The Department of Labor (DOL) issued Prohibited Transaction Exemption (PTE) 2019-02, which permits Retirement Clearinghouse, LLC (RCH) to receive certain fees in connection with its IRA auto-portability program, which transfers an individual's default IRA or eligible mandatory distribution account assets to an individual's new defined contribution plan account.
On July 30, 2019, the DOL issued Prohibited Transaction Exemption (PTE) 2019-02, which provides an individual PTE to Retirement Clearinghouse, LLC (RCH) regarding its auto-portability program (84 Fed. Reg. 37337 (July 31, 2019)).
The PTE allows RCH to receive certain fees in connection with the transfer of an individual's default IRA or eligible mandatory distribution account assets to the individual's new plan account, via the RCH auto-portability program.
The PTE was published in the Federal Register on July 31, 2019, and will be effective for five years from that date.
To learn more about prohibited transactions between parties in interest (disqualified persons) and employee benefit plans under ERISA and the Internal Revenue Code (Code), and the exemptions for those transactions, see:
Auto-portability generally refers to the automatic transfer of an individual's retirement plan assets from a prior employer's plan or default IRA, to the individual's new employer plan. Auto-portability addresses, in part, the "leakage" that occurs when an individual changes employers and cashes out their 401(k) account with the prior employer, incurring potential taxes and penalties.
RCH Auto-Portability Program
As described in PTE 2019-02, the RCH program applies to:
Distributions from terminated defined contribution plans.
Plan sponsors choose to participate in the RCH program and enter into an agreement with RCH. The RCH program transfers individuals' retirement plan assets from their prior employers' plans to their new employers' plans through "locate and match" software that coordinates between multiple plan recordkeeper systems. For example, the RCH program identifies when an individual with a default IRA under Code Section 408(a) (26 U.S.C. § 408(a)) has opened a new plan account in a defined contribution plan maintained by his or her current employer. After an individual fails to respond to two letters notifying them that the assets will be transferred, the program transfers the assets from the IRA to the current employer plan.
Details on the program can be found in Advisory Opinion 2018-01A (which discusses RCH's "fiduciary" status) and the notice of proposed exemption (83 Fed. Reg. 55741 (Nov. 7, 2018)).
The Scope of the PTE as Finalized
The finalized PTE permits RCH to receive certain fees in connection with the transfer of assets, such as a transfer fee (for processing the transfer of assets) and a communication fee (for issuing notices and forms).
The PTE is only available for the transfer of $5,000 or less from the default IRA to a new plan account. Relief is also available for a transfer that exceeds $5,000 solely because of investment gains attributable to the assets held in the individual's default IRA or eligible mandatory distribution account.
PTE 2019-02 provides that RCH must submit to an annual audit performed by a qualified independent auditor, as well as maintain for six years the records necessary to determine whether the conditions for the exemption have been met. PTE 2019-02 details the terms and conditions of the exemption, including the disclosure of fees, the process of facilitating transfers from RCH default IRAs to new plan accounts, and prohibited actions.
Retirement plan leakage and the prospect of auto-portability are closely-watched topics in the retirement plan industry. As with all individual exemptions, PTE 2019-02 can only be relied upon by the specific parties named, but it may prove instructive as a framework for auto-portability more broadly. Plan sponsors who choose to have a plan participate in auto-portability programs are subject to the general fiduciary standards in selecting and monitoring service providers for such programs.