The Employee Benefit Security Administration (EBSA) has released proposed regulation on automatic portability transactions under the SECURE 2.0 Act of 2022, the Department of Labor (DOL) announced today.
According to an announcement from the federal agency, the regulation seeks to help workers keep track of their retirement savings accounts by reducing cash-outs when employees switch jobs.
Recent data from the annual Form 5500 shows an estimated 635,000 defined contribution (DC) plans in the United States, covering around 86.6 million participants with account balances totaling $9.3 trillion in assets.
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.
Conversely, those who choose to withdraw their 401(k) savings after changing jobs face hefty tax penalties and miss out on potential investment gains towards their retirement.
“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.
When workers leave jobs with a retirement benefit valued at $7,000 or less, their savings plan can automatically rollover their benefits to a Safe Harbor individual retirement account (IRA) if the plan document allows it and the employee does not take action after receiving required notices. The proposed regulation would automatically transfer workers’ retirement savings from their Safe Harbor IRA to their active account in a retirement plan sponsored by their new employer.
The department’s proposed rule would implement Section 120 found in SECURE 2.0, which allows an automatic portability provider to receive a fee when executing an automatic portability transaction for certain distributions into Safe Harbor IRAs, through an added exemption to Internal Revenue Code section 4975.
According to the DOL, the proposal must meet requirements under the statutory exemption in order to be covered. These topics include, among others:
- 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.
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Amanda Umpierrez is the Managing Editor of 401(k) Specialist magazine. She is a financial services reporter with over six years of experience and a passion for telling stories and reporting news. Amanda received her degree in journalism and government and politics at St. John’s University. She is originally from Queens, New York, but now resides in Denver, Colorado with her partner. In her free time, Amanda enjoys running, cooking, and watching the latest drama show.
