performs automatic portability transactions designates a plan official responsible for monitoring transfers into the plan and confirming that amounts received on behalf of a participant are invested properly. Under the proposal, amounts received would be deemed to be invested properly if made according to the participant's current investment election under the plan or, if no election is made or permitted, in the plan's qualified default investment alternative under 29 CFR 2550.404c-5 or in another investment selected by a fiduciary with respect to such plan.

9. Timeliness of Execution

Code section 4975(f)(12)(B)(ix) requires timely execution of transfers by requiring the automatic portability provider to transfer the liquidated account balance of the IRA as soon as practicable. Paragraph (b)(8) of the proposed regulation incorporates the statutory text and includes provisions intended to clarify the statutory requirement. First, the proposal clarifies the timeliness of execution is measured from the date after the final deadline passes for the affected individual to affirmatively elect not to participate in the transaction, as specified in the pre-transaction notice. The proposed regulation also provides that the automatic portability provider must follow timeframes formally established in policies and procedures, discussed in more detail below. The proposal does not include a specific timeframe for what would be considered “as soon as practicable” but requests comments on whether the final rule should include such a specific timeframe or other clarification of the standard.

10. Limitation on Exercise of Discretion and Policies and Procedures

Code section 4975(f)(12)(B)(x) provides that the automatic portability provider will neither have nor exercise discretion to affect the timing or amount of the transfer pursuant to an automatic portability transaction other than to deduct the appropriate fees. Paragraph (b)(9) of the proposed regulation incorporates the statutory limitation on discretion and expands upon the statutory text by specifying that an automatic portability provider will be deemed to satisfy the limited discretion requirement if it establishes, maintains, and follows policies and procedures regarding the process for executing automatic portability transactions. The policies and procedures must set specific standards and timeframes that are equally applied to all automatic portability transactions. The Department is proposing the policies and procedures to operationalize the limited discretion standard in accordance with the general regulatory authority granted to the Secretary under section 120(c) of the SECURE 2.0 Act and the authority transferred to the Secretary under section 102 of Reorganization Plan No. 4 of 1978. The policies and procedures are intended to ensure that the automatic portability provider is acting in accordance with its obligations under the exemption and these regulations and consistently with the intent of the statutory exemption. The Department also believes the policies and procedures will ensure that there is appropriate operational documentation by the automatic portability provider to support the audit, described below.

The policies and procedures must, at a minimum, specifically and prudently address: (1) the process to ensure that transfer-in plans designate a plan official that will be responsible for monitoring transfers into the plan due to automatic portability transactions; (2) the process and timing for liquidating the assets of the Default IRA to cash and closing the IRA; (3) the process for verifying and validating that the correct fees are withdrawn from the Default IRA; (4) the process and timing for transmitting assets to the transfer-in plan; (5) verifying the assets were received by the transfer-in plan; and (6) sending all notices to plan participants or individuals on whose behalf a Default IRA is established as required in this proposed regulation.

11. Audit and Corrections

(a) Audit and Audit Report

Code section 4975(f)(12)(B)(xi) includes a requirement for an annual audit to be conducted in accordance with regulations promulgated by the Secretary. The statute requires that an audit be conducted that demonstrates compliance with Code section 4975(f)(12) and any regulations thereunder and that identifies any instances of noncompliance with the statute or such regulations. The statute requires the automatic portability provider to submit a copy of the auditor's report to the Secretary in such form and manner as specified by the Secretary.

(b) Auditor and Auditor's Report

After consideration, the Department is proposing that the audit be an independently conducted audit to best ensure that the automatic portability provider is executing automatic portability transactions in a manner that is consistent with ERISA and that promotes the retirement security of workers. An auditor will be considered independent if: (1) the auditor is a person or an entity that the automatic portability provider does not own or control, and (2) the auditor does not derive more than two percent of its annual revenue from services provided directly or indirectly to the automatic portability provider or any of its affiliates. In addition, the auditor must have the appropriate technical training and proficiency necessary to carry out the audit. The Department invites comments regarding the two percent threshold. The Department believes the two percent threshold supports a presumption of independence but requests comment with supporting rationale if affected entities believe a higher threshold should be permitted. Additionally, the Department requests comment on what additional protections commenters would propose to support one or more higher thresholds.

Paragraph (c) of this proposed regulation would also require the independent auditor to review the automatic portability provider's policies and procedures as well as representative samples of the required disclosures and related automatic portability transactions sufficient for the auditor to make the required audit determinations and findings. The findings must be memorialized in a written audit report, which would include the following: (1) the number of completed automatic portability transactions during the audit period; (2) whether the required notices met the timing and content requirements of these regulations; (3) whether the required notices were written and delivered in a manner reasonably designed to ensure that affected individuals would both receive and understand the notices; (4) whether any required notices were returned as undeliverable and what steps were taken by the automatic portability provider to address undeliverable notices; (5) whether the appropriate transfer-in plan accounts received all the assets due as a result of the automatic portability transactions; (6) a summary of all fees charged by the automatic portability provider (and any

affiliates) for services in connection with automatic portability transactions, including whether those fees increased since the last report; (7) whether the fees and compensation received by the automatic portability provider (including its affiliates) are consistent with the fees authorized by the appropriate fiduciaries and did not exceed reasonable compensation; (8) whether all requirements of section 4975(f)(12) and these proposed regulations were satisfied with respect to: (a) the policies and procedures and (b) the transactions and disclosures that were reviewed; (9) a summary of compliance issues reported to or discovered by the auditor, the auditor's recommendations, and the extent to which the automatic portability provider has addressed or is addressing the issues pursuant to the correction procedures; (10) any other recommendations from the auditor to improve the policies and procedures and overall execution of automatic portability transactions; and (11) a description of the auditor's audit methodology. In order to assist the auditor in the review, the automatic portability provider is required to grant the auditor access to its automatic portability operations and records (including, as necessary, the operations and records of its affiliates) sufficient to allow the auditor to make the determinations and findings noted above.

Section 120(d) of the SECURE 2.0 Act requires the Secretary to provide periodic reports to Congress that include a variety of information related to automatic portability transactions and portability arrangements more generally. The Department envisions that most of the information required for this report to Congress will come from information included in the audit reports filed by automatic portability providers. Therefore, the Department is proposing that the written audit report would also include: (1) the number of automatic rollovers of mandatory distributions from qualified plans into Default IRAs that are included in the automatic portability program;

(2) the number of completed automatic portability transactions; and (3) the number of Default IRAs separately in each of the following categories: (a) which have been transferred to designated beneficiaries, (b) for which the automatic portability provider is searching for next of kin due to a deceased IRA owner without a designated beneficiary, and (c) that were reduced to a zero balance while in the automatic portability provider's custody.

Sec. 120(d)(1)(A)(i) uses the term “automatic cash outs” but the Department believes, based on the context, that it is referring to automatic rollovers of mandatory distributions as that term is used throughout this preamble.

If the automatic portability provider does not have direct access to any information required to be included in the audit report, the automatic portability provider would be required, as a condition of its services, to obtain appropriate information from partnering recordkeepers and participating plans in their possession or control, on request from the automatic portability provider, so it can be provided to the independent auditor and incorporated into the audit report.

The Department seeks comments on the availability of any information not otherwise directly accessible by the automatic portability provider and if there are any barriers to obtaining this information from participating recordkeepers or employer-sponsored plans. The Department also seeks comment on whether there are other readily available sources for such information that would be accessible to the Department.

The automatic portability provider may not have direct access to all the information identified in section 120(d) of the SECURE 2.0 Act if, for instance, the automatic portability provider is not the provider or custodian of all IRAs for which it will execute automatic portability transactions.

i. Timing of Audit Report & Certification

This proposed regulation would require the independent auditor to complete the audit within 180 calendar days following the annual period to which the audit relates. The automatic portability provider must then submit a copy of the written audit report to the Department at

auto-portabilityaudit@dol.gov

within 30 calendar days of completion. The automatic portability provider's submission to the Department must also include a certification, under penalty of perjury, that the automatic portability provider reviewed the audit report and that, to the best of its knowledge at the time, it has addressed, corrected, or remedied any noncompliance or inadequacy, or has an appropriate written plan to address any such issues identified in the audit report.

Section 120(c)(9) specifically grants the Secretary authority to provide for correction procedures in the event the auditor determines the automatic portability provider was not in compliance with the statute and related regulations. To effectuate the intent of this provision, the Department is proposing three components for corrections.

First, the Department is providing an opportunity for an automatic portability provider to make certain self-corrections. Under paragraph (c)(9)(i), the Department would not consider a non-exempt prohibited transaction to have occurred due to a violation of the requirements of Code section 4975(f)(12) and these regulations with respect to a transaction, provided that either the violation does not result in investment losses to the Default IRA or the automatic portability provider made the IRA whole for any resulting losses. In order to self-correct in those situations, the automatic portability provider would be required to correct the violation and document the correction in writing within 30 calendar days of correction. The correction would only be permitted if it occurs no later than 90 calendar days after the automatic portability provider learned of the violation or reasonably should have learned of the violation. Finally, all instances of noncompliance and accompanying corrections would be required to be reported in writing to the auditor and the auditor would have to agree that the transaction did not result in investment losses or that the IRA was made whole. The Department solicits comments on whether specific criteria should be included in the final rule on measuring investment losses and make whole requirements.

The second component for corrections involves additional recommendations from the auditor. If the auditor determines that the automatic portability provider was not in compliance with any provision of Code section 4975(f)(12) or these regulations during the audit period, the auditor must identify the instances of noncompliance in the audit report along with its recommended corrections. An automatic portability provider would not be treated as having failed to comply with any provision of Code section 4975(f)(12) or these regulations, provided it corrects any instance of noncompliance identified by the auditor as soon as reasonably practicable according to the auditor's recommendations.

The Department believes that the first two components for corrections will provide an automatic portability provider with additional incentive to take the audit process seriously, timely identify and correct violations of Code section 4975(f)(12) and these proposed regulations, and use the audit process to correct deficiencies in the automatic portability provider's operations to avoid potential future violations,

penalties, losses to IRA owners/plan participants, and lawsuits.

The third and final component for corrections would involve the Secretary requiring an automatic portability provider to submit to supplemental audits and corrective actions if significant compliance issues are uncovered. The Department is proposing the following scenarios involving the automatic portability provider or an affiliate under which the Secretary may impose additional corrective actions: (1) engaging in a systematic pattern or practice of violating any provision of section 4975(f)(12) or an implementing regulation; (2) intentionally violating any provision of section 4975(f)(12) or an implementing regulation; (3) providing materially misleading information to the Secretary, Secretary of the Treasury, or the auditor in connection with automatic portability transactions; (4) a foreign or domestic criminal conviction involving or arising out of the conduct of the automatic portability program or any automatic portability transaction; or (5) a foreign (or foreign equivalent)

or domestic criminal conviction for any felony involving the following crimes: larceny, theft, robbery, extortion, forgery, counterfeiting, fraudulent concealment, embezzlement, fraudulent conversion, misappropriation of funds or securities, or conspiracy to commit any such crimes or a crime in which any of the foregoing crimes is an element.

The Department does not expect that foreign crimes will arise frequently in connection with automatic portability providers, but if they do, impacted entities may contact the Department for guidance. Additionally, the Department requests comment regarding whether any additional process should be provided for foreign crimes before the Department imposes supplemental audits or corrective actions, particularly those foreign crimes that raise issues regarding their equivalence to a domestic crime.

12. Automatic Portability Provider website

The proposed regulation in paragraph (d) parallels the statutory language in Code section 4975(f)(12)(B)(xii) requiring the automatic portability provider to: (1) maintain a website which contains a list of recordkeepers with respect to which the automatic portability provider carries out automatic portability transactions and (2) list all fees paid to the automatic portability provider. Under the proposed regulation the list would have to include the fees and the identity of the party or account that is paying the particular fee. The proposal also requires that the website include the number of plans and participants covered by each recordkeeper. The Department solicits comments on whether other documents or materials should be required to be posted on the website, for example, a copy of the independent auditor's audit report redacted as needed to protect confidential business information, if any, in the audit report.

Because the Department anticipates that automatic portability providers may include a range of other services and information, customer support features, and functionalities in addition to automatic portability transactions, the proposal would also require the website to display automatic portability transaction-related information in a way that differentiates that information from other information or elements of the website (

e.g.,

separately identifying the automatic portability transaction fees and services from fees and services in connection with establishing and custody of a Default IRA).

The Department intends that these website disclosures and additional parameters will make it easier for plan sponsors to independently assess the overall cost of an automatic portability arrangement in connection with signing up for an automatic portability transaction service covered by the statutory exemption and this regulation.

13. Limitations on Exculpatory Provisions

Section 120(c)(6) of the SECURE 2.0 Act specifically provides the Secretary with the authority to place limitations on exculpatory provisions due to an improper transfer of Default IRA assets. Therefore, the Department is proposing that the automatic portability provider may not include exculpatory provisions in its contracts disclaiming or limiting the automatic portability provider's liability in the event that the automatic portability transaction results in an improper roll-in to the transfer-in plan. However, this requirement would not prohibit disclaimers for liability caused by an error, misrepresentation, or misconduct of a party independent of the automatic portability provider and its affiliates, or damages arising from acts outside the control of the automatic portability provider. Section 120(c)(6) of the SECURE 2.0 Act does not specifically address other exculpatory provisions. The Department requests comments on whether the prohibition on exculpatory provisions should be broader and include violations of the prohibited transaction provisions in Code section 4975 generally and ERISA in connection with any conduct of the automatic portability provider or an affiliate that is subject to Title I.

14. Record Retention

This proposed regulation incorporates the statutory language in Code section 4975(f)(12)(B)(xi)(I) regarding record retention by requiring that an automatic portability provider maintain, for not less than six years, records sufficient to demonstrate compliance with the requirements of the statute and this proposed regulation and make them available to authorized employees of the Department and the Department of the Treasury within 30 calendar days of a written request. This proposal also includes clarifying language regarding the record retention requirement and its impact on the prohibited transaction relief provided by Code section 4975(d)(25), which clarifying language the Department has frequently included in administrative prohibited transaction exemptions. First, the proposal provides that no prohibited transaction will be considered to have occurred if, solely because of circumstances beyond the control of the automatic portability provider, the records are lost or destroyed before the six-year period ends (

e.g.,

due to a natural disaster). Second, an automatic portability provider's failure to maintain the records necessary to determine whether the conditions of Code section 4975(d)(25) and this regulation have been met will result in the loss of the relief provided under this exemption only for the transaction or transactions for which such records are missing or have not been maintained. Such failure does not affect the relief for other transactions if the automatic portability provider maintains records for such other transactions in compliance with the record retention requirements.

15. Definitions

The Department included three definitions in proposed paragraph (g). The proposed definition of “affiliate” is consistent with the Department's definition of affiliate in many other regulations.

Likewise, the definition of “control” is intended to be consistent with the Department's use of that term in other regulations.

The definition of “individual retirement plan” refers to an individual retirement account or annuity described in Code section

408(a) or 408(b). The Department requests comment on whether any other definitions may be necessary to provide additional clarity to the proposed regulation.

A person or entity is an “affiliate” if, directly or indirectly (through one or more intermediaries) it controls, is controlled by, or is under common control with such person or entity; or is an officer, director, or employee of, or partner in, such person or entity. Unless otherwise specified, an “affiliate” refers to an affiliate of the automatic portability provider.

The term “control” means the power to exercise a controlling influence over the management or policies of an entity or person other than an individual.

As one example, should the Department define “active participant” or is this term generally understood?

E. Request for Public Comments

The Department invites comments from interested persons on all facets of the proposed rule. Commenters are free to express their views not only on the specific provisions of the proposal as set forth in this document, but on any issues germane to the subject matter of the proposal. Comments should be submitted in accordance with the instructions at the beginning of this document.

Without limiting the generality of the above request for comments, the Department requests comments on whether the rule should include provisions that specially address issues related to IRA beneficiaries. The statutory provisions envision an automatic portability transaction as a transfer of assets “made from an individual retirement plan which is established on behalf of an individual and to which amounts were transferred under section 401(a)(31)(B)(i)” to an eligible employer-sponsored retirement plan in which “such individual is an active participant.” The statutory provisions do not expressly reference moving funds for a beneficiary from a default IRA to an employer-sponsored plan in which the beneficiary participates. The statutory provisions similarly require notices to “the individual on whose behalf the individual retirement plan . . . is established.” Nonetheless, the Department notes the recordkeeping provisions in the statute expressly reference the automatic portability provider taking steps to ensure it has accurate beneficiary information and the statutory provisions on the required Report to Congress call for separate identification of IRAs transferred to designated beneficiaries and IRAs for which a next of kin is being identified after the death of the IRA owner without a designated beneficiary. Accordingly, the Department is interested in comments on whether the final regulation should address specific beneficiary issues, and, if the commenter believes it should, the Department asks that the commenter identify the issue or issues and include recommendations on how the issue or issues should be addressed in the regulation.

The Department also specifically requests comments on exemptive relief for Default IRAs involving rollovers of mandatory distributions with a value of $1,000 or less. The proposal does not expressly include such mandatory distributions in light of the SECURE 2.0 Act amendment of Code section 4975 defining the term “automatic portability transaction” to mean a transaction in which mandatory distributions pursuant to Code section 401(a)(31)(B)(i) from an employer-sponsored retirement plan to an IRA established on behalf of an individual are subsequently transferred to an eligible employer-sponsored plan in which such individual is an active participant, after such individual has been given advance notice of the transfer and has not affirmatively opted out of such transfer. As noted elsewhere in this document, Code section 401(a)(31)(B)(i) refers to distributions of nonforfeitable accrued benefits the present value of which is in excess of $1,000 but less than or equal to $7,000. The Department confronted a similar issue in implementing section 657(c)(2)(A) of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), which directed the Department to issue regulations providing safe harbors under which (1) a plan administrator's designation of an institution to receive the automatic rollover, and (2) the initial investment choice for the rolled-over funds would be deemed to satisfy the fiduciary responsibility provisions of section 404(a) of ERISA. Section 657 of EGTRRA also referenced Code section 401(a)(31)(B) automatic rollovers. However, in its final rule in 2004, the Department, in response to public comments, included mandatory distribution amounts of $1,000 or less noting that, although not described in Code section 401(a)(31)(B), tax-qualified retirement plans are permitted to distribute to a separating participant without the participant's consent provided the present value of the participant's vested accrued benefit did not exceed the maximum value at that time of $5,000.

The Department said that, after taking into account the purpose and provisions of the safe harbor regulation, it was persuaded that application of the safe harbor to rollovers of mandatory distributions of $1,000 or less was appropriate because the availability of the safe harbor for such distributions might increase the likelihood that such amounts will be rolled over to individual retirement plans and thereby may promote the preservation of retirement assets without compromising the interests of the participants on whose behalf such rollovers are made.

In addition, some plans may find it advisable to provide for automatic rollovers of all sizes of small accounts to avoid the issues that arise when distribution checks remain uncashed.

Thus, in light of the fact that the regulatory exemption in Code section 4975 established by the SECURE 2.0 Act specifically references 401(a)(31)(B), the Department is interested in public comments on whether it should use its general exemption authority under ERISA section 408(a) to provide parallel exemptive relief for mandatory distributions of $1,000 or less for reasons similar to those noted above in connection with the Department's automatic rollover safe harbor in 29 CFR 2550.404a-2.

See 29 CFR 2550.404a-2(d); Final Rule on Fiduciary Responsibility Under the Employee Retirement Income Security Act of 1974 Automatic Rollover Safe Harbor, 69 FR 58018 (Sept. 28, 2004).

Id. at 58019.

See “The Benefits of Mandatory Distributions,” A White Paper by Fred Reish and Bruce Ashton (2013)(available at

https://fredreish.com/wp-content/uploads/2013/03/The-Benefits-of-Mandatory-Distributions-A-White-Paper-February-2013_NEW.pdf

F. Regulatory Impact Analysis

The Department has examined the effects of this proposed rule as required by Executive Order 12866,

Executive Order 13563,

the Congressional Review Act,

the Paperwork Reduction Act of 1995,

the Regulatory Flexibility Act,

section 202 of the Unfunded Mandates Reform Act of 1995,

and Executive Order 13132.

Regulatory Planning and Review, 58 FR 51735 (Oct. 4, 1993).

Improving Regulation and Regulatory Review, 76 FR 3821 (Jan. 21, 2011).

5 U.S.C. 804(2) (1996).

44 U.S.C. 3506(c)(2)(A) (1995).

5 U.S.C. 601

et seq.

(1980).

2 U.S.C. 1501

et seq.

(1995).

Federalism, 64 FR 43255 (Aug. 10, 1999).

1. Executive Order 12866 (Regulatory Planning and Review), Executive Order 14094 (Modernizing Regulatory Review), and 13563 (Improving Regulation and Regulatory Review)

Under E.O. 12866 (as amended by Executive Order 14094), the Office of Management and Budget (OMB)'s Office of Information and Regulatory Affairs determines whether a regulatory action is significant and, therefore, subject to the requirements of the E.O. and review by OMB. 58 FR 51735. As amended by Executive Order 14094, section 3(f) of Executive Order 12866 defines a “significant regulatory action” as a regulatory action that is likely to result

in a rule that may: (1) have an annual effect on the economy of $200 million or more; or adversely affect in a material way the economy, a sector of the economy, productivity, competition, jobs, the environment, public health or safety, or state, local, territorial, or tribal governments or communities; (2) create a serious inconsistency or otherwise interfere with an action taken or planned by another agency; (3) materially alter the budgetary impact of entitlements, grants, user fees or loan programs or the rights and obligations of recipients thereof; or (4) raise legal or policy issues for which centralized review would meaningfully further the President's priorities or the principles set forth in the Executive order. OMB has determined that this revision is a significant regulatory action under section 3(f)(1) of E.O. 12866.

Executive Order 13563 directs agencies to propose or adopt a regulation only upon a reasoned determination that its benefits justify its costs; the regulation is tailored to impose the least burden on society, consistent with achieving the regulatory objectives; and in choosing among alternative regulatory approaches, the agency has selected those approaches that maximize net benefits. E.O. 13563 recognizes that some benefits are difficult to quantify and provides that, where appropriate and permitted by law, agencies may consider and discuss qualitative values that are difficult or impossible to quantify, including equity, human dignity, fairness, and distributive impacts.

2. Need for Regulation

When American workers change jobs, they often encounter frictions that result in reduced retirement savings in aggregate. This regulation will alleviate some of those frictions, resulting in more retirement savings, which will improve Americans' preparation for retirement. This is particularly beneficial given the wider context that many workers have insufficient retirement savings. Only 57 percent of households headed by 55-64 year olds held any retirement savings accounts in 2022, and the median amount in those accounts was $185,000.

The Federal Reserve reports that only one-third of Americans view their retirement savings plan as sufficient to meet their needs in retirement.

This is consistent with projections by VanDerhei (2019) showing that about 41 percent of households ages 35 to 64 will run short of money in retirement.

Similarly, Brown et al. (2018) find that nearly 77 percent of Americans are behind in saving for retirement given their age and income.

2022 Survey of Consumer Finance. “Retirement Account by Age of Reference Person,” The Fed—Table: Survey of Consumer Finances, 1989—2022 (federalreserve.gov).

Federal Reserve. “Survey of Household Economics and Decisionmaking.” 2022.

Jack VanDerhei, “Retirement Savings Shortfalls: Evidence from EBRI's 2019 Retirement Security Projection Model.” Employee Benefit Research Institute (March 7, 2019).

Jennifer Brown, Joelle Saad-Lessler, and Diane Oakley. “Retirement in America: Out of Reach for Working Americans?” National Institute on Retirement Security. 2018.

Previous generations of American workers who had a retirement plan usually had a defined benefit (DB) pension plan that promised fixed payments to them upon retirement. An employee's retirement benefit under a DB plan often is based on a percentage of their final year's compensation multiplied by their total years of employment with the sponsoring employer.

Workers who changed jobs and moved to another plan, however, received less benefits from DB plans, as these plans often had a five-year cliff vesting policy, so a worker who stayed at a job for fewer than five years received no retirement benefits from that job. Even when a worker accrued benefits under a former employer's DB plan, the effects of inflation often meant that their final year's salary earned from their former employer tended to be lower than their final year's salary earned from a subsequent employer before retirement. Since the employee's final year's salary is a key factor in the benefit formula, they would receive lower lifelong pension benefits as a result of switching jobs even if they worked the same number of years at the same salaries.

U.S. Bureau of Labor Statistics, Employee Benefits, “Retirement plan provisions for private industry workers in the United States,” Table 2, reference year 2022, (April, 2023). Available at:

https://www.bls.gov/ebs/publications/retirement-plan-provisions-for-private-industry-workers-2022.htm.

In recent decades defined contribution (DC) plans have supplanted DB plans as the most prevalent type of pension plan provided to workers.

DC plans, such as 401(k) plans, base their benefit on employer and employee contributions to an individual's account and the investment earnings on their account balance. Currently, 49 percent of private industry workers (59 percent of full-time private industry workers) are participating in a DC plan.

For workers that change jobs frequently, DC plans have certain portability advantages over traditional DB plans. Public policies such as this new automatic portability statutory exemption and this proposed regulation can further benefit participants by facilitating portability among DC plans and IRAs.

Employee Benefits Security Administration,

Private Pension Plan Bulletin Historical Tables and Graphs 1975-2021,

(September 2023), Table E4, (September 2023),

https://www.dol.gov/sites/dolgov/files/ebsa/researchers/statistics/retirement-bulletins/private-pension-plan-bulletin-historical-tables-and-graphs.pdf.

U.S. Bureau of Labor Statistics, National Compensation Survey, Series: NBU29000000000000026313 & NBU29000000000002526313, (March, 2023), Available at:

https://data.bls.gov/cgi-bin/srgate.

In the current retirement system where employer-sponsored DC plans are the primary vehicle available for employees to save for retirement, an employee separating from service with an employer may be suddenly confronted with an important financial decision regarding how to handle retirement assets they have accrued in their employer's DC plan. Making it simpler for employees to consolidate their retirement accounts and maintain their tax-favored status can improve retirement security for American workers.

Currently, employees who change jobs generally have the following four options for handling their retirement assets:

1. Leave the assets in their former employer's plan. The separating employee can do this if the value of their accrued benefit under the plan meets any threshold imposed by the plan, which can be at most $7,000 beginning in 2024. (A participant might choose this option because they find the former plan's services, investments, and fees to be attractive or because of simple inattention.)

2. Roll over their savings into a retirement plan sponsored by their new employer.

3. Roll over their assets into an IRA.

4. Cash out the balance.

The first three of these options, where the assets are in a plan or an IRA, retain their tax-preferred status. A cashout, on the other hand, results in the loss of tax-preferred status for those assets. It is no longer earning investment returns that are tax-deferred. The funds are distributed directly to the employee and are subject to regular income taxes. Additionally, a 10 percent penalty tax applies if the employee is under age 55 throughout the year in which they terminate service with the employer and if the employee does not qualify for an exception.

When a plan participant separates from service with an employer with an account balance in the former employer's DC plan, the former employer has the option to immediately

cash out account balances of $5,000 or less without the participant's consent (if the plan has a provision allowing the immediate distribution).

These distributions are a form of cashout and are often referred to as “mandatory distributions.” If, however, the participant's account balance is between $1,001 and $5,000, and the participant does not elect to have the account balance paid to an eligible retirement plan or receive the distribution directly in cash, then the plan administrator of the former employer's plan must transfer such account balance to a so-called “Default IRA” if this is required by the plan's provisions. These distributions are commonly referred to as “force-outs” or “automatic rollovers of mandatory distributions.”

As part of the SECURE 2.0 Act, Congress raised the $5,000 threshold to $7,000 (effective for distributions occurring after December 31, 2023).

Code sections 411(a)(11) and 417(e).

Code section 401(a)(31)(B)(i).

See

SECURE 2.0 Act, Sec. 304.

Default IRAs, while intended to preserve retirement assets in conservatively managed accounts, typically yield only minimal returns for investors while often imposing considerable fees.

A 2014 study by the Government Accountability Office (GAO) found that, “fees outpaced returns in most of the [forced-out] IRAs analyzed” and that account balances “tended to decrease over time.”

GAO also found the average return to be less than two percent for money market funds, which are typical investments for Default IRAs. In contrast, many accounts rolled into a worker's new employer's plan likely will be invested in the plan's default investment, usually target date funds, which typically outpace the return on money market funds. Observing data on small balance rollover IRAs in general suggests that most Default IRA owners will stay invested in money market funds for a substantial length of time; recent data suggest roughly 40 percent of these accounts remain in principal-preserving investments for at least 10 years.

Government Accountability Office (GAO). “401(k) Plans: Greater Protections Needed for Forced Transfers and Inactive Accounts.” (2014).

Id.

Lucas Goodman, Anita Mukherjee, and Shanthi Ramnath (2023): “Set it and forget it? Financing retirement in an age of defaults”,

Journal of Financial Economics,

vol 148, p.47-68. Investment Company Institute. “The IRA Investor Profile: Traditional IRA Investors' Activity, 2007-2016.” (September 2018), Appendix: Figure A.2, Page 68.

With job turnover, a single individual may end up with multiple Default IRAs, further complicating the management of their retirement account assets, and in many cases, exposing participants to duplicative fees that might otherwise have been avoided if their assets were consolidated into a single account. Also, these Default IRAs are established by employers on behalf of non-responsive participants; therefore, they are more susceptible to being abandoned or forgotten by participants.

Cashouts affect participants by removing their assets from tax-favored retirement accounts. A 2023 study by Wang, Zhai, and Lynch found that over 40 percent of separating employees report cashing out at least some of their retirement account balance, consistent with reporting from numerous recordkeepers suggesting a cashout rate of approximately 40 percent among separating participants with account balances below $5,000.

VanDerhei (2019) analyzes individuals age 35 to 64, projects forward their main sources of retirement resources, estimates how much they will fall short, aggregates that across all individuals, and calculates a present value, estimating an aggregate retirement savings shortfall in excess of $3 trillion. In light of this shortfall, reducing cashouts and retaining assets in the retirement system is an important retirement policy objective, particularly for those workers with small balance accounts who may be struggling to accumulate significant retirement assets.

Yanwen Wang, Muxin Zhai, and John G. Lynch, Jr. “Cashing Out Retirement Savings at Job Separation.” (2023). Vanguard. “How America Saves.” 2023. Alight. “Universe Benchmarks Report: How Workers Are Saving and Investing in Defined Contribution Plans.” (2023). Alight. “Distributions from Defined Contribution Plans: What Do Workers Do with their Retirement Savings After They Leave Their Employers? A Deep Dive into Post-Termination Behavior, 2008-2017.” (2019). Lucus Goodman, Jacob Mortenson, Kathleen Mackie, and Heidi R. Schramm, “Leakage from Retirement Savings Accounts in the United States,” (2021)

National Tax Journal,

74(3), 689-719.

VanDerhei, “Retirement Savings Shortfalls,” 2019.

Taking a cashout or taking no action at all may seem like the simplest and most expedient courses of action for a small-balance account participant upon job separation but can result in sub-optimal outcomes. A 2013 GAO study found that the rollover process was complex, inefficient, and burdensome for participants.

These findings were reinforced by a 2019 GAO report, which suggested that frictions in the rollover process likely contributed to participants cashing out their accounts prematurely.

Both studies advised that improving the processes for account consolidation after job separation is imperative to reducing the leakage of assets from the retirement system.

Government Accountability Office. “401(k) Plans: Labor and IRS Could Improve the Rollover Process for Participants.” Report to Congressional Requesters. (2013).

Government Accountability Office. “Retirement Savings: Additional Data Analysis Could Provide Insight into Early Withdrawals.” Report to the Chairman, Special Committee on Aging, U.S. Senate. (2019).

Plan account portability is thus integral to the retention and accumulation of retirement assets for workers. Measures to improve account portability would serve to reduce participant losses due to cashouts (and the associated taxes and penalties for early withdrawals), lost accounts, duplicative fees arising from multiple accounts, and boost average investment return.

The SECURE 2.0 Act includes a new statutory prohibited transaction exemption that seeks to improve retirement plan portability by permitting an automatic portability provider to perform automatic portability transactions for participants with Default IRA accounts established as a result of a mandatory distribution from a former employer's plan if the individual does not respond to their former plan's administrator's notices.

If an automatic portability provider meets the conditions of the statutory exemption, it can transfer assets from a worker's Default IRA to their active account in their new employer's DC plan. The proposed rule would implement the new statutory exemption.

Internal Revenue Code section 4975(d)(25).

3. Baseline and Post Statute and Regulation Scenarios

Prior to the passage of SECURE 2.0 Act, RCH operated in the automatic portability marketplace using PTE 2019-02 which is the “baseline” scenario for this analysis. As discussed previously, the PTE was issued for a five-year term. The need to renew the PTE, and the uncertainty associated with its continual renewal, creates uncertainty for the marketplace. The baseline includes the assumptions of future renewals of PTE 2019-02 for RCH and the mandatory distribution threshold to be at the pre-statute level of $5,000. SECURE 2.0 Act raised the mandatory distribution threshold for a plan administrator to transfer assets into a Default IRA from $5,000 to $7,000 and creates a statutory exemption that eliminated the uncertainty in the marketplace about the continued existence of PTE 2019-02, which should encourage the marketplace to expand its reach in the Defined Contribution universe.

The analysis looks at the

combined impacts of the SECURE 2.0 Act and the proposed regulations and does not distinguish between the two.

Brian Croce, “SECURE 2.0 Enshrines Auto Portability Into Law,”

Pensions and Investments,

(January 27, 2023) at

https://www.pionline.com/retirement-plans/secure-20-enshrines-auto-portability-law#:~:text=The%20SECURE%202.0%20provision%20stipulates,sell%20data%20relating%20to%20the.

The baseline assumes that the recordkeepers currently performing automatic portability transactions continue to be the only recordkeepers providing automatic portability transactions in the future, therefore the percent of plans and accounts covered by automatic portability remains unchanged at 65 percent. However, the percent of plans and accounts covered by automatic portability is expected to increase in the post-rule and regulation scenario, increasing from 65 percent to 90 percent by year 10.

This is actually a simplification, the average of a number that likely would have grown slightly in the absence of the Secure 2.0 Act. Before passage of the Act, in October 2022, there were only three recordkeepers who had joined the automatic portability consortium. of 2022, the Secure 2.0 Act was signed in late December 2022, and very soon shortly thereafter other large recordkeepers joined. While much of this growth in consortium members is likely related to the prospect and enactment of legislation, there might have been some growth even without the legislation. The inclusion of automatic portability in the Secure 2.0 Act increases awareness of the program and that publicity may promote growth.

In other words, for an affected participant who changes jobs in year 10, there is a 90 percent chance that their former plan has a recordkeeper that belongs to PSN and also a 90 percent chance that their new plan has a recordkeeper that belongs to PSN. This means that 81 percent of the workers who switch from one DC plan to another in year 10, have a small balance account, and do not take any affirmative action, would experience an automatic portability transaction.

This assumption is based on 2016 testimony by RCH and EBRI before the ERISA Advisory Council wherein they stated that the ability to locate and match accounts to conduct automatic portability transfers is “highly dependent on market adoption.”

As the network grows, there is a greater likelihood of being able to match a separating participant with their new employer's plan. As a result, the benefits of belonging to the network increase, encouraging more recordkeepers to join. It is anticipated that as a result of the legislation and the reduced uncertainty, more recordkeepers will join the consortium, and this dramatic growth is reflected in the post-rule estimates. Section 9 “Uncertainty” provides an alternative estimate reflecting growth in the number of recordkeepers joining the network in the baseline scenario. The Department requests comment on the portion of the expansion in recordkeepers joining the network that would be attributable to the proposal.

Retirement Clearinghouse, LLC, Employee Benefit Research Institute, and contributor Boston Research Technologies. “Auto Portability Research & Simulation: Automating Plan-to-Plan Transfers for Small Accounts.” Consolidated Testimony in front of the ERISA Advisory Council, June 8, 2016.

4. Affected Entities

4.1. Automatic Portability Providers

Retirement Clearinghouse (RCH), originally founded as RolloverSystems in 2001, was the first company to approach the Department for sub-regulatory guidance and prohibited transaction relief to offer an automatic portability program to plans. RCH asserted that its services would facilitate automatic rollovers into Default IRAs from accounts in plans of individuals' former employers that are eligible for mandatory distributions under Code section 401(a)(31)(B), automatic rollovers into Default IRAs of account balances from terminated DC plans, and automatic roll-in of funds held in Default IRAs to an individual account plan maintained by the IRA owner's new employer when the Default IRA owner changes jobs and has an account in their new employer's DC plan. In 2019, the Department issued PTE 2019-02, an individual prohibited transaction exemption permitting RCH to receive certain fees in connection with the transfer of an individual's Default IRA to the individual's account in a new employer-sponsored plan, without the individual's affirmative consent.

See

83 FR 55741 (Nov. 7, 2018) (proposed exemption) and 84 FR 37337 (July 31, 2019) (granted exemption).

Since then, RCH's footprint in the automatic portability space has grown with its formation of the Portability Services Network (PSN). This network currently consists of founding owning members RCH and six recordkeepers: Alight, Empower, Fidelity, Principal, TIAA, and Vanguard, and it can incorporate an unlimited number of additional member recordkeepers. While PSN operates as a separate entity from RCH that is controlled by RCH's founding owning members, PSN solely relies on the technological infrastructure and operations established by RCH.

PSN's website currently states that it does not charge a fee to recordkeepers or plan sponsors for its automatic portability services; instead, it charges participants a one-time fee when their account balances are transferred into a new employer's plan. Currently, the maximum transfer fee is $30, and the fee could be lower for smaller accounts.

Portability Services Network,

Our Structure,

(2023),

https://psn1.com/learning-center/about-psn/structure-of-psn.

Portability Services Network,

Our Fees,

(2023),

https://psn1.com/learning-center/about-psn/what-are-psns-fees#:~:text=Key%20aspects%20of%20PSN's%20fee,be%20processed%20at%20no%20charge.

The automatic portability provider market is new and complex. Therefore, there is significant uncertainty regarding how many entities will offer automatic portability services in the future and how the automatic portability marketplace will evolve. Barriers to entry exist in the business model, because entities must have sufficient access to plan and IRA participant data and information systems technology that would allow it to match a worker's default IRA with their plan account and transfer the employee's Default IRA to their new employer's plan. The larger the amount of data available to the automatic portability provider, the more successful it will be in matching participants' Default IRAs with their active accounts in a new employer's plan.

Based on the best available data, the Department estimates that PSN currently covers more than 60 percent of account holders in large DC plans

and that its market share is likely to increase further due to the new statutory prohibited transaction exemption. Due to the aforementioned barriers to entry for potential automatic portability providers, the Department is unaware of any entities other than PSN that are currently planning to become an automatic portability provider in reliance on Code section 4975(d)(25).

Therefore, for purposes of this analysis, the Department assumes that PSN will be the only entity providing automatic portability provider services pursuant to the statutory exemption. The Department assumes this will be the case even though RCH was granted PTE 2019-02, because the individual exemption has a limited five-year term that expires on July 31, 2024, while the

statutory exemption does not, and RCH would have to request additional relief from the Department to continue relying on PTE 2019-02 after its five-year term expires. If, counter to the Department's assumption, it turns out that there is more than one automatic portability provider, the Department anticipates that the number of automatic portability providers would be very small because of the barriers to entry. They might specialize by geography or by types of plan; for example, one automatic portability provider might specialize in plans for government employees. It seems likely that their networks would overlap so both automatic portability providers could be successful in making many matches. The Department welcomes comments regarding how many automatic portability providers there would be, as well as data and other information that will allow the Department to further assess how the automatic portability marketplace will develop.

Plans classified as large constitute nearly 90 percent of account holders in plans required to file the Form 5500 and must submit the Schedule C of the Form 5500, which covers service providers, such as recordkeepers. Plans considered small do not report this information. Calculation based on tabulations of the 2021 EBSA Private Pension Plan Bulletin Research File.

The Department is aware of one additional entity that had expressed interest in becoming an automatic portability provider; however, the Department understands this entity is no longer moving ahead with plans to become an automatic portability provider.

4.2. Recordkeepers

As discussed above, the Department assumes that PSN will be the only automatic portability provider in the market. PSN is structured with seven “owner members,” who have board control. It allows for open recordkeeper membership without board control. In September of 2023, PSN stated that the owner members, which include Alight, Empower, Fidelity, Principal, RCH, TIAA, and Vanguard, were the only members at that time.

There is significant uncertainty regarding how many recordkeepers will join PSN. The Department believes that automatic portability transactions will be a desirable feature for plan sponsors and participants, which may drive growth in recordkeeper participation. Recordkeepers do not incur a direct cost to join PSN. The Department requests comment on how many recordkeepers would choose to join PSN.

Portability Services Network,

PSN Participating Owner Members and Members,

(2023),

https://psn1.com/auto-portability/regulatory-information/participating-recordkeepers.

While this analysis assumes that PSN will be the only automatic portability provider, the Department acknowledges that another automatic portability provider may enter the market. Entry of additional automatic portability providers may impact the number of affected recordkeepers and the manner in which those recordkeepers are affected by this proposed regulation.

According to the Department's analysis of 2021 Form 5500 data, there were 1,951 recordkeepers providing services to private sector DC retirement plans.

As described in more detail in subsection 3.1 above, the six recordkeepers that are founding owner members of PSN administer accounts for over 60 percent of account holders in large DC plans that file Form 5500. The Department estimates that by the end of the ten-year estimation period for this analysis, roughly 90 percent of the DC account holders in plans filing Form 5500 would be associated with participating recordkeepers. As an illustration, this level of recordkeeper participation could be achieved if the next 12 largest recordkeepers, in terms of account holders serviced, fully participated in the program. Because the market is currently dominated by large recordkeepers, the Department anticipates that additional entry into the market will be initially dominated by other large recordkeepers. However, because of the low cost to participate in the PSN, it is possible that most recordkeepers will eventually participate in it. The Department solicits comments on its assumptions and estimates regarding recordkeeper participation.

The analysis only included plans with nonzero plan assets and nonzero participants. Calculations based on the 2021 Form 5500.

4.3. Plans, Plan Participants, and the Number of Automatic Portability Transactions

This section derives an estimate of the number of automatic portability transactions. It does so by (1) identifying plans, participants, and assets covered by PSN-participating recordkeepers, (2) estimating the number of accounts below the mandatory distribution threshold, and (3) estimating employment separations and post-separation behavior. It estimates these figures under the baseline scenario and under implementation of the statute and regulation.

4.3.1. Plans, Participants and Assets

The proposed regulation has the potential to affect participants with account balances in any employer-sponsored retirement plan that is: (1) a qualified trust; (2) an annuity plan described in Code section 403(a); (3) an eligible deferred compensation plan described in Code section 457(b) which is maintained by an eligible employer described in Code section 457(e)(1)(A); or (4) an annuity contract described in Code section 403(b).

Approximately 635,000 DC plans reported participants with account balances on their 2021 Form 5500. These plans cover 86.6 million participants with total account balances of $9.3 trillion.

While this rulemaking technically may apply to separated, vested DB participants as well, the Department believes that it is rare that they would be affected by the rule and therefore does not include them in its estimates. For further discussion, please see section 9. Uncertainty. The number of participants is left static throughout the ten-year time period of analysis. While this could impact the overall estimate of the benefits and costs, it does not impact the relative difference between benefits and costs.

To understand the number of plans, participants and assets that could be impacted one would need to know if the plan's recordkeeper is part of the PSN network and if their account balance is below the mandatory distribution threshold ($5,000 baseline or $7,000 post statute and regulation) when they separate from employment. To identify plans with PSN-participating recordkeepers the Department queried Form 5500 Schedule C data, which has information on a plan's service providers. The data has limitations. in particular, only large plans are required to submit the Schedule C, which means the majority of plans do not have to file the Schedule C. However, the group of retirement plans required to submit the Schedule C covers nearly 90 percent of participants with account balances and 90 percent of assets, which are the main variables of interest.

The query of Schedule C data showed that the six recordkeepers that are founding owner members of PSN provided services to over 34,600 large plans (40 percent of large plans) with 47 million account holders (61 percent of account holders in large plans). These plans held $5.5 trillion in assets (66 percent of large plan assets) in 2021.

Tabulations presented are based on the 2021 EBSA Private Pension Plan Bulletin Research File.

Some plans with participants that may be impacted by the proposed rule are not required to file the Form 5500, for example state and local governmental plans. Account holders who participate in state and local governmental plans that are not covered by ERISA may also be affected by the proposed rule if their plan sponsor contracts with an automatic portability provider to provide automatic portability services. According to BLS employment data, there are almost 20 million currently employed state and local government workers in the United States.

The March 2021 National Compensation Survey: Employee Benefits in the United States indicates that 18 percent of state and local

government workers participate in a defined contribution plan.

Without more granular data, it is difficult

for the Department to determine a reasonably specific proportion of these workers that could be affected by the proposed rule. However, the Department estimates that up to 3.5 million state and local government workers participate in a DC plan that may also incorporate a mandatory distribution provision for small account balances.

BLS Series Report(s) from the Current Employment Statistics program: CES9092000001 & CES9093000001, Dec 2022 data element, data accessed 10/2/2023 from:

https://data.bls.gov/cgi-bin/srgate.

5,087,000 state employees and 14,370,000 local government employees.

BLS, “National Compensation Survey: Employee Benefits in the United States”, (September 2021), Employee Benefits in the United States, March 2021 (

bls.gov

Calculated as: 18% × (5,087,000 state employees + 14,370,000 local government employees) = 3,502,260.

4.3.2. Accounts With Balances Less Than the Mandatory Distribution Amount

The proposed regulation directly affects participants with account balances less than $7,000 in a plan at the time of separation from employment, previously only $5,000.

To estimate the number of affected participants, the Department considered the separation rate for participants within this group and the proportion of DC plan accounts with balances under $7,000.

There are some accounts that could have balances above the $7,000 threshold that are still subject to a mandatory distribution.

See

Code section 411(a)(11)(D) for circumstances where the amount of a distribution may be greater than $5,000 if a participant made a previous roll-in to a plan from an individual retirement plan. In such circumstances, the roll-in funds are not considered in determining the $5,000 vested accrued balance, so a larger amount of assets could be subject to a mandatory distribution under the terms of the plan.

While the Department lacks data specifically on DC accounts with less than $7,000, there are related data that are useful in the construction of an estimate. The Employee Benefit Research Institute (EBRI) reported that in 2020, 40 percent of 401(k) plan accounts with balances had less than $10,000 in their accounts and 28 percent had less than $5,000 in their account.

The Department used this data to estimate that approximately 33 percent of DC plan accounts will have balances below the new mandatory distribution threshold of $7,000. Additionally, the Department estimates that 28 percent of DC plan accounts would have balances below the current mandatory distribution threshold of $5,000 that represent the baseline. The Department requests comment on these assumptions and this estimate.

Sarah Holden, Steven Bass, and Craig Copeland. “401(k) Plan Asset Allocation, Account Balances and Loan Activity in 2020,” EBRI Issue Brief #576. November 29, 2022. Retirement Clearinghouse, LLC, Employee Benefit Research Institute, and contributor Boston Research Technologies. “Auto Portability Research & Simulation: Automating Plan-to-Plan Transfers for Small Accounts.” Consolidated Testimony in front of the ERISA Advisory Council, June 8, 2016.

4.3.3. Affected Accounts

Table 1 shows the estimates of the number of accounts, how the affected accounts are identified, and how the affected accounts are impacted in the baseline scenario and post-rule scenario for the first year in the estimation period. This section explains the assumptions and calculations used to obtain the estimates in the table. A similar table could be constructed for each year, with the difference for each year being the percent of accounts covered by the automatic portability network. A key takeaway from the table is the increase in accounts in plans with the automatic portability feature from the baseline to the post-rule scenario. The increase in these accounts is the source of much of the benefits of the rule. Bolded numbers at the bottom of a table are numbers that flow into a subsequent table.

Table 1—Affected Accounts

Baseline

Post-rule

Defined Contribution Plan Account Holders

86,573,634

× Job Separation Rate Associated with Modest Account Balances

20%

= Annual Account Churn

17,314,727

× Proportion with Balance of $7,000 or less

33%

= Affected Accounts

5,713,860

× Proportion of Separating Account Holders Subject to Mandatory Distribution

85%

100%

= Accounts Subject to Mandatory Distribution

4,848,124

5,713,860

Accounts Not Subject to Mandatory Distribution

865,736

These values flow into Table 3.

A 2023 report by Vanguard suggests that accounts with balances below $10,000, which is the most similar balance category that aligns with the mandatory distribution limit and therefore used as a proxy for this group, are primarily held by participants with household incomes of less than $50,000.

The Federal Reserve Economic Well-Being of U.S. Households Survey of Household Economics and Decisionmaking (SHED) survey provides data on voluntary and involuntary employment separations by income range. Based on SHED data from 2018-2022, the Department assumes a separation rate of 20 percent for workers with annual household incomes of less than $50,000.

The Department uses this factor as the separation rate for small balance plans in its estimations.

Vanguard. “How America Saves.” 2023.

Federal Reserve. “Economic Well-Being of U.S. Households in 2022.” (2023).

https://www.federalreserve.gov/publications/files/2022-report-economic-well-being-us-households-202305.pdf.

The Department is interested in the post-separation behavior of both the employer/plan sponsor and account owner. A survey conducted by the Callan Institute in 2022 found that 65 percent of DC plan sponsors sought to retain assets of both retirees and terminated participants, with 85 percent seeking to retain assets of retirees and 65 percent seeking to retain assets of other terminated participants.

This study also suggests that plan sponsors seek to retain separating employees' plan assets due to cost efficiencies, although half of the responding plan sponsors did not have a strategy in place for asset retention. The Department seeks comment from entities such as plan sponsors and recordkeepers with information on plan policies and

participant behavior after job separation related to small balance accounts.

Callan Institute. “2023 Defined Contribution Trends.”

https://www.callan.com/research/2023-defined-contribution-trends-survey/.

Two recordkeepers servicing 8 million accounts, Alight and Vanguard, published separate experience studies regarding post-separation actions in 2023.

These reports have informed the Department's understanding of the disposition of small balance accounts. As presented in table 2, the two studies report similar rates of cashouts. However, the proportion of accounts rolling over and remaining with the prior employer's plan varied significantly. These differences may be attributable to differing economic conditions, differing levels of financial literacy, or by plan design elements unique to the recordkeeper.

Vanguard. “How America Saves.” 2023; Alight. “Universe Benchmarks Report.” 2023.

Table 2—Post-Separation Behavior for Small Balance Accounts

[$1,000-$4,999]

Year

published

Recordkeeper

Accounts

Cashout

(%)

Remain in plan

(%)

Rollover

(%)

2023

Vanguard

5,000,000

2023

Alight

3,000,000

Behavior Assumptions without Automatic Portability Feature *

Behavior Assumptions with Automatic Portability Feature (Based on RCH Pilot)

* Weighted average of values from Vanguard and Alight reports. Automatic portability is estimated to decrease cashouts by 25% across eligible accounts, which increases rollovers by approximately 40%.

The Department developed its estimates related to post-separation actions using both studies to create weighted averages based on the number of accounts in each study. Therefore, the Department estimates that 36 percent of separations will result in a cashout in the absence of the enhanced automatic portability plan feature provided in this proposal and statutory exemption. The Department acknowledges that the experience of these two service providers may not be representative of the experience for all plan recordkeepers and requests comments or additional data concerning this assumption.

This proposal would affect plan participants differently depending on the size of their account balance. As discussed above, under current law, a separating employee with a DC plan account balance of $7,000 or less can be “cashed out” of the plan by their employer without their consent. A separating employee with DC plan savings between $1,001 and $7,000 can only be “forced out” of their plan into a Default IRA through an automatic rollover if they do not provide directions to the employer after receiving a notice from the plan's administrator.

See

Code section 401(a)(31)(B) as amended by the SECURE 2.0 Act. Previously, this “force out” applied to a separating employee with DC plan savings between $1,001 and $5,000.

Alternatively, this proposal would allow for “automatic portability transactions.” These are transactions in which assets held in a Default IRA established on behalf of an individual from a mandatory distribution from an employer-sponsored retirement savings plan are subsequently transferred to an eligible employer-sponsored plan in which such individual is an active participant, after such individual has been given advance notice of the transfer and has not affirmatively opted out of such transfer. As shown above in table 2, the Department estimates that the statutory exemption would reduce the propensity to cash out for separating participants with small accounts by 25 percent. The basis for this estimate is a pilot study of automatic portability conducted by RCH which reduced cashout rates for small balance account holders by approximately 50 percent.

The specific way the pilot study was implemented, however, suggests that this finding is larger than we would observe under the statutory exemption. The pilot study had a selected sample of participants who had been matched to a current, active account. Participants received a letter encouraging them to call and speak with someone who would provide advice or guidance about their options and offer to help them implement a rollover.

Boston Research Technologies. “Eliminating Friction and Leaks in America's Defined Contribution System.” 2013.

Table 3 shows how the affected accounts are sorted in the Department's estimation process for year one. For both the baseline and the post-rule scenario, the first step is to group the accounts based on whether or not the account belongs to a plan with the automatic portability feature and accounts subject to a mandatory distribution requirement. There are 865,736 accounts that are not subject to mandatory distribution in the baseline because their balances are between $5,001 and $7,000. These accounts are subject to mandatory distribution in the post-rule scenario. The assumptions from table 2 are then applied to these groups to estimate the share of small accounts post-separation being cashed out, remaining in the plan, and those rolled over.

These estimates are calculated as follows: 36% baseline cashout rate × 25% decline from automatic portability = 9 percentage points. The estimated post-rule cashout rate is the baseline cashout rate, 36%, minus 9%, which equals 22%. The estimated post-rule rollover rate is the baseline rollover rate of 22%, plus the 9% increase from automatic portability, which equals 31%.

Table 3—Year One Disposition of Accounts

Disposition of accounts

Baseline

Accounts subject

to mandatory

distribution

Accounts not

subject to

mandatory

distribution

Total

Post-rule

Accounts subject

to mandatory

distribution

Total

Accounts with Balances Below $7,000

4,848,124

865,736

5,713,860

Cashout:

Number of Accounts

1,461,709

311,665

1,773,374

1,722,728

Remain in Plan:

Number of Accounts

2,036,212

363,609

2,399,821

Rollover:

Number of Accounts

1,350,202

190,462

1,540,664

1,591,310

× Estimated Percent of Rollovers Going into Default IRAs

60%

Total Default IRAs

810,122

954,786

× Year One Account Coverage by AP Network

65%

Automatic Portability Feature

526,579

620,611

No Automatic Portability Feature

283,543

334,175

In the baseline, accounts with assets between $5,001 and $7,000 are not subject to mandatory distribution. In the post-rule scenario, all accounts with assets below $7,000 are subject to mandatory distribution.

Coverage by the AP network is expected to expand in the post rule scenario while the baseline is assumed to remain constant. The post rule scenario is modeled using the following coverage assumptions: A

= {65%, 72%, 78%, 82%, 84%, 86%, 88%, 89%, 90%, 90%}; where element

= years 1 through 10.

35 percent of accounts are not assumed to be covered by the AP network in year one. The percent of accounts not covered by the AP network in subsequent years may be calculated as 1−A

Finally, the Department estimates the number of default IRA accounts expected to be generated from the roll over activity in year one. Research finds that approximately 60 percent of all small account balance IRA rollovers (default IRAs) are the result of automatic rollovers of mandatory distributions.

The estimates of accounts rolling over for the first year described in table 3 are applied to the 60 percent factor to generate the estimated number of affected accounts expected to roll over into a default IRA. This is the group where the automatic portability transactions will occur. These calculations continue into table 4, where the number of Default IRAs is shown over each of the first ten years, followed by the number of Default IRAs with automatic portability features, as well as the number that ultimately result in an automatic portability transaction each year.

Approximately 60% is an estimate of the share of IRAs below the current mandatory distribution threshold of $5,000, established from a rollover, that remain fully invested in money market funds after one year of opening.

See

Figure 6.8. Investment Company Institute. “The IRA Investor Profile: Traditional IRA Investors' Activity, 2007-2016.” (2018). Goodman, Mukherjee, and Ramnath, “Set It and Forget It,” 2023.

Table 4—Ten Year Counts of Default IRA and Automatic Portability (AP) Transactions

Estimation period

Year 1

Year 2

Year 3

Year 4

Year 5

Year 6

Year 7

Year 8

Year 9

Year 10

Total

Baseline (RCH/PSN Operates, $5,000 Distribution Limit)

Coverage/Match Factor

65%

Default IRAs

810,122

8,101,220

Accounts with AP

526,579

5,265,790

AP Transfers

337,484

3,374,840

Post-Rule (RCH/PSN Grows, $7,000 Distribution Limit)

Coverage/Match Factor

65%

72%

78%

82%

84%

86%

88%

89%

90%

Default IRAs

954,786

976,384

994,897

1,007,239

1,013,410

1,019,581

1,025,752

1,028,837

1,031,923

10,084,732

Accounts with AP

620,611

702,996

776,020

825,936

851,264

876,840

902,662

915,665

928,731

8,329,456

AP Transfers

397,749

519,606

630,585

699,159

724,418

766,494

809,360

817,864

839,779

824,156

7,029,170

Differences between the Baseline and Post-Rule:

Default IRAs

144,664

166,262

184,775

197,117

203,288

209,459

215,630

218,715

221,801

1,983,512

Accounts with AP

94,032

176,417

249,441

299,357

324,685

350,261

376,083

389,086

402,152

3,063,666

AP Transfers

60,265

182,122

293,101

361,675

386,934

429,010

471,876

480,380

502,295

486,672

3,654,330

* The Department estimates that approximately 1.4% of all accounts that are matched for an automatic portability transaction will not be transferred due to account holder opt-out. The coverage/match rates can not be applied directly to the estimates in the table to obtain other estimates in the table. The drop in Automatic Portability transfers from year 9 to year 10 is a function of the coverage/match rates being the same in both years in the estimation model.

5. Benefits

This section describes the benefits of the proposed regulation in comparison to the baseline before the statutory exemption for automatic portability transactions was enacted by SECURE 2.0 Act. As previously stated, RCH/PSN already relies on relief the Department provided in PTE 2019-02, an administrative individual exemption, to provide automatic portability provider services. In general, the benefits of the proposed regulation are derived from the removal of the uncertainty associated with the need to rely on an individual exemption. Moreover, RCH/PSN will benefit from this proposed regulation because they would not have to request additional relief from the Department when the five-year term of PTE 2019-02 expires.

The establishment of a statutory exemption encourages the growth of the market for automatic portability providers. As previously stated, the Department assumes that RCH currently represents roughly 65 percent of the accounts in the system and that they have a success rate of 65 percent in matching accounts in that system. This results in roughly 337,000 automatic portability transfers estimated to occur each year in the baseline. This is compared to the expansion that results from the rule where the Department estimates the number of automatic portability transfers to grow to approximately 825,000 at the end of the estimation window. This estimate represents automatic portability coverage for approximately 90 percent of the accounts in the DC system. This is anticipated to result in $2.8 billion of undiscounted benefits arising through:

• An increase in potentially affected accounts due to the increase in the mandatory distribution threshold from $5,000 to $7,000;

• Projected account balance appreciation and higher returns;

• Reduction of duplicative fees; and

• Consolidation of abandoned accounts.

Retaining assets in retirement accounts and avoiding cashouts is an objective of the statute and proposed rules. Table 5a shows the value of assets retained in the retirement accounts through a reduction of the amount of assets cashed out. The impact of the rule is the difference in the value of accounts that cashout post-rule relative to the baseline. This amount is not classified as a benefit. Table 5b shows each component of the quantified benefit stream measured as improvements between the baseline scenario and the post proposed rule scenario. The increase overtime in affected accounts is incorporated into the values displayed.

Table 5

—Value of Affected Accounts

[$ in millions]

Year

Total

Retirement Assets Retained via Cashout Avoidance:

Rule

$5,334

$5,202

$5,086

$5,007

$4,967

$4,926

$4,886

$4,865

$4,844

$49,962

−Baseline

5,461

54,609

= Assets Retained

127

259

375

454

494

534

575

596

617

4,647

Present Value of Assets Retained by Discount Rate:

3 Percent

123

244

343

403

426

448

468

470

473

459

3,856

7 Percent

118

226

306

346

352

356

358

347

335

313

3,059

Table 5

—Value of Affected Accounts

[$ in millions]

Year

Total

Value of Reallocation of Assets:

Rule

$29,218

$27,792

$26,380

$24,954

$23,554

$22,267

$21,058

$19,905

$18,839

$17,842

$231,808

−Baseline

29,249

27,570

26,013

24,569

23,229

21,987

20,835

19,767

18,776

17,857

229,851

= Benefits

−31

222

367

385

325

280

223

139

−15

1,957

Value of Duplicated Account Fees:

Rule

125

157

191

225

261

295

1,469

−Baseline

113

128

142

780

= Benefits

112

133

153

689

Value of Abandoned Accounts Consolidated:

Rule

211

−Baseline

101

= Benefits

110

Annual Total:

Rule

29,247

27,846

26,464

25,069

23,701

22,447

21,273

20,155

19,125

18,162

233,488

−Baseline

29,273

27,609

26,066

24,636

23,310

22,082

20,944

19,890

18,913

18,009

230,732

= Benefits

−26

237

398

433

390

365

329

265

211

153

2,756

Present Value of Benefits by Discount Rate:

3 Percent

−26

224

364

385

337

306

267

209

162

114

2,342

7 Percent

−25

207

325

331

278

243

205

154

115

1,911

Lastly, it should enhance the ability of American workers to achieve their retirement savings goals by consolidating retirement funds into fewer accounts and investing assets consistent with their retirement needs. These benefits are described in more detail in the following subsections.

5.1. Benefits for Plan Participants

The Department expects that DC plan participants with small account balances that are subject to the Code's mandatory distribution rules would benefit from increased access to automatic portability transactions in several ways. First, their retirement account balances would be consolidated in their new employer's plan, which would reduce participants' exposure to duplicative fees. Second, the incidence of missing participants and abandoned accounts would decrease as a result of the automatic portability providers matching a Default IRA with an individual's account in their new employer's plan. Third, moving assets from a Default IRA to a DC plan would likely provide greater investment returns, on average, as the assets are reallocated from being invested in money market funds to target date funds and other, more diversified investments.

5.1.1. Account Consolidation

One potential outcome of a highly mobile labor force (one in which employees change jobs frequently) is the proliferation of retirement accounts. Data from the Federal Reserve indicates that approximately 20 percent of employees with a DC plan account and household incomes below $50,000 changed jobs in the past year.

As participants change jobs, mandatory distributions into a Default IRAs can result in individuals owning several retirement accounts.

Once potential outcome of multiple accounts is individuals paying management or recordkeeping fees for several accounts. GAO reported a median annual record-keeping flat fee of $42 per account. Although modest, this fee can contribute to an erosion of accumulated retirement assets, especially if applied to multiple, small-balance accounts.

Thus, each account consolidation provides a benefit to participants equal to the value of any associated fees or expenses arising from maintaining an additional retirement account that would be eliminated through consolidation net of the transfer fee discussed in section 6.4 of the Costs section below. Accordingly, the Department estimates that over the 10-year estimation window, account consolidations will total approximately 3.7 million additional accounts when compared to the baseline, yielding approximately $689 million in undiscounted benefits for participants accruing from the reduction of duplicative fees for multiple accounts over the 10-year estimation period.

Federal Reserve. “Economic Well-Being of U.S. Households in 2022.” (2023).

https://www.federalreserve.gov/publications/files/2022-report-economic-well-being-us-households-202305.pdf.

Employee Benefit Research Institute. “EBRI IRA Database: IRA Balances, Contributions, Rollovers, Withdrawals, and Asset Allocation, 2017 Update.” (2020).

Government Accountability Office. “401(k) Plans: Greater Protections Needed for Forced Transfers and Inactive Accounts.” (2014).

The estimate is calculated as follows: 3,654,330 account consolidations × $42 = $153,481,860 in benefits. $153,481,860 × average of 4.5 years receiving benefit per account = $689,003,322 in total benefits. At a discount rate of 3 percent, this results in $552,051,586 in total benefits. At a discount rate of 7 percent, this results in $417,450,008 in total benefits.

5.1.2. Missing Participants and Abandoned Accounts

Another consequence of the proliferation of small-balance accounts is the potential for a high volume of retirement assets that are “abandoned” by participants. Over time, DC plan account holders that have separated from their employers may become disconnected from their retirement assets as a result of mandatory distributions into Default IRAs. Abandonment of these accounts may be attributable to any number of reasons but are often the result of participants that are missing (cannot be found by the plan provider), unresponsive (failing to respond to communications from the plan provider), or unaware that an account has been established on their behalf. Goodman, Mukherjee, and Ramnath (2023) found that 0.4 percent of retirement-aged IRA owners abandoned their IRAs, amounting to $66 million (in 2016 dollars).

100

Because this figure only relates to retirees, it represents only a fraction of the assets that exist in abandoned IRAs for the larger pool of IRA owners of all ages; a portion of these IRA owners would have been impacted by mandatory distributions. The Department estimates that 1.0 percent of Default IRA owners will abandon their IRAs, which is consistent with Goodman, Mukherjee, and Ramnath (2023).

101

It seems likely that IRA owners who experienced force-outs may have higher abandonment rates than other IRA owners. Owners who experienced force-outs allowed themselves to be defaulted into an IRA instead of taking action to perform a rollover or obtain a cashout, indicating they may have a tendency to be unaware or passive, characteristics that may increase the likelihood of abandonment. From FY 2017 through FY 2023, EBSA benefit advisors have located 4,732 participants through a joint initiative with the Pension Benefit Guaranty Corporation (PBGC) to connect individuals with retirement benefits valued at $227.6 million.

100

In this study, account abandonment is proxied by a failure to claim the account over ten years after a legal requirement to do so; specifically, the required minimum distribution requirement. Goodman, Mukherjee, and Ramnath, “Set It and Forget It,” 2023.

101

Id.

Given the threshold for mandatory distributions increases to $7,000 in 2024 while the adoption of auto-enrollment policies by plan sponsors continues to expand, there will be an increased number of potential Default IRAs, and, as a result, the number of accounts that might be abandoned or have missing participants will also increase.

102

However, over time the Department estimates a minimum of approximately 37,000 accounts will be saved from abandonment with the statutory exemption over the 10-year estimation period (1.0 percent of the approximately 3.6 million accounts that will be consolidated through automatic portability transactions when compared to the baseline). The Department further estimates the consolidation of abandoned accounts would provide approximately $109.6 million in undiscounted benefits for participants over the 10-year estimation window when compared to the baseline.

103

The Department requests comment on these estimates.

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Id.

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The estimate is calculated as follows: 3,654,330 account consolidations from automatic portability transactions × 1% of retirement accounts that are abandoned = 36,544 abandoned accounts consolidated. 36,544 accounts × $3,000 average account balance for Default IRAs = $109,632,000. At a discount rate of 3 percent, this results in $90,685,800 in total benefits. At a discount rate of 7 percent, this results in $71,592,717 in total benefits.

5.1.3. Improve Asset Allocation

Upon job separation, some employees with small-balance accounts between $1,001 and $7,000 (in 2024)

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