DOL proposes new 401(k) ‘auto-portability’ regulations for job changers

The move to expand auto portability for retirement plans took another step forward last week, when the Department of Labor proposed rules to implement a portion of the SECURE 2.0 Act, rules that would clarify the legality of fees associated with auto portability for defined contribution (DC) accounts.

The SECURE 2.0 Act made it easier for employers and employees to handle the movement of retirement funds as they move from one job to another. The Jan. 18 announcement said the new rules would allow automatic portability providers to receive fees for executing automatic portability transactions for certain IRA distributions.

Reducing losses in retirement savings due to changing jobs

This change is part of a broader move by the federal government to help working Americans keep track of their retirement savings as they move between jobs. It has been estimated that around $100 billion in retirement savings is lost every year when workers switch employers and cash out of their DC retirement plans. Workers can lose money through fees, taxes, or general “leakage” as the funds are either transferred or put to other uses.

The DOL changes clarify the legality of the process of auto-portability, officials said.

“With the widespread adoption of these accounts, there is a particular need for automatic portability solutions that help ensure participants remain connected to their retirement savings when they change jobs,” said Assistant Secretary for Employee Benefits Security Lisa M. Gomez.

Industry groups that have worked to set up the auto-portability framework expressed support for the new rules. “We appreciate the guidance provided by the DOL,” American Retirement Association CEO Brian Graff said. “Anything that reduces the rate of retirement plan leakage results in better outcomes for participants.”

This analysis in 401(k) Specialist summed up the inefficiencies of the old system. “Past studies have shown that forgotten retirement accounts, otherwise known as ‘lost 401(k)s,’ can cost retirement savers up to $115 billion annually from higher fees and lower investment returns if misallocated,” the article said.

In addition to simplifying the process, the new changes raise the top limit of these accounts from $5,000 to $7,000, meaning more workers will now have access to the auto-portability function.

The fine print

Other elements of the proposed regulations, according to the DOJ statement:

• Scope of the exemption.
• Disclosures about automatic portability transactions, fees, compensation, and services, including an acknowledgement of the automatic portability provider’s fiduciary status, website requirements for the automatic portability provider, and a requirement that disclosures be written in a culturally and linguistically appropriate manner.
• Investments permitted in connection with automatic portability transactions.
• Restriction on receipt or payment of third-party compensation by an automatic portability provider in connection with an automatic portability transaction.
• Prohibition on exculpatory provisions disclaiming or limiting liability if an automatic portability transaction results in an improper transfer.
• Required actions to ensure that participant and beneficiary data is current, accurate and secure.
• Limitations on the use of data related to automatic portability transactions for any purpose other than to execute such transactions or locate missing participants.
• Record retention requirements.
• Annual audit and corrections procedures if an auditor determines the automatic portability provider did not comply with the requirements of the statutory exemption and the proposed regulation.

Related: No more 401(k) plan ‘leakage’: SECURE 2.0 auto-portability now in effect

The DOJ statement also provided a link to the full notice of the rulemaking and the 60-day public comment period, with instructions on how to submit comments.