DOL Clarifies Fiduciary Roles in Auto-Portability Solution

The Department of Labor (DOL) has issued an advisory opinion letter in response to a request by J. Spencer Williams, founder, president and CEO of Retirement Clearinghouse (RCH), for the Department’s opinion on the status of certain parties as “fiduciaries” within the meaning of Section 3(21)(A) of the Employee Retirement Income Security Act (ERISA) and Section 4975(e)(3) of the Internal Revenue Code (Code) as a result of actions undertaken as part of RCH’s Auto-Portability Program.

The letter provides details of the program, but basically, the RCH Program portability services related to the request involve automatic rollovers of mandatory distributions and account balances from terminated defined contribution plans into default IRAs and the subsequent automatic roll-in of funds in the default IRAs to an individual account plan maintained by a new employer when the IRA owner changes jobs.

Plan sponsor responsibilities

According to the DOL, when plan sponsors or other responsible fiduciaries choose to have a plan participate in the RCH Program, they are acting in a fiduciary capacity, and would be subject to the general fiduciary standards and prohibited transaction provisions of ERISA in selecting and monitoring the RCH Program. “Fiduciaries must act prudently and solely in the interest of the plan’s participants and beneficiaries, for the exclusive purpose of providing benefits and defraying reasonable plan administration expenses, and must comply with the documents and instruments governing the plan to the extent consistent with the provisions of Titles I and IV of ERISA,” the letter says.

In addition, the DOL says, plan fiduciaries considering the RCH Program are responsible for ensuring that the RCH Program is a necessary service, a reasonable arrangement, and the compensation received is no more than reasonable within the meaning of ERISA Section 408(b)(2) and Code section 4975(d)(2) (including the Department’s implementing regulations). “Thus, the responsible plan fiduciaries must evaluate the package of services and separate service providers that are part of the RCH Program and conclude that the services, including the portability services, are appropriate and helpful to carrying out the purposes of the plan, and that the compensation paid or received by the service providers is no more than reasonable taking into account the services provided and available alternatives,” according to the letter.

The Department adds that the responsible plan fiduciaries must also monitor the arrangement and periodically ensure that the plan’s continued participation in the program is consistent with ERISA’s standards.

However, the DOL notes that a plan sponsor that may be a fiduciary with respect to certain activities regarding the RCH program are not necessarily fiduciaries with respect to all aspects of the program.

With the RCH program, once the assets are transferred to the default IRA, the plan sponsor of the former employer’s plan has no discretion or authority over the decisions of the IRA owner or RCH related to any future transfer of the default IRA assets. “It is the view of the Department that the plan sponsors of the former and new plans would not be acting as a fiduciary with respect to the decision to transfer the individual’s default IRA into the new employer’s plan. Once a plan fiduciary properly distributes the entire benefit to which a plan participant is entitled, the distribution ends the individual’s status as a participant covered under the plan and the distributed assets are no longer plan assets under ERISA,” the letter says.

RCH’s fiduciary responsibilities

Under the Auto-Portability Program, before RCH transfers default IRA funds to a new employer’s plan, the new employer’s plan must adopt the RCH Program under which it will acknowledge that the transfer of IRA funds is consistent with the plan’s terms and that it will accept the roll-in. RCH will notify the participant and seek affirmative consent to the transfer. But, if the participant does not affirmatively consent after receiving the notices, RCH will assume responsibility to direct the roll-in from the default IRA or RCH IRA acting as a conduit into the individual’s current employer plan.

The DOL says that absent affirmative consent of the IRA owner/participant, RCH acts as a fiduciary within the meaning of Section 4975(e)(3) of the Code in deciding to transfer the individual’s RCH default IRA to the individual’s new employer plan. The individual’s failure to respond to the RCH Program communications about default transfers is not tantamount to affirmative consent by the participant/IRA owner to default transfers to the new employer’s plan, and does not relieve RCH from fiduciary status and responsibilities.

The DOL notes that unlike regulations with respect to the default transfer of a participant’s account into an IRA, no similar statutory or regulatory provision provides relief from fiduciary responsibility for “default” transfers of the IRA funds to the new employer’s plan.

The letter does not address the prohibited transaction implications of RCH receiving additional fees as a result of exercising fiduciary discretion in the transfers. It has applied for an individual exemption under ERISA Section 408(a) and Code section 4975(c)(2) for certain transactions involved in its program, and the DOL has requested comments about the proposed exemption.