PLANSPONSOR - April/May 2020 - 51

INSIDE ANGLE
The Pluses
Of Portability
The auto-feature lessens leakage and the number of missing participants
S
mall 401(k) accounts left behind by terminated participants
can increase plan costs and fiduciaries' legal risks.
Many sponsors currently address the concerns by including
in their plan an automatic rollover (ARO) feature that allows
terminated vested participants' accounts of under $5,000 to be
rolled over to an individual retirement account (IRA) and/or permits
accounts under $1,000 to be cashed out. The ARO market is
evolving, however, and there's an increasing focus on incorporating
functionality into traditional ARO systems that helps prevent
plan leakage-i.e., pre-retirement withdrawals-and reduces
the number of unlocatable participants.
As fiduciaries periodically review their ARO practices,
it's important that they understand their obligations under the
Employee Retirement Income Security Act (ERISA). Fiduciaries
generally must prudently select and monitor ARO providers, just
like they would any other service provider. The Department of
Labor (DOL) issued a regulation years ago creating a fiduciary
safe harbor for the selection of an ARO provider.
The key requirements of the regulation are that the fiduciary
have a written agreement with the provider-enforceable
by the participant-that requires: 1) amounts rolled over into an
IRA to be invested in certain principal preservation investments;
2) the investments provide a reasonable rate of return; 3) the fees
be reasonable and appropriate; and 4) the fees be disclosed to the
participant. The regulation is not the exclusive way for fiduciaries
to satisfy their obligations under ERISA, but it does provide
a road map for fiduciary decisionmaking.
Improved AROs
Plan sponsors should keep in mind that the DOL regulation is 15
years old. Over that decade and a half, an increasing number of
products and services has come to market, intended to make AROs
work better for both sponsors and participants. For example, there
has been much discussion recently about automatic portability,
as a result of a DOL advisory opinion and prohibited transaction
exemption (PTE) issued to one ARO service provider.
The goal of auto-portability is to prevent plan leakage and
reduce the number of unlocatable participants by automatically
transferring a participant's ARO into an active 401(k) account. It
does this by using a network of recordkeepers that can be periodically
searched to find a person's active 401(k) account. Once an
active account is found, the ARO can be automatically transferred
through a negative consent process to the active account, thereby
consolidating the participant's savings and reducing the number
of small accounts.
DOL guidance in Advisory Opinion 2018-01A has clarified
that fiduciaries can prudently add an auto-portability service to
their ARO practices consistent with the existing regulation. Plan
fiduciaries must continue to
consider the fees associated
with ARO services, including
those enabling auto-portability,
but, the DOL explained, a fiduciary
should also consider " the
number of successful matches
and account consolidation
transfers achieved through use
of " auto-portability in light of
the fees for the service.
The DOL guidance
suggests that, when considering adding auto-portability
functionality, fiduciaries should take into account the benefits to
participants, including whether its use can help more participants
keep track of their savings, as well as the costs. The idea is
consistent with the DOL's broader view that plan fiduciaries have
an obligation to locate missing participants and to pay benefits.
Missing Participants
As sponsors and fiduciaries engage in periodic reviews of their
ARO systems, they may consider opportunities to help the fiduciaries
satisfy other duties, including taking steps to locate missing
participants. Fiduciaries might consider incorporating new questions
related to ARO services into their diligence procedures.
They could inquire about: 1) the availability of services, including
auto-portability, intended to preserve account balances and
reduce cash-outs, and 2) the existing processes and procedures
for locating missing account holders, including any data related
to the effectiveness of those procedures-e.g., the percentage
of missing participants/IRA holders that get located and the
median duration of safe harbor IRAs.
Steve Saxon is a partner with Groom Law Group, Chartered,
and George Sepsakos is a principal with Groom. Offices for
Groom are in Washington, D.C.
Plan sponsors
should keep
in mind
that the DOL
regulation is
15 years old.
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