The Department of Labor (DOL) made it easier to consolidate small retirement account balances with a prior employer into a new employer’s plan, now without the direct involvement of the participant. With many participants lacking adequate private retirement savings, the federal government has permitted retirement plans to automate or default participants to defer income into a 401(k) plan or other investment options. Now comes the automatic rollover between a participant’s old and new employer retirement plans.
In recent years, the Department of Labor (DOL), which is responsible for regulating the administration of employee pension and 401(k) plans to protect the rights of participants, has focused on missing participants—those who have account balances at a prior employer or in a rollover IRA and are unaware of the account or unable to track down the plan when they are ready to retire. For example, plans must notify the Social Security Administration (SSA) when a participant leaves with a vested account balance that the participant (and the SSA is expected to notify the participant when the participant files for Social Security benefits).
For several years, the DOL and IRS have permitted plans to automatically rollover into Individual Retirement Accounts (IRAs) accounts of terminated participants without the participants’ consent, where the account balance was less than $5,000. The Pension Benefit Guaranty Corporation (PBGC) that regulates defined benefit and multiemployer (union) pension plans has a database of participant names that are owed benefits under any plans under the control of the PBGC. The DOL has issued guidance to terminated plans on the fiduciary responsibility to locate missing participants through the internet or private location services before turning those vested benefits over to the PBGC to administer.
All of these efforts work to match the retirement benefits with the correct participants and prevent “leakage,” the term that refers to terminated participants who cash out their retirement accounts each time they leave an employer rather than rollover the amount to an IRA or new employer plan.
With the growth in Fintech and big data, there are more resources to track and locate orphan accounts and missing participants. Recently, the DOL granted an exemption from its prohibited transactions rules to allow an employer plan to contract with such a search firm, in this case Retirement Clearinghouse, LLC (RCH) to locate, match and transfer a new employee’s retirement accounts from a prior employer into the new employer’s retirement plan. RCH contracts with an employer to set up an IRA for the departed participant into which the small account balances are paid, and then uses its search services to match that account with an account in the new employer’s retirement plan. Generally, the participant would have to take action to rollover the IRA into the new employer’s plan. The DOL has approved RCH’s use of a participant’s negative consent to make the rollover into the new employer’s retirement plan.
Then, RHC locates the participant’s account (or multiple accounts in many cases where an employee has had several different employers), sets up an IRA where the old employer’s account is transferred, and locates the new employer’s plan. RCH is then permitted to notify the participant that it will transfer the IRA balance into the new employer’s plan automatically unless the participant notifies RCH that the participant does not want the rollover. The DOL exemption sets several conditions that the old employer, RCH, and the new employer must meet to fulfill their fiduciary obligations, including disclosure and approval of reasonable fees charged to the accounts, selection of proper investments for the default IRAs, restrictions on RCH’s use of the information it gathers on participants and their accounts, and disclosure of the process and fees to participants. However, participants with larger account balances in a prior employer’s account, as a result of automatic enrollment and safe harbor matches, will still have to take affirmative action to rollover their accounts. But for many employers and participants in high turnover industries, this newly approved process will serve to preserve retirement accounts that will provide more participants with a more secure retirement with minimal effort.