Automatic Portability Transaction Regulations, 5624-5672 [2024-01208]
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Federal Register / Vol. 89, No. 19 / Monday, January 29, 2024 / Proposed Rules
DEPARTMENT OF LABOR
Employee Benefits Security
Administration
29 CFR Part 2550
RIN 1210–AC21
Automatic Portability Transaction
Regulations
Employee Benefits Security
Administration (EBSA), Labor.
ACTION: Notice of proposed rulemaking.
AGENCY:
This document contains a
proposed rule that would implement the
statutory prohibited transaction
exemption under section 4975 of the
Internal Revenue Code (Code) for
certain automatic portability
transactions. Section 120 of the SECURE
2.0 Act of 2022 amended Code section
4975 to add a statutory exemption for
the receipt of fees and compensation by
an automatic portability provider for
services provided in connection with an
automatic portability transaction.
Specifically, Code section 4975(d)(25)
provides prohibited transaction relief if
the conditions set forth in Code section
4975(f)(12) are met. The Department of
Labor is proposing this regulation
because, with certain exceptions not
relevant here, section 102 of
Reorganization Plan No. 4 of 1978
transfers the authority of the Secretary
of the Treasury to issue certain
regulations, rulings, opinions, and
exemptions under Code section 4975 to
the Secretary of Labor. Consistent with
this transfer of authority, Congress
authorized and directed the Department
of Labor to issue regulations under Code
section 4975 to implement provisions of
section 120 of the SECURE 2.0 Act.
DATES: Comments on these proposed
rules are due on March 29, 2024.
ADDRESSES: EBSA encourages interested
persons to submit their comments on
these proposed rules online. You may
submit comments, identified by RIN
1210–AC21, by either of the following
methods:
Federal eRulemaking Portal:
www.regulations.gov. Follow the
instructions for submitting comments.
Mail: Office of Regulations and
Interpretations, Employee Benefits
Security Administration, Room N–5655,
U.S. Department of Labor, 200
Constitution Avenue NW, Washington,
DC 20210, Attn: Automatic Portability
Regulations RIN 1210–AC21.
Instructions: All submissions must
include the agency name and Regulatory
Identifier Number RIN 1210–AC21 for
this rulemaking. If you submit
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SUMMARY:
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comments online, do not submit paper
copies. All comments received will be
posted without change on
www.regulations.gov and www.dol.gov/
agencies/ebsa and will be made
available for public inspection at the
Public Disclosure Room, N–1513,
Employee Benefits Security
Administration, U.S. Department of
Labor, 200 Constitution Avenue NW,
Washington, DC 20210.
Warning: Do not include any
personally identifiable or confidential
business information in your comment
that you do not want publicly disclosed.
Comments are public records that are
posted online as received and can be
retrieved by most internet search
engines.
Docket: Go to the Federal
eRulemaking Portal at https://
www.regulations.gov for access to the
rulemaking docket, including any
background documents and the plainlanguage summary of the proposed rule
of not more than 100 words in length
required by the Providing
Accountability Through Transparency
Act of 2023.
FOR FURTHER INFORMATION CONTACT:
Scott Ness, Office of Regulations and
Interpretations, Employee Benefits
Security Administration, (202) 693–
8500 or Joseph Brennan, Office of
Exemption Determinations, Employee
Benefits Security Administration, (202)
693–8456. These are not toll-free
numbers.
SUPPLEMENTARY INFORMATION:
A. Background Regarding Automatic
Portability Transactions
Section 120 of the SECURE 2.0 Act of
2022 (SECURE 2.0 Act) 1 amended
Internal Revenue Code (Code) section
4975 to add a statutory prohibited
transaction exemption for the receipt of
fees and compensation by an ‘‘automatic
portability provider’’ for services
provided in connection with an
‘‘automatic portability transaction.’’
Specifically, Code section 4975(d)(25)
provides prohibited transaction relief if
the conditions set forth in Code section
4975(f)(12) are met. In the retirement
plan context, portability refers to the
process of transferring workers’
retirement savings from one taxadvantaged plan or account to another
when their covered service with an
employer terminates (e.g., from a
traditional 401(k) plan account to a
traditional individual retirement plan—
such as an individual retirement
account or annuity described in Code
section 408(a) or (b) (IRA)—or from a
1 Public
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Roth 401(k) plan account to a Roth IRA.
As described in more detail below, the
term ‘‘automatic portability transaction’’
means a transaction in which
mandatory distributions pursuant to
Code section 401(a)(31)(B)(i) from an
employer-sponsored retirement plan to
an IRA established on behalf of an
individual are subsequently transferred
to an eligible employer-sponsored plan
in which such individual is an active
participant, after such individual has
been given advance notice of the
transfer and has not affirmatively opted
out of such transfer. According to the
most recent Department of Labor
(Department) annual report (Form 5500)
data, there are an estimated 635,000
defined contribution plans, covering an
estimated 86.6 million participants with
account balances totaling $9.3 trillion in
assets.2 With the proliferation of these
accounts, there is a particular need for
this type of automatic portability
solution to help ensure participants
remain connected to their retirement
savings when they change jobs.3
1. Mandatory Distributions of Small
Account Balances
Under the Code, qualified retirement
plans are permitted to include
provisions requiring an immediate
distribution to a separating participant
without the participant’s consent if the
present value of the participant’s vested
accrued benefit does not exceed $5,000 4
(for distributions made after December
31, 2023, the $5,000 threshold is
increased to $7,000).5 These
transactions are generally referred to as
‘‘mandatory distributions.’’
Code section 401(a)(31)(B) provides
that a trust will not constitute a
qualified trust unless the plan of which
the trust is a part provides that: (1) if a
mandatory distribution of more than
$1,000 is to be made; and (2) the
participant does not elect to have such
distribution paid directly to an eligible
2 2021
Form 5500 Data, U.S. Department of Labor.
the Department believes this body of
plans is the one primarily relevant for purposes of
the application of the statutory exemption, the
Department notes that additional defined
contribution plans that do not file a Form 5500 or
Form 5500–SF and certain defined benefit plans are
eligible to make mandatory distributions. See the
regulatory impact analysis sections in this
document for a discussion of the plans and
participants impacted by this proposed regulation.
4 Code sections 411(a)(11) and 417(e). See Code
section 411(a)(11)(D) for circumstances where the
amount of a distribution may be greater than $5,000
if a participant made a previous roll-in to a plan
from an IRA. In such circumstances, the roll-in
funds are not considered in determining the $5,000
vested accrued balance, so a larger amount of assets
could be subject to a mandatory distribution under
the terms of the plan.
5 See SECURE 2.0 Act Sec. 304, updating dollar
limit for mandatory distributions.
3 Although
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retirement plan or to receive the
distribution directly, then (3) the plan
administrator must transfer such
distribution to an IRA of a designated
trustee or issuer.6 These distributions
are referred to as ‘‘automatic rollovers of
mandatory distributions.’’ Code section
401(a)(31)(B)(i) requires the plan
administrator to notify the participant in
writing, either separately or as part of
the notice required under Code section
402(f), that the participant may transfer
the distribution to another IRA.7 Code
section 402(f)(1)(A) requires plan
administrators to provide a participant
with a written notice within a
reasonable period of time before making
an automatic rollover of a mandatory
distribution explaining, among other
things, the following: (1) the Code
provisions under which the participant
may elect to have the distribution
transferred directly to an eligible
retirement plan and that if an election
is not made, such automatic rollover of
a mandatory distribution is subject to
the provisions of Code section
401(a)(31)(B); (2) the provision requiring
income tax withholding if the
distribution is not directly transferred to
an eligible retirement plan; and (3) the
provisions under which the distribution
will not be taxed if the participant
transfers the distribution amount
(including amounts withheld under
Code section 3405) to an eligible
retirement plan within 60 days of
receipt.8
The Secretary of Labor (the Secretary)
issued regulations in 2004 providing
safe harbors for such automatic rollovers
of mandatory distributions from a plan
subject to Title I of the Employee
Retirement Income Security Act (ERISA)
which provide that (1) a plan
administrator’s designation of an IRA to
receive the automatic rollover and (2)
the initial investment choice for the
rolled-over funds will be deemed to
satisfy the fiduciary responsibility
provisions of ERISA section 404(a) if the
safe harbor requirements are met.9
Specifically, plan administrators
complying with the Department’s
fiduciary safe harbor regulations must
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6 Code
section 401(a)(31)(B)(i) requires the
transfer be made to an ‘‘individual retirement
plan,’’ defined by Code section 7701(a)(37) as an
individual retirement account described in Code
section 408(a) and an individual retirement annuity
described in Code section 408(b). See IRS Notice
2005–5, 2005–1 C.B. 337, regarding the
applicability of Code section 401(a)(31)(B) to
retirement plans under Code sections 401(a), 401(k),
403(a), 403(b), and 457(b) (https://www.irs.gov/irb/
2005-03_IRB).
7 ;Code section 401(a)(31)(B)(i).
8 See 29 CFR 2550.404a–2; Code section
401(a)(31)(B)(i); and Code section 402(f).
9 See 69 FR 58017 (Sep. 28, 2004).
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invest the former participant’s assets in
an investment product designed to
preserve principal and provide a
reasonable rate of return.10 An IRA
established pursuant to Code section
401(a)(31)(B) and/or in compliance with
the Department’s regulation is
commonly referred to respectively as a
‘‘Default IRA’’ or ‘‘Safe Harbor IRA.’’
2. Automatic Portability Transactions
An automatic portability transaction
as defined in Code section
4975(f)(12)(A)(i) builds on the
portability concept and is part of a
larger framework for facilitating the
movement of assets from one taxfavored retirement plan to another. The
overall terms and details of an
automatic portability framework would
generally be memorialized in contracts
with recordkeepers, plan sponsors, and
the automatic portability provider. A
comprehensive automatic portability
framework includes three key
components. First, there is a ‘‘transferout’’ plan that initiates a mandatory
distribution. Second, there is an IRA
established in accordance with Code
Section 401(a)(31)(B) (a Default IRA) to
receive (via a rollover) and hold the
distributed funds.11 Third, there is a
‘‘transfer-in’’ plan that receives the rollin distribution from the Default IRA
when an IRA owner is matched with an
account in an eligible employersponsored plan at a new employer.
To roll in funds from an IRA to the
transfer-in plan, the transfer-in plan
must permit such roll-ins. Additionally,
an automatic portability provider must
have access to records for the Default
IRA and transfer-in plan sufficient to
make a match. The general concept of
‘‘locate, match, and transfer’’ involves
making queries of cooperating
recordkeepers’ systems to determine if a
Default IRA owner has become a
participant in an employer-sponsored
retirement plan through re-employment
(i.e., the transfer-in plan).12 If the
individual is matched with an account
in the transfer-in plan, the automatic
portability transaction is designed for
the automatic portability provider to roll
the individual’s IRA assets into the
individual’s account in the transfer-in
plan. Automatic portability transactions
may be particularly important and
helpful to workers who have lost
contact with their retirement plans
10 29
CFR 2550.404a–2(c)(3)(i).
may be, but is not necessarily, a Safe
Harbor IRA established in accordance with the
Department’s regulations at 29 CFR 2550.404a–2
because all Safe Harbor IRAs are generally Default
IRAs, but not all Default IRAs are Safe Harbor IRAs.
12 The concept of ‘‘locate, match, and transfer’’ is
discussed in more detail below.
11 This
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when they change jobs, cannot be
located because the plan does not have
updated address information or other
contact information for separated
employees, or refuse to respond to plan
communications about their retirement
account. When an automatic portability
provider transfers funds from the
transfer-out plan to a Default IRA
without a participant’s active
involvement, the risk of funds becoming
lost or difficult to locate increases.
Therefore, automatic portability
transactions are intended to benefit
participants and IRA owners that are
unresponsive or considered missing.13
3. Current DOL Individual Prohibited
Transaction Exemption for Automatic
Portability Transactions
When an automatic portability
provider transfers assets from an IRA to
a new employer’s plan without the IRA
owner’s affirmative consent, the
automatic portability provider is
exercising fiduciary discretion for
purposes of the prohibited transaction
provisions of the Code.14 The
assessment of a fee against the IRA, in
turn, implicates the prohibited
transaction provisions in Code section
4975(c)(1). The Department first issued
guidance regarding an automatic
portability transaction before the
enactment of the SECURE 2.0 Act.
Retirement Clearinghouse (RCH)
approached the Department in 2018 for
sub-regulatory guidance and prohibited
transaction exemptive relief regarding
its multi-part automatic portability
framework (the RCH Program). In
response, the Department issued
Advisory Opinion 2018–01A (AO 2018–
01A) 15 and an administrative
prohibited transaction exemption (PTE
2019–02) 16 in connection with the RCH
Program. AO 2018–01A concerned the
status of certain parties involved in the
RCH Program as ‘‘fiduciaries’’ within
the meaning of ERISA section 3(21)(A)
and Code section 4975(e)(3).17 In AO
2018–01A, the Department stated that
plan sponsors exercise discretion in
their fiduciary capacity and would be
13 The Department notes that Code section
4975(f)(12) defines an automatic portability
transaction with respect to an individual that has
not affirmatively consented to the transfer. An
individual who affirmatively consents may still
have IRA assets rolled into a new plan through the
same mechanisms, although it would not
technically fall within the statutory definition.
14 See the discussion of AO 2018–01A, below.
15 Available at: https://www.dol.gov/sites/dolgov/
files/EBSA/about-ebsa/our-activities/resourcecenter/advisory-opinions/2018-01a.pdf.
16 See 83 FR 55741 (Nov. 7, 2018) (proposed
exemption) and 84 FR 37337 (July 31, 2019)
(granted exemption).
17 AO 2018–01A (Nov. 18, 2018).
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subject to the general fiduciary
standards of ERISA when deciding
whether to participate in the RCH
Program. The advisory opinion further
explained that, without the individual’s
affirmative consent, RCH acted as a
fiduciary within the meaning of Code
section 4975(e)(3) in deciding whether
to transfer the assets from an
individual’s Default IRA to the
individual’s new employer plan.18
Furthermore, the Department indicated
that an individual’s failure to respond to
RCH’s communications about a default
transfer of the assets in the individual’s
account to the new employer’s plan is
not tantamount to affirmative consent
by the individual to the default transfer
and does not relieve RCH from fiduciary
status and related responsibilities.19
The Department additionally stated in
AO 2018–01A that, unlike the
Department’s automatic safe harbor
regulations,20 which pertain to the
automatic rollover of an individual’s
retirement plan mandatory distribution
into an IRA, no similar statutory or
regulatory provision provides relief
from fiduciary responsibility for the
‘‘default’’ transfer of assets from the
Default IRA to a new employer’s plan.21
Therefore, it was necessary for RCH to
receive a prohibited transaction
exemption from the Department in order
for RCH to receive a fee or other
compensation when it exercised
fiduciary authority to make the default
transfer of assets from the Default IRA
to a new employer’s plan.22 At RCH’s
request, the Department issued PTE
2019–02, an administrative exemption
that provides such prohibited
transaction relief for RCH.23 Due to the
novelty of the RCH Program, the
Department limited the relief provided
in PTE 2019–02 to a five-year term,
which expires on July 31, 2024. To
receive prohibited transaction relief
beyond the five-year term, RCH would
need to submit an additional individual
administrative exemption request to the
Department.
18 Id.
at 5.
at 5–6.
20 29 CFR 2550.404a–2 and 2550.404a–3.
21 Id. at 6. The Department notes that Code
section 4975(f)(12) applies only to transfers made
under Code section 401(a)(31)(B)(i), so the fiduciary
relief provided in 29 CFR 404a–3 is not applicable
to transactions covered by 4975(d)(25).
22 AO 2018–01A addressed the fiduciary status of
an automatic portability provider but did not
address whether a prohibited transaction would
occur.
23 84 FR 37337.
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19 Id.
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B. Overview of the SECURE 2.0 Act
Statutory Exemption for Automatic
Portability Transactions
Section 120 of the SECURE 2.0 Act
added a statutory exemption in Code
section 4975 that allows an automatic
portability provider to receive a fee in
connection with executing an automatic
portability transaction that largely
mirrors the relief the Department
granted RCH in PTE 2019–02. The
availability of the statutory exemption
to all automatic portability providers
that meet its requirements generally
eliminates the need for RCH, and other
automatic portability providers, to
request an administrative PTE for relief
similar to the relief the Department
granted in PTE 2019–02. Specifically,
the statutory exemption in Code section
4975(d)(25) provides a conditional
prohibited transaction exemption from
the restrictions in Code sections
4975(c)(1)(D) and (E) for an automatic
portability provider to receive fees and
compensation for services provided ‘‘in
connection with an automatic
portability transaction’’ if the conditions
set forth in Code section 4975(f)(12) are
met.24
Code section 4975(f)(12)(A)(i)
generally defines an automatic
portability transaction as a transfer of
assets from a Default IRA 25 to a transferin plan after the IRA owner has been
given advance notice of the transfer and
has not affirmatively opted out. The
‘‘transfer-in’’ plan covered by the
definition is any employer-sponsored
retirement plan (other than a defined
benefit plan) that is: a qualified trust, an
annuity plan described in Code section
403(a), an eligible deferred
compensation plan described in Code
section 457(b) which is maintained by
an eligible employer described in Code
section 457(e)(1)(A), or an annuity
contract described in Code section
403(b).26
Notably, the SECURE 2.0 Act
amendment to the Code does not
specifically include any references to a
transfer-out plan (i.e., the plan engaging
in the mandatory distribution and
automatic rollover). As discussed above,
the existence of a transfer-out plan is a
necessary precursor to an automatic
portability transaction, but the transferout transaction is already governed by
mandatory distribution and automatic
rollover provisions in the Code that are
24 Emphasis
added.
statutory definition specifically references
‘‘an individual retirement plan which is established
on behalf of an individual and to which amounts
were transferred under section 401(a)(31)(B)(i).’’
26 These are plans described in clause (iii), (iv),
(v), or (vi) of Code section 402(c)(8)(B).
25 The
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discussed above, and the Department
already has provided conditional
fiduciary and prohibited transaction
relief for such transactions under its
automatic rollover safe harbor
regulations.27 Similarly, the general
fiduciary principles regarding an
individual’s default investments in the
transfer-in plan and the Department’s
regulations on qualified default
investment alternatives will govern the
transfer-in plan sponsor’s
responsibilities once the assets are
transferred from the individual Default
IRA into the transfer-in plan.28
As noted, Code section 4975(d)(25)
provides prohibited transaction relief if
the conditions set forth in Code section
4975(f)(12) are met. Specifically, Code
section 4975(f)(12) and this proposed
regulation require:
• the automatic portability provider
to acknowledge its fiduciary status with
respect to the IRA;
• that the automatic portability
provider’s fees do not exceed reasonable
compensation;
• restrictions to be placed on an
automatic portability provider’s use of
plan participant and IRA owner data;
• participation in the program to be
available on the same terms for all
eligible transfer-in plans;
• the automatic portability provider
to conduct at least monthly searches for
transfer-in plan accounts;
• the automatic portability provider
to timely execute automatic portability
transactions;
• the automatic portability provider’s
discretion to affect the timing or amount
of the transfer pursuant to an automatic
portability transaction to be limited; and
• the automatic portability provider
to retain records demonstrating it is
complying with the exemption
conditions, conducting an annual audit,
and maintaining a website with a list of
participating recordkeepers and the
automatic portability provider’s fees.
Section 120 of the SECURE 2.0 Act
also provides that, not later than 12
months after the date of its enactment,
the Secretary shall issue such guidance
as may be necessary to carry out the
purposes of the amendments made by
section 120, including regulations or
other guidance which:
1. Require an automatic portability
provider to provide a notice to
individuals on whose behalf the default
IRA is established in advance of the pretransaction notice;
2. Require an automatic portability
provider to disclose to a responsible
plan fiduciary information about the
27 29
28 29
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CFR 2550.404a–2.
CFR 2550.404c–5.
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provider’s fees, compensation, and
services as required of covered service
providers pursuant to DOL regulations
under ERISA section 408 (i.e., 29 CFR
2550.408b–2(c));
3. Require plans involved in the
automatic portability transaction to fully
disclose fees related to an automatic
portability transaction in its summary
plan description or summary of material
modifications;
4. Require plans involved in the
automatic portability transaction to
invest amounts received on behalf of a
participant pursuant to an automatic
portability transaction in the
participant’s current investment
election under the plan or, if no election
is made or permitted, in the plan’s
qualified default investment alternative
under the Department’s Qualified
Default Investment Alternative (QDIA)
regulations (i.e., 29 CFR 2550.404c–5) or
another investment selected by a
fiduciary with respect to such plan;
5. Prohibit or restrict the receipt or
payment of third-party compensation
(other than a direct fee paid by a plan
sponsor which is in lieu of a fee
imposed on an IRA owner) by an
automatic portability provider in
connection with an automatic
portability transaction;
6. Prohibit exculpatory provisions in
an automatic portability provider’s
contracts or communications with
individuals disclaiming or limiting
liability in the event that an automatic
portability transaction results in an
improper transfer;
7. Require an automatic portability
provider to take actions necessary to
reasonably ensure that participant and
beneficiary data is current and accurate;
8. Limit the automatic portability
provider’s use of data related to
automatic portability transactions for
any purpose other than the execution of
such transactions or locating missing
participants, except as permitted by the
Secretary;
9. Provide for corrections procedures
in the event an auditor determines the
automatic portability provider was not
in compliance with the statute and
related regulations, including deadlines,
supplemental audits, and corrective
actions which may include a temporary
prohibition from relying on the statutory
exemption;
10. Ensure that participants and
beneficiaries receive all the required
notices and disclosures; and
11. Make clear that the statutory
exemption applies solely to the
automatic portability transactions
described in the statutory exemption,
and, to the extent the Secretary deems
necessary or advisable, specify how the
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application of the exemption relates to
or coordinates with other statutory
provisions, regulations, and
administrative guidance.29
Some interested stakeholders have
communicated to the Department that
they have already developed products
and established procedures for an
automatic portability service and that
they do not believe any further guidance
from the Department is necessary to
effectuate the purpose of section 120 of
the SECURE 2.0 Act. However, the
Department believes that regulations, as
compared to some other form of
guidance, are needed to implement
section 120(c) of the SECURE 2.0 Act in
a manner that addresses and reinforces
the consumer protections in the above
list of statutory conditions and
requirements. Furthermore, the
Department believes that these proposed
regulations will provide a broader crosssection of interested and affected
entities with the opportunity to formally
comment on the proposal, whether
implementing regulations are necessary,
and whether elements of the proposed
requirements should be modified or
eliminated to best support Congress’
intent in passing the new statutory
exemption.
C. Prospective Effect of Implementing
Regulations and Interim Interpretive
Policy
The Department is proposing that any
final rule adopted based on this
proposal would be effective 60 days
after publication in the Federal Register
and that the requirements of the final
rule would have prospective
applicability. The Department
specifically solicits comments on
whether there should be some delayed
applicability date to allow for automatic
portability providers and plan
fiduciaries to make any changes to
automatic portability programs or
related contracts or arrangements that
may be needed or desired in light of the
final rule. This approach is intended to
make it clear the statutory exemption is
available in accordance with the
effective date of the SECURE 2.0 Act
while acknowledging that there may be
a need to transition contracts or
arrangements to meet specific
requirements of the final rule.
As noted above, section 120 of the
SECURE 2.0 Act directed the Secretary
to issue such guidance as may be
necessary to carry out the purposes of
the amendments made by section 120
no later than 12 months after the date
of the enactment of the Act. Compliance
29 See Public Law 117–328, Dec. 29, 2022,
Division T, Sec. 120(c).
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5627
with the conditions and requirements in
Code sections 4975(d)(25) and
4975(f)(12) is an independent statutory
obligation for parties seeking their
prohibited transaction relief that is not
dependent upon the issuance of
regulations or guidance by the
Department. For the period from
publication of this proposed regulation
until after the Department issues a final
regulation or other applicable
administrative guidance, automatic
portability providers and plan
fiduciaries are expected to comply with
the requirements of Code sections
4975(f)(12) and 4975(d)(25) using a good
faith, reasonable interpretation of the
law taking into account the list of
consumer protection conditions and
requirements in section 120(c) of the
SECURE 2.0 Act.30 During that period,
to the extent an automatic portability
provider or plan fiduciary believes there
is some uncertainty regarding whether
the automatic portability program or the
parties’ conduct in connection with the
program complies with the statutory
provisions, the Department expects that
the provider or fiduciary will strictly
adhere to the requirements in Code
section 4975(f)(12) and act in a manner
that furthers the financial interests of
the affected plan, plan participant, or
IRA owner taking into account the
consumer protection conditions and
requirements listed in section 120(c) of
the SECURE 2.0 Act.
D. Overview of the Proposed Regulation
Certain provisions of ERISA Title I,
such as the provisions on prohibited
transactions, have parallel provisions
enacted in Title II of ERISA and codified
in the Code. When ERISA was passed,
30 The Department expects to issue a final rule
before the first annual audit would be required
pursuant to the requirement in Code section
4975(f)(12)(B)(xi)(II) under which an automatic
portability provider must ‘‘conduct an annual audit,
in accordance with regulations promulgated by the
Secretary of Labor, of automatic portability
transactions occurring during the calendar year to
demonstrate compliance with this paragraph and
any regulations thereunder and identify any
instances of noncompliance therewith, and shall
submit such audit annually to the Secretary of
Labor, in such form and manner as specified by
such Secretary.’’ However, because a final rule may
be published part way through the first audit
period, the Department specifically solicits
comments on whether the final rule should provide
an alternative pursuant to which the submission of
the annual audit for the first year could be delayed
and submitted together with the audit for the
second year. See, for comparison, 29 CFR 2520.104–
50—Short plan years, deferral of accountant’s
examination and report. The Department also
requests comment on whether certain aspects of
this proposal that would be subject to audit review
should have a specific delayed effective date
because the aspect of the proposal may take
additional time for an automatic portability
provider to fully implement.
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regulatory authority over Title I resided
with the Secretary of Labor while
regulatory authority over Title II resided
with the Secretary of the Treasury. To
rationalize the administration and
interpretation of these parallel
provisions, Reorganization Plan No. 4 of
1978, 5 U.S.C. App., divided the
interpretive and rulemaking authority
between the Secretaries of Labor and of
the Treasury, so that, in general, the
agency with regulatory and interpretive
responsibility for a given provision of
ERISA Title I would also have
regulatory and interpretive
responsibility for the parallel provision
in the Code. Among the sections
transferred to the Department were
certain of the prohibited transaction
provisions (including exemptions) in
Code section 4975. Title I’s prohibited
transaction rules, 29 U.S.C. 1106–1108,
apply to Title I-covered plans, and the
Code’s corresponding prohibited
transaction rules, 26 U.S.C. 4975, apply
both to Title I-covered pension plans
that are tax-qualified pension plans, as
well as other specified tax-advantaged
arrangements, including IRAs.
Although the new automatic
portability transaction prohibited
transaction exemption appears only in
Code section 4975 and directly pertains
to transactions involving IRAs, the
Secretary of Labor still retains
regulatory authority over certain
prohibited transaction provisions under
Code section 4975, as provided in
Reorganization Plan No. 4 of 1978.
Consistent with that authority, section
120 of the SECURE 2.0 Act directs the
Secretary of Labor to issue regulations
and guidance related to the new
statutory exemption for automatic
portability transactions.
Therefore, the proposed regulation
would add a new § 2550.4975f–12 to the
Department’s fiduciary regulations at 29
CFR part 2550. The proposed regulation
tracks the requirements under Code
section 4975(f)(12) that must be satisfied
in order for the automatic portability
transaction to be covered by the
statutory prohibited transaction
exemption in Code section 4975(d)(25).
Paragraph (a) describes the general
scope of the statutory exemption and
regulation. Paragraph (b) sets forth the
conditions an automatic portability
provider must satisfy for a transaction to
qualify as an ‘‘automatic portability
transaction’’ and for the exemption to
apply. Paragraph (c) sets forth proposed
annual audit and correction procedure
requirements. Paragraph (d) sets forth
website requirements that must be met
for automatic portability providers to
satisfy the statutory exemption and
proposed regulation. Paragraph (e)
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describes prohibitions on the automatic
portability provider’s use of exculpatory
provisions in contracts or
communications disclaiming or limiting
their liability in the event an improper
transfer of assets in connection with an
automatic portability transaction occurs.
Paragraph (f) sets forth the record
retention requirement automatic
portability providers must meet to
satisfy the statutory exemption and
proposed regulation. Paragraph (g)
defines certain terms used in the
proposed regulation.
1. Scope of Prohibited Transaction
Relief
The relief provided by Code section
4975(d)(25) and the proposed
exemption is limited to Code sections
4975(c)(1)(D) and (E) for the receipt of
fees and compensation by an automatic
portability provider for services
provided in connection with an
automatic portability transaction and
Code section 4975(c)(1)(F) for the
receipt of fees by an automatic
portability provider from a plan sponsor
in lieu of fees imposed on an IRA
owner. Neither the statutory exemption
in Code section 4975(d)(25) nor the
proposed regulation contains an
exemption for other acts described in
Code section 4975(c)(1)(D) and (E)
(relating to the transfer to, or use by or
for the benefit of, a disqualified person
of the income or assets of a plan and to
fiduciaries dealing with the income or
assets of plans in their own interest or
for their own account) that are not in
connection with the automatic
portability transaction. Additionally,
neither the statutory exemption in Code
section 4975(d)(25) nor the proposed
regulation contains an exemption for
acts described in Code section
4975(c)(1)(F) (relating to fiduciaries
receiving consideration for their own
personal account from any party dealing
with a plan in connection with a
transaction involving the income or
assets of the plan) except for the limited
relief for a fee paid by a plan sponsor,
noted above. Such acts described in
Code sections 4975(c)(1)(D), (E), and (F)
are separate transactions not described
in Code section 4975(d)(25). Further,
neither the statutory exemption in Code
section 4975(d)(25) nor this proposed
regulation contains an exemption from
other provisions of the Code, such as
section 401, or other provisions of law
which may impose requirements or
restrictions relating to the transactions
that are exempt under Code section
4975(d)(25). As defined in Code section
4975(f)(12)(A)(ii) and in this proposed
regulation, an automatic portability
provider is a person, other than an
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individual, who executes the automatic
portability transaction on the same
terms to all transfer-in plans and Default
IRAs that use the provider.
The Department interprets the ‘‘in
connection with’’ language from Code
section 4975(d)(25) to include only
those services and related fees and
compensation that would not otherwise
occur or be incurred if not for the
automatic portability transaction or
anticipation of a future automatic
portability transaction. The Department
requests comments on whether
additional specificity regarding the
types of services that are covered by
Code section 4975(d)(25) should be
included, for example, by a definition
added to the regulations that identifies
the types of services. Further, if a
commenter believes more specificity
would be helpful, the Department
requests that the commenter include a
proposed definition, list, or other
identification of the services that should
be covered.
2. Acknowledgment of Fiduciary Status
Code section 4975(f)(12)(B)(i) and this
proposed regulation requires an
automatic portability provider to
acknowledge that it is a fiduciary with
respect to the IRA in an automatic
portability transaction.31 Pursuant to the
statutory text authorizing the Secretary
to specify the time and format of such
an acknowledgment, paragraph (b)(1) of
this proposed regulation requires the
automatic portability provider to
acknowledge in writing that it is a
fiduciary as defined in Code section
4975(e)(3) upon being engaged by a plan
fiduciary, as well as in the required
notices and disclosures, described
below, to plan participants and IRA
owners. This fiduciary
acknowledgement is designed to ensure
that the fiduciary nature of the
relationship is clear to the automatic
portability provider and responsible
plan fiduciaries as well as to affected
participants and IRA owners.32 The
automatic portability provider’s
acknowledgment of its fiduciary status
may include a description of the scope
of the fiduciary status of the automatic
portability provider and may explain
that, consistent with Code section
4975(e)(3), the automatic portability
provider is not a fiduciary under the
Code’s definition with respect to any
31 As described in Code section
4975(f)(12)(A)(i)(I).
32 This is generally when an individual fails to
respond to notices and the automatic portability
provider directs the transfer of assets and assesses
fees. See AO 2018–01 for a more detailed
description of fiduciary status in automatic
portability arrangements.
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assets or administration of the plan or
IRA with respect to which the automatic
portability provider does not (1) have
any discretionary authority,
discretionary control, or discretionary
responsibility (2) exercise any authority
or control, and (3) render investment
advice for a fee or other compensation,
nor have any authority or responsibility
to render such investment advice. The
Department notes that it is possible that
the automatic portability provider may
have fiduciary status under other laws,
e.g., the Federal securities laws. The
acknowledgment required by the
exemption does not reach such status
but the Department notes that the
acknowledgment required by the
exemption should not be presented in a
way that misinforms or misleads
individuals regarding potential
fiduciary status under such other laws.
(a) Reasonable Compensation
Subject to two exceptions described
below, Code section 4975(f)(12)(B)(ii)(I)
and this proposed regulation permit an
automatic portability provider to receive
fees and compensation for services
provided in connection with the
automatic portability transaction,
provided that the fees and
compensation do not exceed reasonable
compensation. The proposed
regulations incorporate the existing
standard regarding reasonable
compensation for the provision of
services found at 26 CFR 54.4975–6(e).
(c) Prohibition of Fees for Automatic
Portability Transactions Involving a
Plan of the Automatic Portability
Provider or Its Affiliates
The statute prohibits an automatic
portability provider from receiving any
fees or compensation in connection
with an automatic portability
transaction involving a plan which is
sponsored or maintained by the
automatic portability provider. In other
words, the automatic portability
provider may execute such transactions,
but it may not receive fees for doing so.
In the Department’s view, the statutory
reference to the automatic portability
provider in this circumstance should be
read to include any affiliates of the
automatic portability provider.
Accordingly, paragraph (b)(2)(iv) of the
proposed regulation mirrors the
statutory provision by prohibiting an
automatic portability provider from
receiving any fees or compensation in
connection with an automatic
portability transaction involving a plan
that is sponsored or maintained by the
automatic portability provider but
includes plans maintained by any of the
automatic portability provider’s
affiliates.
(b) Fee and Compensation Disclosure
Requirement
This proposed regulation mirrors the
statutory text by requiring the automatic
portability provider to disclose to a
responsible plan fiduciary of the
transfer-in plan the information that a
service provider to the plan would be
required to disclose under 29 CFR
2550.408b–2(c). For purposes of this
requirement, the disclosures would
relate to the automatic portability
provider’s services as an automatic
portability provider and not other
services that may be provided. For
purposes of this disclosure requirement,
the automatic portability provider will
be considered to be a ‘‘covered service
provider’’ under 2550.408b–
2(c)(1)(iii)(A) and (B) providing services
as a fiduciary and as a recordkeeper.
Since the automatic portability provider
would generally be precluded from
receiving third-party compensation
under other provisions of the proposal,
the Department does not believe the
provisions of 2550.408b–2(c) related to
a covered service provider under
(d) Prohibition on Receipt of ThirdParty Compensation in Connection With
Automatic Portability Transactions
Section 120(c)(5) of the SECURE 2.0
Act provides the Secretary with the
regulatory authority to prohibit or
restrict the receipt or payment of thirdparty compensation (other than a direct
fee paid by a plan sponsor that is in lieu
of a fee imposed on an IRA owner) by
an automatic portability provider in
connection with an automatic
portability transaction. The proposed
regulation includes text that mirrors the
statutory text allowing a direct fee to be
paid by a plan sponsor if it is in lieu of
a fee imposed on an IRA owner. The
proposed regulation includes one
exception to the general restriction on
third-party compensation. Specifically,
under the proposal, an automatic
portability provider would be able to
share a portion of its fee or
compensation with another automatic
portability provider as long as the
overall fee paid, directly or indirectly,
by the plan or IRA does not increase as
compared to the fees disclosed in the
3. Fees
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2550.408b–2(c)(1)(iii)(C)—‘‘other
services for indirect compensation’’—
would be relevant. The Department
seeks comments on whether there are
particular compliance issues under
2550.408b–2(c) for automatic portability
providers that the Department should
specifically address in a final rule.
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5629
description provided to the plan
administrator and in the initial
enrollment notice provided to the IRA
owner.
The third-party compensation
restriction in the proposed regulation is
limited to fees and compensation in
connection with the automatic
portability transaction and would not
prevent an automatic portability
provider from receiving fees for services
provided to an IRA or employersponsored retirement plan that are in
addition to services provided in
connection with the automatic
portability transaction. However, the
prohibited transaction relief provided in
Code section 4975(d)(25) applies only to
fees and compensation received in
connection with the automatic
portability transaction. The automatic
portability provider would need to rely
upon other statutory or administrative
exemptions if it receives fees for
providing additional services that
involve prohibited transactions.
4. Data Usage and Protection
Code section 4975(f)(12)(B)(iii)
prohibits an automatic portability
provider from using data it obtains in
connection with automatic portability
transactions for any purpose other than
to execute the automatic portability
transactions or locate missing
participants as part of its automatic
portability service, except as permitted
by the Secretary. The automatic
portability provider is specifically
prohibited by the statute from marketing
or selling data relating to the IRA or to
the plan participants. Paragraph (b)(3) of
the proposed regulation parallels the
statutory language by not permitting the
use of data for any purpose other than
the execution of automatic portability
transactions or locating missing
participants. For purposes of the
restriction on marketing or selling IRA
data, the Department interprets this to
include specific data regarding the IRA
owner. The Department is not proposing
any exceptions to this restriction.
However, the Department welcomes
comments on whether the regulations
should permit use of data for other
purposes, and, if it should, what those
other purposes would be, whether
allowing use of data for those purposes
would provide a benefit to IRA owners
and plan participants, and what
regulatory protections should be applied
to that use of the data.
In support of the obligation to limit
use of data, the proposed regulation
provides that the automatic portability
provider must take steps that a prudent
fiduciary would take to safeguard plan
participant and IRA data in its
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possession or under its control.33 The
proposal further would require, if data
were improperly accessed, that the
automatic portability provider take
appropriate remedial actions to
safeguard the data based on the
sensitivity of the accessed data and the
nature and severity of the breach. The
Department seeks comment on whether
the regulation should include specific
data security requirements, such as a
requirement to carry insurance to cover
data breaches.
5. Open Participation
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Paragraph (b)(4) of this proposed
regulation parallels Code section
4975(f)(12)(B)(iv) by requiring as a
condition of the availability of the
exemption that the automatic portability
provider offer automatic portability
transactions on the same terms to any
transfer-in plan. This proposed
requirement does not mean that fees can
never change. Rather, at any given time,
the fees paid for automatic portability
transactions should be the same for any
transfer-in plan that engages the
automatic portability provider.
Based on the general regulatory
authority granted to the Secretary in
section 120(c) of the SECURE 2.0 Act,
the Department is also proposing that
open participation would require that
the automatic portability provider not
restrict or limit the ability of an
employer-sponsored retirement plan,
IRA provider (including trustees under
Code section 408(a), custodians under
Code section 408(h), or issuers under
Code section 408(b)), or recordkeeper to
engage other automatic portability
providers to execute automatic
portability transactions. In proposing
this requirement, the Department
recognizes that numerous service
providers that have existing systems for
automatic rollovers of mandatory
distributions may want to supplement
their services with automatic portability
transaction features. Plan fiduciaries or
service providers may determine that
there are cost-effective ways to integrate
services of more than one automatic
portability provider to increase the
likelihood of successfully locating
participant funds for transfer into the
transfer-in plan.
33 See generally Cybersecurity Program Best
Practices at https://www.dol.gov/sites/dolgov/files/
ebsa/key-topics/retirement-benefits/cybersecurity/
best-practices.pdf; Online Security Tips at https://
www.dol.gov/sites/dolgov/files/ebsa/key-topics/
retirement-benefits/cybersecurity/online-securitytips.pdf; and Tips for Hiring a Service Provider with
Strong Cybersecurity Practices at https://
www.dol.gov/sites/dolgov/files/ebsa/key-topics/
retirement-benefits/cybersecurity/tips-for-hiring-aservice-provider-with-strong-security-practices.pdf.
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6. Notices
(a) Notice to the Department
The Department has an obligation
under the statute to monitor and enforce
the audit reporting requirements for
automatic portability providers relying
on the exemption, including deadlines
for submitting the audit report to the
Department. Accordingly, under the
proposed regulation, within 90 calendar
days of the date that the automatic
portability provider begins operating an
automatic portability transaction
program that is intended to rely on
prohibited transaction relief provided
by section 4975(d)(25), the automatic
portability provider must notify the
Secretary at auto-portability@dol.gov
that it is operating as an automatic
portability provider in accordance with
Code section 4975(d)(25). The automatic
portability provider must report the
legal name of each business entity
relying upon the exemption and any
name (e.g., trade or Doing Business As
(DBA) name) under which the business
entity may be operating. This
notification needs to be updated to
report a change to the legal or operating
name(s) of the automatic portability
provider that is relying upon the
exemption. The automatic portability
provider will have 90 calendar days to
report a change to the legal or operating
name. The automatic portability
provider may also notify the Department
if it is no longer operating in reliance
upon the exemption. The notification
requirement will allow the Department
to monitor and enforce the audit report
requirements.
(b) Model Description of Automatic
Portability Program for Use in Summary
Plan Descriptions by Transfer-Out and
Transfer-In Plans
In the Department’s view, to comply
with the summary plan description
(SPD) content requirements in 29 CFR
2510.102–2 that the SPD ‘‘shall be
sufficiently comprehensive to apprise
the plan’s participants and beneficiaries
of their rights and obligations under the
plan,’’ participating transfer-out plans
and transfer-in plans subject to ERISA’s
SPD requirements must include a
description of the automatic portability
program in the plan’s SPD. Further,
section 120(c)(3) of the SECURE 2.0 Act
provides the Secretary with authority to
require a transfer-in plan to fully
disclose fees related to an automatic
portability transaction in its SPD or
summary of material modifications
(SMM) to the extent an SMM is used to
fulfill this SPD disclosure requirement.
The Department’s existing regulatory
safe harbors for automatic rollovers by
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the transfer-out plan already require
plan administrators for ERISA Title I
plans to provide participants with an
SPD or SMM that describes the plan’s
automatic rollover provisions. The SPD
or SMM also must include: (1) an
explanation that the mandatory
distribution will be invested in an
investment product designed to
preserve principal and provide a
reasonable rate of return and liquidity;
(2) a statement indicating how fees and
expenses attendant to the IRA will be
allocated (i.e., the extent to which
expenses will be borne by the IRA
owner alone or shared with the
distributing plan or plan sponsor); (3)
the name, address and phone number of
a plan contact (to the extent not
otherwise provided in the SPD or SMM)
for further information concerning the
plan’s automatic rollover provisions;
and (4) the IRA provider and the fees
and expenses attendant to the IRA.
The Department proposes a
requirement that the automatic
portability provider provide the
administrator of participating plans
with a description of the automatic
portability program, including fees and
expenses, that the administrator could
use in fulfilling its SPD obligations, as
relevant. The Department requests
comments on whether the final rule
should set forth specific content
requirements for an automatic
portability provider model notice.
(c) Notices to IRA Owner
This proposed regulation specifies
two notices an automatic portability
provider is required to send to IRA
owners before an automatic portability
transaction is executed and one notice
after the automatic portability
transaction is executed, as described
below.
i. Initial Enrollment Notice
Section 120(c)(1) of the SECURE 2.0
Act authorizes the Secretary to require
the automatic portability provider to
provide a notice to IRA owners in
advance of the pre-transaction notice
specified in Code section
4975(f)(12)(B)(v). Consistent with this
authority, this proposed regulation
includes a requirement that an
automatic portability provider provide
an ‘‘initial enrollment notice’’ to the IRA
owner no later than 15 calendar days
after the IRA is enrolled in an
arrangement that includes an automatic
portability transaction component. The
Department assumes that the date of
enrollment will generally be the date
that an IRA is established in connection
with a mandatory distribution.
However, for IRAs that were established
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prior to the existence of the new
statutory exemption, or established and
then later added into an automatic
portability arrangement, the enrollment
date may be a later date (e.g., when the
IRA provider begins acting as an
automatic portability provider or
engages an automatic portability
provider to begin including the IRA in
a locate-and-match service).
The Department requests comments
regarding the 15-calendar-day timeframe
for sending the initial enrollment notice,
particularly if the automatic portability
provider is not the provider of the IRA.
In this regard, the Department requests
comments about the process by which
IRAs that are not established with or
provided by the automatic portability
provider would engage an automatic
portability provider and how the
automatic portability provider would
ensure that such a notice would be
provided.
The Department proposes that the
initial enrollment notice would include
a variety of information regarding the
nature of the automatic portability
transaction and additional aspects of the
IRA arrangement that are required to be
included in the pre-transaction notice,
discussed below. The Department
anticipates that this notice requirement
could be satisfied by including the
information specified in proposed
paragraph (b)(5)(iv) in the notice
required under Code section
401(a)(31)(B) upon the establishment of
a Default IRA.
ii. Pre-Transaction Notice
Paragraph (b)(5)(iv) of the proposed
regulation incorporates the statutory
provisions of Code section
4975(f)(12)(B)(v) requiring the automatic
portability provider to provide a pretransaction notice to the IRA owner at
least 60 days before an automatic
portability transaction occurs with
information describing the automatic
portability transaction, fees to be
received in connection with the
transaction, the right to elect not to
participate in an automatic portability
transaction, distribution options,
deadlines for making elections, a
telephone number for the automatic
portability provider, and the right to and
procedures for designating a beneficiary.
The proposed regulation provides
additional clarification regarding the
timing of the pre-transaction notice by
requiring that the notice be sent no
earlier than 90 days in advance of the
automatic portability transaction. This
is intended to ensure that the notice is
sent sufficiently close to the actual
execution of the automatic portability
transaction so that the assets of the IRA
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do not remain there for an unreasonable
period waiting to be rolled-in to the
transfer-in plan.
The Department seeks comments on
the proposed pre-transaction notice and
whether additional information should
be required. The Department is
particularly interested in comments
regarding whether specific information
should be provided to the IRA owner
explaining the significance of
transferring assets into an employersponsored plan as opposed to retaining
those assets in an IRA, as well as any
plain language examples to help the IRA
owner better understand the various
aspects of an automatic portability
arrangement. Relatedly, the Department
requests comment on whether model
disclosures or model language for the
pre-transaction notice would be helpful
and encourages commenters who
support a model disclosure or model
language, model charts, or other formats
submit suggestions for the model
language, chart or format they believe
would help ensure readability and
accessibility for the target audience. The
Department also requests comment on
whether a final rule should specify a
minimum amount of time that the IRA
owner has to make an election to opt out
of the automatic portability transaction,
e.g., no sooner than 10 days before the
anticipated execution of the automatic
portability transaction identified in the
pre-transaction notice.
iii. Post-Transaction Notice
This post-transaction notice, which
would occur after a transfer-in plan
receives an individual’s IRA funds, is
the last notice that the automatic
portability provider would be required
to provide to the IRA owner or plan
participant. Paragraph (b)(5)(v) of this
proposed regulation incorporates the
statutory requirements in
4975(f)(12)(B)(vi). The statute requires
that no later than three business days
after the completion of an automatic
portability transaction, the automatic
portability provider shall provide notice
to the IRA owner of the actions taken by
the automatic portability provider with
respect to the IRA. The statute also
requires the notice to include all
relevant information regarding the
location and amount of any transferred
assets, a statement of fees charged
against the IRA or transfer-in plan
account in connection with the transfer,
and a contact phone number for the
automatic portability provider.
The proposed regulation provides
some minor clarifying language
intended to explain the Department’s
view regarding the information needed
to satisfy the statutory language. For
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5631
instance, the proposed regulation adds
that (1) a description of the actions
taken by the automatic portability
provider specifically includes that the
individual was matched with an
account in a new employer plan, (2)
relevant information regarding the
amount of transferred assets includes
the name of the employer and name of
the plan where the assets were
transferred, and (3) the telephone
number required by the statutory text is
a customer service telephone number.
The Department requests comment on
whether model disclosures or model
language for the post-transaction notice
would be helpful and encourages
commenters to submit language or
formats they believe would help ensure
readability and accessibility for the
target audience.
(d) Consolidation of Automatic
Portability Provider Notices With Other
Disclosures
The Department understands that an
automatic portability provider may also
be the designated provider of Default
IRAs for a transfer-out plan and may be
providing notices required by the Code
and/or the Department’s Safe Harbor
Regulation. To the extent that the
automatic portability provider has been
engaged to provide notices to
participants in connection with
mandatory distributions on behalf of
employer-sponsored plans, the notices
and disclosures to individuals required
by the statutory exemption and this
proposed regulation would not have to
be provided separately. However, the
automatic portability provider should
take care to ensure that the information
required by the notice provisions to
individuals in this proposed regulation
is clearly displayed to reduce possible
confusion with other provided
information.
(e) Accessibility of Disclosures to
Participants and IRA Owners
Paragraph (b)(5)(vi) of this proposed
regulation parallels the statutory text of
Code section 4975(f)(12)(B)(vii) by
requiring all required notices to
participants and IRA owners to be
written in a manner calculated to be
understood by the average person and
not include inaccurate or misleading
statements. The proposed regulation
includes provisions intended to clarify
and explain this requirement. In the
Department’s view, the idea of an
‘‘average person’’ in the context of
understanding the notices under the
exemption should be read as the average
person receiving the notices rather than
an abstract concept of an average person
at large. Accordingly, the proposed
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regulation speaks in terms of the average
intended recipient of the notices. The
proposal also specifies that the
disclosures must be accurate, not
misleading,34 and sufficiently
comprehensive to apprise the individual
of their rights and obligations under the
automatic portability program, must not
be formatted to have the effect of
misleading, misinforming, or failing to
inform the recipient, and be written in
a culturally and linguistically
appropriate manner (see discussion
below). In fulfilling these requirements,
the proposed regulation requires the
automatic portability provider to
exercise considered judgment and
discretion by taking into account such
factors as the level of comprehension
and education of the typical intended
recipient and the complexity of the
terms of the program. Consideration of
these factors will usually require the
limitation or elimination of technical
jargon and of long, complex sentences,
the use of clarifying examples and
illustrations, the use of clear cross
references, and a table of contents.
These proposed requirements are
modeled on the Department’s regulation
governing the style and format of SPDs
that plan administrators are required to
provide plan participants and
beneficiaries.35
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(f) Culturally and Linguistically
Appropriate Standards for Required
Notices and Disclosures to Participants
and IRA Owners
The proposed regulation would
require that notices and disclosures to
participants and IRA owners be
provided in a culturally and
linguistically appropriate manner in
certain situations. The proposal
essentially adopts the ACA standard for
group health benefit notices.36
Specifically, if the address of a recipient
of a required notice or disclosure is in
a county where 10 percent or more of
the population is literate only in the
same non-English language, the notice
or disclosure must include a prominent
statement in the relevant non-English
language about the availability of
language services. The automatic
portability provider would also be
required to provide a verbal customer
assistance process in the non-English
34 The Department would consider it misleading,
for example, for the automatic portability provider
to include in notices to individuals any exculpatory
clauses or indemnification provisions that are not
permitted under this proposed regulation or by
applicable law.
35 29 CFR 2520.102–2.
36 See, e.g., 29 CFR 2590.715–2715 and 2590.715–
2719(e).
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language and provide written notices in
the non-English language upon request.
(g) Ensuring Participants and IRA
Owners Receive Notices
Section 120(c)(10) of the SECURE 2.0
Act authorizes the Secretary to issue
regulations to ensure that the
participants and IRA owners, ‘‘in fact,
receive all required notices and
disclosures.’’ Furthermore, Section
120(c)(7) of the SECURE 2.0 Act grants
the Secretary regulatory authority to
require the automatic portability
provider ‘‘to take actions necessary to
reasonably ensure that participant and
beneficiary data is current and
accurate.’’ To this end, paragraph
(b)(5)(vii) of the proposed regulation
would require the automatic portability
provider to adopt and implement
prudent policies and procedures to
ensure that it obtains individual
participant and IRA owner data
necessary to effectively administer the
automatic portability program and that
the participant and IRA owner data in
its possession or control is current and
accurate. The proposed regulation also
specifies that notices and disclosures to
participants and IRA owners must be
made using methods that satisfy the
disclosure requirements in 29 CFR
2520.104b–1(b). The regulation at 29
CFR 2520.104b–1(b) provides a general
standard that covered materials shall be
furnished using ‘‘measures reasonably
calculated to ensure actual receipt of the
material by plan participants,
beneficiaries and other specified
individuals.’’ The Department requests
comments on how an automatic
portability provider would handle
undeliverable mail and whether specific
additional regulatory protections should
be established for individuals with
respect to whom the automatic
portability provider has received
returned mail. The Department also
invites comments on whether the
regulation should specifically address
electronic disclosure of notices and
disclosures under the exemption,
including how to deal with
undeliverable electronic notices.
7. Frequency of Searches
The proposed regulation parallels the
Code section 4975(f)(12)(B)(viii)
requirement that the automatic
portability provider query on at least a
monthly basis whether any individual
with an IRA has an account in a
transfer-in plan. The Department
believes that verification of the
information used in connection with
performing searches is important to
carrying out the purposes of the
statutory exemption. Accordingly,
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under the proposal, the automatic
portability provider must perform
ongoing participant address validation
searches via automated checks of (1)
National Change of Address records, (2)
two separate commercial locator
databases, and (3) any internal databases
maintained by the automatic portability
provider. If a valid address is not
obtained from the automated checks, the
automatic portability provider must also
perform a manual internet-based search.
The proposal would require these
verification steps to be performed at
least twice in the first year an account
is entered into the automatic portability
provider system and once a year
thereafter. The Department invites
comments on whether additional or
different verification steps should be
required and on whether a final
regulation should specifically list other
information to be used in the searches
that may aid in validating a match, for
example, beneficiary information. In the
Department’s view, the statutory
exemption’s description of the search
requirement envisions the automatic
portability provider taking reasonable
steps to verify the accuracy of the
information used for conducting the
required searches.
The Department requests comment on
whether the final regulations should
permit the query to be performed by a
partnering recordkeeper in addition to
the automatic portability provider and
how the automatic portability provider
would share information with
recordkeepers for purposes of running
the query. If the Department permits
this under the final regulations, the
Department anticipates that the ultimate
obligation to ensure the required
searches are performed would remain
with the automatic portability provider.
The Department also requests comment
on whether there should be specific
parameters or obligations for partnering
recordkeepers if they are permitted to
run the queries. Finally, if any
commenter believes partnering
recordkeepers should be permitted to
run queries, the Department requests
any additional information that would
support the need and rationale for
permitting this under a final regulation.
8. Monitoring Transfers
The Department believes proper
monitoring of automatic portability
transactions by the transfer-in plan is
also critical to ensuring the successful
execution of the transactions, and,
accordingly, the proposal includes a
monitoring requirement. The
Department believes general prudence
obligations would require such
monitoring but is including this
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requirement in the proposed regulation
pursuant to the general regulatory
authority provided to the Department in
section 120(c) of the SECURE 2.0 Act
and the authority transferred to the
Secretary under section 102 of
Reorganization Plan No. 4 of 1978.
Paragraph (b)(7) of the proposed
regulation requires that the automatic
portability provider ensure that each
transfer-in plan for whom the automatic
portability provider performs automatic
portability transactions designates a
plan official responsible for monitoring
transfers into the plan and confirming
that amounts received on behalf of a
participant are invested properly. Under
the proposal, amounts received would
be deemed to be invested properly if
made according to the participant’s
current investment election under the
plan or, if no election is made or
permitted, in the plan’s qualified default
investment alternative under 29 CFR
2550.404c–5 or in another investment
selected by a fiduciary with respect to
such plan.
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9. Timeliness of Execution
Code section 4975(f)(12)(B)(ix)
requires timely execution of transfers by
requiring the automatic portability
provider to transfer the liquidated
account balance of the IRA as soon as
practicable. Paragraph (b)(8) of the
proposed regulation incorporates the
statutory text and includes provisions
intended to clarify the statutory
requirement. First, the proposal clarifies
the timeliness of execution is measured
from the date after the final deadline
passes for the affected individual to
affirmatively elect not to participate in
the transaction, as specified in the pretransaction notice. The proposed
regulation also provides that the
automatic portability provider must
follow timeframes formally established
in policies and procedures, discussed in
more detail below. The proposal does
not include a specific timeframe for
what would be considered ‘‘as soon as
practicable’’ but requests comments on
whether the final rule should include
such a specific timeframe or other
clarification of the standard.
10. Limitation on Exercise of Discretion
and Policies and Procedures
Code section 4975(f)(12)(B)(x)
provides that the automatic portability
provider will neither have nor exercise
discretion to affect the timing or amount
of the transfer pursuant to an automatic
portability transaction other than to
deduct the appropriate fees. Paragraph
(b)(9) of the proposed regulation
incorporates the statutory limitation on
discretion and expands upon the
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statutory text by specifying that an
automatic portability provider will be
deemed to satisfy the limited discretion
requirement if it establishes, maintains,
and follows policies and procedures
regarding the process for executing
automatic portability transactions. The
policies and procedures must set
specific standards and timeframes that
are equally applied to all automatic
portability transactions. The Department
is proposing the policies and procedures
to operationalize the limited discretion
standard in accordance with the general
regulatory authority granted to the
Secretary under section 120(c) of the
SECURE 2.0 Act and the authority
transferred to the Secretary under
section 102 of Reorganization Plan No.
4 of 1978. The policies and procedures
are intended to ensure that the
automatic portability provider is acting
in accordance with its obligations under
the exemption and these regulations and
consistently with the intent of the
statutory exemption. The Department
also believes the policies and
procedures will ensure that there is
appropriate operational documentation
by the automatic portability provider to
support the audit, described below.
The policies and procedures must, at
a minimum, specifically and prudently
address: (1) the process to ensure that
transfer-in plans designate a plan
official that will be responsible for
monitoring transfers into the plan due to
automatic portability transactions; (2)
the process and timing for liquidating
the assets of the Default IRA to cash and
closing the IRA; (3) the process for
verifying and validating that the correct
fees are withdrawn from the Default
IRA; (4) the process and timing for
transmitting assets to the transfer-in
plan; (5) verifying the assets were
received by the transfer-in plan; and (6)
sending all notices to plan participants
or individuals on whose behalf a Default
IRA is established as required in this
proposed regulation.
11. Audit and Corrections
(a) Audit and Audit Report
Code section 4975(f)(12)(B)(xi)
includes a requirement for an annual
audit to be conducted in accordance
with regulations promulgated by the
Secretary. The statute requires that an
audit be conducted that demonstrates
compliance with Code section
4975(f)(12) and any regulations
thereunder and that identifies any
instances of noncompliance with the
statute or such regulations. The statute
requires the automatic portability
provider to submit a copy of the
auditor’s report to the Secretary in such
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form and manner as specified by the
Secretary.
(b) Auditor and Auditor’s Report
After consideration, the Department is
proposing that the audit be an
independently conducted audit to best
ensure that the automatic portability
provider is executing automatic
portability transactions in a manner that
is consistent with ERISA and that
promotes the retirement security of
workers. An auditor will be considered
independent if: (1) the auditor is a
person or an entity that the automatic
portability provider does not own or
control, and (2) the auditor does not
derive more than two percent of its
annual revenue from services provided
directly or indirectly to the automatic
portability provider or any of its
affiliates. In addition, the auditor must
have the appropriate technical training
and proficiency necessary to carry out
the audit. The Department invites
comments regarding the two percent
threshold. The Department believes the
two percent threshold supports a
presumption of independence but
requests comment with supporting
rationale if affected entities believe a
higher threshold should be permitted.
Additionally, the Department requests
comment on what additional
protections commenters would propose
to support one or more higher
thresholds.
Paragraph (c) of this proposed
regulation would also require the
independent auditor to review the
automatic portability provider’s policies
and procedures as well as representative
samples of the required disclosures and
related automatic portability
transactions sufficient for the auditor to
make the required audit determinations
and findings. The findings must be
memorialized in a written audit report,
which would include the following: (1)
the number of completed automatic
portability transactions during the audit
period; (2) whether the required notices
met the timing and content
requirements of these regulations; (3)
whether the required notices were
written and delivered in a manner
reasonably designed to ensure that
affected individuals would both receive
and understand the notices; (4) whether
any required notices were returned as
undeliverable and what steps were
taken by the automatic portability
provider to address undeliverable
notices; (5) whether the appropriate
transfer-in plan accounts received all
the assets due as a result of the
automatic portability transactions; (6) a
summary of all fees charged by the
automatic portability provider (and any
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affiliates) for services in connection
with automatic portability transactions,
including whether those fees increased
since the last report; (7) whether the fees
and compensation received by the
automatic portability provider
(including its affiliates) are consistent
with the fees authorized by the
appropriate fiduciaries and did not
exceed reasonable compensation; (8)
whether all requirements of section
4975(f)(12) and these proposed
regulations were satisfied with respect
to: (a) the policies and procedures and
(b) the transactions and disclosures that
were reviewed; (9) a summary of
compliance issues reported to or
discovered by the auditor, the auditor’s
recommendations, and the extent to
which the automatic portability
provider has addressed or is addressing
the issues pursuant to the correction
procedures; (10) any other
recommendations from the auditor to
improve the policies and procedures
and overall execution of automatic
portability transactions; and (11) a
description of the auditor’s audit
methodology. In order to assist the
auditor in the review, the automatic
portability provider is required to grant
the auditor access to its automatic
portability operations and records
(including, as necessary, the operations
and records of its affiliates) sufficient to
allow the auditor to make the
determinations and findings noted
above.
Section 120(d) of the SECURE 2.0 Act
requires the Secretary to provide
periodic reports to Congress that
include a variety of information related
to automatic portability transactions and
portability arrangements more generally.
The Department envisions that most of
the information required for this report
to Congress will come from information
included in the audit reports filed by
automatic portability providers.
Therefore, the Department is proposing
that the written audit report would also
include: (1) the number of automatic
rollovers of mandatory distributions
from qualified plans into Default IRAs
that are included in the automatic
portability program; 37 (2) the number of
completed automatic portability
transactions; and (3) the number of
Default IRAs separately in each of the
following categories: (a) which have
been transferred to designated
beneficiaries, (b) for which the
automatic portability provider is
37 Sec.
120(d)(1)(A)(i) uses the term ‘‘automatic
cash outs’’ but the Department believes, based on
the context, that it is referring to automatic rollovers
of mandatory distributions as that term is used
throughout this preamble.
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searching for next of kin due to a
deceased IRA owner without a
designated beneficiary, and (c) that were
reduced to a zero balance while in the
automatic portability provider’s
custody.
If the automatic portability provider
does not have direct access to any
information required to be included in
the audit report, the automatic
portability provider would be required,
as a condition of its services, to obtain
appropriate information from partnering
recordkeepers and participating plans in
their possession or control, on request
from the automatic portability provider,
so it can be provided to the independent
auditor and incorporated into the audit
report.38 The Department seeks
comments on the availability of any
information not otherwise directly
accessible by the automatic portability
provider and if there are any barriers to
obtaining this information from
participating recordkeepers or
employer-sponsored plans. The
Department also seeks comment on
whether there are other readily available
sources for such information that would
be accessible to the Department.
i. Timing of Audit Report & Certification
This proposed regulation would
require the independent auditor to
complete the audit within 180 calendar
days following the annual period to
which the audit relates. The automatic
portability provider must then submit a
copy of the written audit report to the
Department at auto-portabilityaudit@
dol.gov within 30 calendar days of
completion. The automatic portability
provider’s submission to the
Department must also include a
certification, under penalty of perjury,
that the automatic portability provider
reviewed the audit report and that, to
the best of its knowledge at the time, it
has addressed, corrected, or remedied
any noncompliance or inadequacy, or
has an appropriate written plan to
address any such issues identified in the
audit report.
(c) Corrections
Section 120(c)(9) specifically grants
the Secretary authority to provide for
correction procedures in the event the
auditor determines the automatic
portability provider was not in
compliance with the statute and related
regulations. To effectuate the intent of
this provision, the Department is
38 The automatic portability provider may not
have direct access to all the information identified
in section 120(d) of the SECURE 2.0 Act if, for
instance, the automatic portability provider is not
the provider or custodian of all IRAs for which it
will execute automatic portability transactions.
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proposing three components for
corrections.
First, the Department is providing an
opportunity for an automatic portability
provider to make certain selfcorrections. Under paragraph (c)(9)(i),
the Department would not consider a
non-exempt prohibited transaction to
have occurred due to a violation of the
requirements of Code section 4975(f)(12)
and these regulations with respect to a
transaction, provided that either the
violation does not result in investment
losses to the Default IRA or the
automatic portability provider made the
IRA whole for any resulting losses. In
order to self-correct in those situations,
the automatic portability provider
would be required to correct the
violation and document the correction
in writing within 30 calendar days of
correction. The correction would only
be permitted if it occurs no later than 90
calendar days after the automatic
portability provider learned of the
violation or reasonably should have
learned of the violation. Finally, all
instances of noncompliance and
accompanying corrections would be
required to be reported in writing to the
auditor and the auditor would have to
agree that the transaction did not result
in investment losses or that the IRA was
made whole. The Department solicits
comments on whether specific criteria
should be included in the final rule on
measuring investment losses and make
whole requirements.
The second component for corrections
involves additional recommendations
from the auditor. If the auditor
determines that the automatic
portability provider was not in
compliance with any provision of Code
section 4975(f)(12) or these regulations
during the audit period, the auditor
must identify the instances of
noncompliance in the audit report along
with its recommended corrections. An
automatic portability provider would
not be treated as having failed to comply
with any provision of Code section
4975(f)(12) or these regulations,
provided it corrects any instance of
noncompliance identified by the auditor
as soon as reasonably practicable
according to the auditor’s
recommendations.
The Department believes that the first
two components for corrections will
provide an automatic portability
provider with additional incentive to
take the audit process seriously, timely
identify and correct violations of Code
section 4975(f)(12) and these proposed
regulations, and use the audit process to
correct deficiencies in the automatic
portability provider’s operations to
avoid potential future violations,
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penalties, losses to IRA owners/plan
participants, and lawsuits.
The third and final component for
corrections would involve the Secretary
requiring an automatic portability
provider to submit to supplemental
audits and corrective actions if
significant compliance issues are
uncovered. The Department is
proposing the following scenarios
involving the automatic portability
provider or an affiliate under which the
Secretary may impose additional
corrective actions: (1) engaging in a
systematic pattern or practice of
violating any provision of section
4975(f)(12) or an implementing
regulation; (2) intentionally violating
any provision of section 4975(f)(12) or
an implementing regulation; (3)
providing materially misleading
information to the Secretary, Secretary
of the Treasury, or the auditor in
connection with automatic portability
transactions; (4) a foreign or domestic
criminal conviction involving or arising
out of the conduct of the automatic
portability program or any automatic
portability transaction; or (5) a foreign
(or foreign equivalent) 39 or domestic
criminal conviction for any felony
involving the following crimes: larceny,
theft, robbery, extortion, forgery,
counterfeiting, fraudulent concealment,
embezzlement, fraudulent conversion,
misappropriation of funds or securities,
or conspiracy to commit any such
crimes or a crime in which any of the
foregoing crimes is an element.
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12. Automatic Portability Provider
website
The proposed regulation in paragraph
(d) parallels the statutory language in
Code section 4975(f)(12)(B)(xii)
requiring the automatic portability
provider to: (1) maintain a website
which contains a list of recordkeepers
with respect to which the automatic
portability provider carries out
automatic portability transactions and
(2) list all fees paid to the automatic
portability provider. Under the
proposed regulation the list would have
to include the fees and the identity of
the party or account that is paying the
particular fee. The proposal also
requires that the website include the
number of plans and participants
39 The
Department does not expect that foreign
crimes will arise frequently in connection with
automatic portability providers, but if they do,
impacted entities may contact the Department for
guidance. Additionally, the Department requests
comment regarding whether any additional process
should be provided for foreign crimes before the
Department imposes supplemental audits or
corrective actions, particularly those foreign crimes
that raise issues regarding their equivalence to a
domestic crime.
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covered by each recordkeeper. The
Department solicits comments on
whether other documents or materials
should be required to be posted on the
website, for example, a copy of the
independent auditor’s audit report
redacted as needed to protect
confidential business information, if
any, in the audit report.
Because the Department anticipates
that automatic portability providers may
include a range of other services and
information, customer support features,
and functionalities in addition to
automatic portability transactions, the
proposal would also require the website
to display automatic portability
transaction-related information in a way
that differentiates that information from
other information or elements of the
website (e.g., separately identifying the
automatic portability transaction fees
and services from fees and services in
connection with establishing and
custody of a Default IRA).
The Department intends that these
website disclosures and additional
parameters will make it easier for plan
sponsors to independently assess the
overall cost of an automatic portability
arrangement in connection with signing
up for an automatic portability
transaction service covered by the
statutory exemption and this regulation.
13. Limitations on Exculpatory
Provisions
Section 120(c)(6) of the SECURE 2.0
Act specifically provides the Secretary
with the authority to place limitations
on exculpatory provisions due to an
improper transfer of Default IRA assets.
Therefore, the Department is proposing
that the automatic portability provider
may not include exculpatory provisions
in its contracts disclaiming or limiting
the automatic portability provider’s
liability in the event that the automatic
portability transaction results in an
improper roll-in to the transfer-in plan.
However, this requirement would not
prohibit disclaimers for liability caused
by an error, misrepresentation, or
misconduct of a party independent of
the automatic portability provider and
its affiliates, or damages arising from
acts outside the control of the automatic
portability provider. Section 120(c)(6) of
the SECURE 2.0 Act does not
specifically address other exculpatory
provisions. The Department requests
comments on whether the prohibition
on exculpatory provisions should be
broader and include violations of the
prohibited transaction provisions in
Code section 4975 generally and ERISA
in connection with any conduct of the
automatic portability provider or an
affiliate that is subject to Title I.
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14. Record Retention
This proposed regulation incorporates
the statutory language in Code section
4975(f)(12)(B)(xi)(I) regarding record
retention by requiring that an automatic
portability provider maintain, for not
less than six years, records sufficient to
demonstrate compliance with the
requirements of the statute and this
proposed regulation and make them
available to authorized employees of the
Department and the Department of the
Treasury within 30 calendar days of a
written request. This proposal also
includes clarifying language regarding
the record retention requirement and its
impact on the prohibited transaction
relief provided by Code section
4975(d)(25), which clarifying language
the Department has frequently included
in administrative prohibited transaction
exemptions. First, the proposal provides
that no prohibited transaction will be
considered to have occurred if, solely
because of circumstances beyond the
control of the automatic portability
provider, the records are lost or
destroyed before the six-year period
ends (e.g., due to a natural disaster).
Second, an automatic portability
provider’s failure to maintain the
records necessary to determine whether
the conditions of Code section
4975(d)(25) and this regulation have
been met will result in the loss of the
relief provided under this exemption
only for the transaction or transactions
for which such records are missing or
have not been maintained. Such failure
does not affect the relief for other
transactions if the automatic portability
provider maintains records for such
other transactions in compliance with
the record retention requirements.
15. Definitions
The Department included three
definitions in proposed paragraph (g).
The proposed definition of ‘‘affiliate’’ is
consistent with the Department’s
definition of affiliate in many other
regulations.40 Likewise, the definition of
‘‘control’’ is intended to be consistent
with the Department’s use of that term
in other regulations.41 The definition of
‘‘individual retirement plan’’ refers to
an individual retirement account or
annuity described in Code section
40 A person or entity is an ‘‘affiliate’’ if, directly
or indirectly (through one or more intermediaries)
it controls, is controlled by, or is under common
control with such person or entity; or is an officer,
director, or employee of, or partner in, such person
or entity. Unless otherwise specified, an ‘‘affiliate’’
refers to an affiliate of the automatic portability
provider.
41 The term ‘‘control’’ means the power to
exercise a controlling influence over the
management or policies of an entity or person other
than an individual.
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408(a) or 408(b). The Department
requests comment on whether any other
definitions may be necessary to provide
additional clarity to the proposed
regulation.42
E. Request for Public Comments
The Department invites comments
from interested persons on all facets of
the proposed rule. Commenters are free
to express their views not only on the
specific provisions of the proposal as set
forth in this document, but on any
issues germane to the subject matter of
the proposal. Comments should be
submitted in accordance with the
instructions at the beginning of this
document.
Without limiting the generality of the
above request for comments, the
Department requests comments on
whether the rule should include
provisions that specially address issues
related to IRA beneficiaries. The
statutory provisions envision an
automatic portability transaction as a
transfer of assets ‘‘made from an
individual retirement plan which is
established on behalf of an individual
and to which amounts were transferred
under section 401(a)(31)(B)(i)’’ to an
eligible employer-sponsored retirement
plan in which ‘‘such individual is an
active participant.’’ The statutory
provisions do not expressly reference
moving funds for a beneficiary from a
default IRA to an employer-sponsored
plan in which the beneficiary
participates. The statutory provisions
similarly require notices to ‘‘the
individual on whose behalf the
individual retirement plan . . . is
established.’’ Nonetheless, the
Department notes the recordkeeping
provisions in the statute expressly
reference the automatic portability
provider taking steps to ensure it has
accurate beneficiary information and the
statutory provisions on the required
Report to Congress call for separate
identification of IRAs transferred to
designated beneficiaries and IRAs for
which a next of kin is being identified
after the death of the IRA owner without
a designated beneficiary. Accordingly,
the Department is interested in
comments on whether the final
regulation should address specific
beneficiary issues, and, if the
commenter believes it should, the
Department asks that the commenter
identify the issue or issues and include
recommendations on how the issue or
issues should be addressed in the
regulation.
42 As
one example, should the Department define
‘‘active participant’’ or is this term generally
understood?
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The Department also specifically
requests comments on exemptive relief
for Default IRAs involving rollovers of
mandatory distributions with a value of
$1,000 or less. The proposal does not
expressly include such mandatory
distributions in light of the SECURE 2.0
Act amendment of Code section 4975
defining the term ‘‘automatic portability
transaction’’ to mean a transaction in
which mandatory distributions pursuant
to Code section 401(a)(31)(B)(i) from an
employer-sponsored retirement plan to
an IRA established on behalf of an
individual are subsequently transferred
to an eligible employer-sponsored plan
in which such individual is an active
participant, after such individual has
been given advance notice of the
transfer and has not affirmatively opted
out of such transfer. As noted elsewhere
in this document, Code section
401(a)(31)(B)(i) refers to distributions of
nonforfeitable accrued benefits the
present value of which is in excess of
$1,000 but less than or equal to $7,000.
The Department confronted a similar
issue in implementing section
657(c)(2)(A) of the Economic Growth
and Tax Relief Reconciliation Act of
2001 (EGTRRA), which directed the
Department to issue regulations
providing safe harbors under which (1)
a plan administrator’s designation of an
institution to receive the automatic
rollover, and (2) the initial investment
choice for the rolled-over funds would
be deemed to satisfy the fiduciary
responsibility provisions of section
404(a) of ERISA. Section 657 of
EGTRRA also referenced Code section
401(a)(31)(B) automatic rollovers.
However, in its final rule in 2004, the
Department, in response to public
comments, included mandatory
distribution amounts of $1,000 or less
noting that, although not described in
Code section 401(a)(31)(B), tax-qualified
retirement plans are permitted to
distribute to a separating participant
without the participant’s consent
provided the present value of the
participant’s vested accrued benefit did
not exceed the maximum value at that
time of $5,000.43 The Department said
that, after taking into account the
purpose and provisions of the safe
harbor regulation, it was persuaded that
application of the safe harbor to
rollovers of mandatory distributions of
$1,000 or less was appropriate because
the availability of the safe harbor for
such distributions might increase the
likelihood that such amounts will be
43 See 29 CFR 2550.404a–2(d); Final Rule on
Fiduciary Responsibility Under the Employee
Retirement Income Security Act of 1974 Automatic
Rollover Safe Harbor, 69 FR 58018 (Sept. 28, 2004).
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rolled over to individual retirement
plans and thereby may promote the
preservation of retirement assets
without compromising the interests of
the participants on whose behalf such
rollovers are made.44 In addition, some
plans may find it advisable to provide
for automatic rollovers of all sizes of
small accounts to avoid the issues that
arise when distribution checks remain
uncashed.45 Thus, in light of the fact
that the regulatory exemption in Code
section 4975 established by the SECURE
2.0 Act specifically references
401(a)(31)(B), the Department is
interested in public comments on
whether it should use its general
exemption authority under ERISA
section 408(a) to provide parallel
exemptive relief for mandatory
distributions of $1,000 or less for
reasons similar to those noted above in
connection with the Department’s
automatic rollover safe harbor in 29 CFR
2550.404a–2.
F. Regulatory Impact Analysis
The Department has examined the
effects of this proposed rule as required
by Executive Order 12866,46 Executive
Order 13563,47 the Congressional
Review Act,48 the Paperwork Reduction
Act of 1995,49 the Regulatory Flexibility
Act,50 section 202 of the Unfunded
Mandates Reform Act of 1995,51 and
Executive Order 13132.52
1. Executive Order 12866 (Regulatory
Planning and Review), Executive Order
14094 (Modernizing Regulatory Review),
and 13563 (Improving Regulation and
Regulatory Review)
Under E.O. 12866 (as amended by
Executive Order 14094), the Office of
Management and Budget (OMB)’s Office
of Information and Regulatory Affairs
determines whether a regulatory action
is significant and, therefore, subject to
the requirements of the E.O. and review
by OMB. 58 FR 51735. As amended by
Executive Order 14094, section 3(f) of
Executive Order 12866 defines a
‘‘significant regulatory action’’ as a
regulatory action that is likely to result
44 Id.
at 58019.
‘‘The Benefits of Mandatory Distributions,’’
A White Paper by Fred Reish and Bruce Ashton
(2013)(available at https://fredreish.com/wpcontent/uploads/2013/03/The-Benefits-ofMandatory-Distributions-A-White-Paper-February2013_NEW.pdf).
46 Regulatory Planning and Review, 58 FR 51735
(Oct. 4, 1993).
47 Improving Regulation and Regulatory Review,
76 FR 3821 (Jan. 21, 2011).
48 5 U.S.C. 804(2) (1996).
49 44 U.S.C. 3506(c)(2)(A) (1995).
50 5 U.S.C. 601 et seq. (1980).
51 2 U.S.C. 1501 et seq. (1995).
52 Federalism, 64 FR 43255 (Aug. 10, 1999).
45 See
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in a rule that may: (1) have an annual
effect on the economy of $200 million
or more; or adversely affect in a material
way the economy, a sector of the
economy, productivity, competition,
jobs, the environment, public health or
safety, or state, local, territorial, or tribal
governments or communities; (2) create
a serious inconsistency or otherwise
interfere with an action taken or
planned by another agency; (3)
materially alter the budgetary impact of
entitlements, grants, user fees or loan
programs or the rights and obligations of
recipients thereof; or (4) raise legal or
policy issues for which centralized
review would meaningfully further the
President’s priorities or the principles
set forth in the Executive order. OMB
has determined that this revision is a
significant regulatory action under
section 3(f)(1) of E.O. 12866.
Executive Order 13563 directs
agencies to propose or adopt a
regulation only upon a reasoned
determination that its benefits justify its
costs; the regulation is tailored to
impose the least burden on society,
consistent with achieving the regulatory
objectives; and in choosing among
alternative regulatory approaches, the
agency has selected those approaches
that maximize net benefits. E.O. 13563
recognizes that some benefits are
difficult to quantify and provides that,
where appropriate and permitted by
law, agencies may consider and discuss
qualitative values that are difficult or
impossible to quantify, including
equity, human dignity, fairness, and
distributive impacts.
2. Need for Regulation
When American workers change jobs,
they often encounter frictions that result
in reduced retirement savings in
aggregate. This regulation will alleviate
some of those frictions, resulting in
more retirement savings, which will
improve Americans’ preparation for
retirement. This is particularly
beneficial given the wider context that
many workers have insufficient
retirement savings. Only 57 percent of
households headed by 55–64 year olds
held any retirement savings accounts in
2022, and the median amount in those
accounts was $185,000.53 The Federal
Reserve reports that only one-third of
Americans view their retirement savings
plan as sufficient to meet their needs in
retirement.54 This is consistent with
projections by VanDerhei (2019)
53 2022 Survey of Consumer Finance. ‘‘Retirement
Account by Age of Reference Person,’’ The Fed—
Table: Survey of Consumer Finances, 1989—2022
(federalreserve.gov).
54 Federal Reserve. ‘‘Survey of Household
Economics and Decisionmaking.’’ 2022.
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showing that about 41 percent of
households ages 35 to 64 will run short
of money in retirement.55 Similarly,
Brown et al. (2018) find that nearly 77
percent of Americans are behind in
saving for retirement given their age and
income.56
Previous generations of American
workers who had a retirement plan
usually had a defined benefit (DB)
pension plan that promised fixed
payments to them upon retirement. An
employee’s retirement benefit under a
DB plan often is based on a percentage
of their final year’s compensation
multiplied by their total years of
employment with the sponsoring
employer.57 Workers who changed jobs
and moved to another plan, however,
received less benefits from DB plans, as
these plans often had a five-year cliff
vesting policy, so a worker who stayed
at a job for fewer than five years
received no retirement benefits from
that job. Even when a worker accrued
benefits under a former employer’s DB
plan, the effects of inflation often meant
that their final year’s salary earned from
their former employer tended to be
lower than their final year’s salary
earned from a subsequent employer
before retirement. Since the employee’s
final year’s salary is a key factor in the
benefit formula, they would receive
lower lifelong pension benefits as a
result of switching jobs even if they
worked the same number of years at the
same salaries.
In recent decades defined
contribution (DC) plans have
supplanted DB plans as the most
prevalent type of pension plan provided
to workers.58 DC plans, such as 401(k)
plans, base their benefit on employer
and employee contributions to an
individual’s account and the investment
earnings on their account balance.
Currently, 49 percent of private industry
workers (59 percent of full-time private
industry workers) are participating in a
55 Jack VanDerhei, ‘‘Retirement Savings
Shortfalls: Evidence from EBRI’s 2019 Retirement
Security Projection Model.’’ Employee Benefit
Research Institute (March 7, 2019).
56 Jennifer Brown, Joelle Saad-Lessler, and Diane
Oakley. ‘‘Retirement in America: Out of Reach for
Working Americans?’’ National Institute on
Retirement Security. 2018.
57 U.S. Bureau of Labor Statistics, Employee
Benefits, ‘‘Retirement plan provisions for private
industry workers in the United States,’’ Table 2,
reference year 2022, (April, 2023). Available at:
https://www.bls.gov/ebs/publications/retirementplan-provisions-for-private-industry-workers2022.htm.
58 Employee Benefits Security Administration,
Private Pension Plan Bulletin Historical Tables and
Graphs 1975–2021, (September 2023), Table E4,
(September 2023), https://www.dol.gov/sites/
dolgov/files/ebsa/researchers/statistics/retirementbulletins/private-pension-plan-bulletin-historicaltables-and-graphs.pdf.
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DC plan.59 For workers that change jobs
frequently, DC plans have certain
portability advantages over traditional
DB plans. Public policies such as this
new automatic portability statutory
exemption and this proposed regulation
can further benefit participants by
facilitating portability among DC plans
and IRAs.
In the current retirement system
where employer-sponsored DC plans are
the primary vehicle available for
employees to save for retirement, an
employee separating from service with
an employer may be suddenly
confronted with an important financial
decision regarding how to handle
retirement assets they have accrued in
their employer’s DC plan. Making it
simpler for employees to consolidate
their retirement accounts and maintain
their tax-favored status can improve
retirement security for American
workers.
Currently, employees who change
jobs generally have the following four
options for handling their retirement
assets:
1. Leave the assets in their former
employer’s plan. The separating
employee can do this if the value of
their accrued benefit under the plan
meets any threshold imposed by the
plan, which can be at most $7,000
beginning in 2024. (A participant might
choose this option because they find the
former plan’s services, investments, and
fees to be attractive or because of simple
inattention.)
2. Roll over their savings into a
retirement plan sponsored by their new
employer.
3. Roll over their assets into an IRA.
4. Cash out the balance.
The first three of these options, where
the assets are in a plan or an IRA, retain
their tax-preferred status. A cashout, on
the other hand, results in the loss of taxpreferred status for those assets. It is no
longer earning investment returns that
are tax-deferred. The funds are
distributed directly to the employee and
are subject to regular income taxes.
Additionally, a 10 percent penalty tax
applies if the employee is under age 55
throughout the year in which they
terminate service with the employer and
if the employee does not qualify for an
exception.
When a plan participant separates
from service with an employer with an
account balance in the former
employer’s DC plan, the former
employer has the option to immediately
59 U.S. Bureau of Labor Statistics, National
Compensation Survey, Series:
NBU29000000000000026313 &
NBU29000000000002526313, (March, 2023),
Available at: https://data.bls.gov/cgi-bin/srgate.
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cash out account balances of $5,000 or
less without the participant’s consent (if
the plan has a provision allowing the
immediate distribution).60 These
distributions are a form of cashout and
are often referred to as ‘‘mandatory
distributions.’’ If, however, the
participant’s account balance is between
$1,001 and $5,000, and the participant
does not elect to have the account
balance paid to an eligible retirement
plan or receive the distribution directly
in cash, then the plan administrator of
the former employer’s plan must
transfer such account balance to a socalled ‘‘Default IRA’’ if this is required
by the plan’s provisions. These
distributions are commonly referred to
as ‘‘force-outs’’ or ‘‘automatic rollovers
of mandatory distributions.’’ 61 As part
of the SECURE 2.0 Act, Congress raised
the $5,000 threshold to $7,000 (effective
for distributions occurring after
December 31, 2023).62
Default IRAs, while intended to
preserve retirement assets in
conservatively managed accounts,
typically yield only minimal returns for
investors while often imposing
considerable fees.63 A 2014 study by the
Government Accountability Office
(GAO) found that, ‘‘fees outpaced
returns in most of the [forced-out] IRAs
analyzed’’ and that account balances
‘‘tended to decrease over time.’’ 64 GAO
also found the average return to be less
than two percent for money market
funds, which are typical investments for
Default IRAs. In contrast, many
accounts rolled into a worker’s new
employer’s plan likely will be invested
in the plan’s default investment, usually
target date funds, which typically
outpace the return on money market
funds. Observing data on small balance
rollover IRAs in general suggests that
most Default IRA owners will stay
invested in money market funds for a
substantial length of time; recent data
suggest roughly 40 percent of these
accounts remain in principal-preserving
investments for at least 10 years.65
With job turnover, a single individual
may end up with multiple Default IRAs,
further complicating the management of
their retirement account assets, and in
60 Code
sections 411(a)(11) and 417(e).
section 401(a)(31)(B)(i).
62 See SECURE 2.0 Act, Sec. 304.
63 Government Accountability Office (GAO).
‘‘401(k) Plans: Greater Protections Needed for
Forced Transfers and Inactive Accounts.’’ (2014).
64 Id.
65 Lucas Goodman, Anita Mukherjee, and Shanthi
Ramnath (2023): ‘‘Set it and forget it? Financing
retirement in an age of defaults’’, Journal of
Financial Economics, vol 148, p.47–68. Investment
Company Institute. ‘‘The IRA Investor Profile:
Traditional IRA Investors’ Activity, 2007–2016.’’
(September 2018), Appendix: Figure A.2, Page 68.
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many cases, exposing participants to
duplicative fees that might otherwise
have been avoided if their assets were
consolidated into a single account. Also,
these Default IRAs are established by
employers on behalf of non-responsive
participants; therefore, they are more
susceptible to being abandoned or
forgotten by participants.
Cashouts affect participants by
removing their assets from tax-favored
retirement accounts. A 2023 study by
Wang, Zhai, and Lynch found that over
40 percent of separating employees
report cashing out at least some of their
retirement account balance, consistent
with reporting from numerous
recordkeepers suggesting a cashout rate
of approximately 40 percent among
separating participants with account
balances below $5,000.66 VanDerhei
(2019) analyzes individuals age 35 to 64,
projects forward their main sources of
retirement resources, estimates how
much they will fall short, aggregates that
across all individuals, and calculates a
present value, estimating an aggregate
retirement savings shortfall in excess of
$3 trillion. In light of this shortfall,
reducing cashouts and retaining assets
in the retirement system is an important
retirement policy objective, particularly
for those workers with small balance
accounts who may be struggling to
accumulate significant retirement
assets.67
Taking a cashout or taking no action
at all may seem like the simplest and
most expedient courses of action for a
small-balance account participant upon
job separation but can result in suboptimal outcomes. A 2013 GAO study
found that the rollover process was
complex, inefficient, and burdensome
for participants.68 These findings were
reinforced by a 2019 GAO report, which
suggested that frictions in the rollover
process likely contributed to
participants cashing out their accounts
prematurely.69 Both studies advised that
66 Yanwen Wang, Muxin Zhai, and John G.
Lynch, Jr. ‘‘Cashing Out Retirement Savings at Job
Separation.’’ (2023). Vanguard. ‘‘How America
Saves.’’ 2023. Alight. ‘‘Universe Benchmarks
Report: How Workers Are Saving and Investing in
Defined Contribution Plans.’’ (2023). Alight.
‘‘Distributions from Defined Contribution Plans:
What Do Workers Do with their Retirement Savings
After They Leave Their Employers? A Deep Dive
into Post-Termination Behavior, 2008–2017.’’
(2019). Lucus Goodman, Jacob Mortenson, Kathleen
Mackie, and Heidi R. Schramm, ‘‘Leakage from
Retirement Savings Accounts in the United States,’’
(2021) National Tax Journal, 74(3), 689–719.
67 VanDerhei, ‘‘Retirement Savings Shortfalls,’’
2019.
68 Government Accountability Office. ‘‘401(k)
Plans: Labor and IRS Could Improve the Rollover
Process for Participants.’’ Report to Congressional
Requesters. (2013).
69 Government Accountability Office.
‘‘Retirement Savings: Additional Data Analysis
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improving the processes for account
consolidation after job separation is
imperative to reducing the leakage of
assets from the retirement system.
Plan account portability is thus
integral to the retention and
accumulation of retirement assets for
workers. Measures to improve account
portability would serve to reduce
participant losses due to cashouts (and
the associated taxes and penalties for
early withdrawals), lost accounts,
duplicative fees arising from multiple
accounts, and boost average investment
return.
The SECURE 2.0 Act includes a new
statutory prohibited transaction
exemption that seeks to improve
retirement plan portability by
permitting an automatic portability
provider to perform automatic
portability transactions for participants
with Default IRA accounts established
as a result of a mandatory distribution
from a former employer’s plan if the
individual does not respond to their
former plan’s administrator’s notices.70
If an automatic portability provider
meets the conditions of the statutory
exemption, it can transfer assets from a
worker’s Default IRA to their active
account in their new employer’s DC
plan. The proposed rule would
implement the new statutory
exemption.
3. Baseline and Post Statute and
Regulation Scenarios
Prior to the passage of SECURE 2.0
Act, RCH operated in the automatic
portability marketplace using PTE
2019–02 which is the ‘‘baseline’’
scenario for this analysis. As discussed
previously, the PTE was issued for a
five-year term. The need to renew the
PTE, and the uncertainty associated
with its continual renewal, creates
uncertainty for the marketplace. The
baseline includes the assumptions of
future renewals of PTE 2019–02 for RCH
and the mandatory distribution
threshold to be at the pre-statute level
of $5,000. SECURE 2.0 Act raised the
mandatory distribution threshold for a
plan administrator to transfer assets into
a Default IRA from $5,000 to $7,000 and
creates a statutory exemption that
eliminated the uncertainty in the
marketplace about the continued
existence of PTE 2019–02, which should
encourage the marketplace to expand its
reach in the Defined Contribution
universe.71 The analysis looks at the
Could Provide Insight into Early Withdrawals.’’
Report to the Chairman, Special Committee on
Aging, U.S. Senate. (2019).
70 Internal Revenue Code section 4975(d)(25).
71 Brian Croce, ‘‘SECURE 2.0 Enshrines Auto
Portability Into Law,’’ Pensions and Investments,
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combined impacts of the SECURE 2.0
Act and the proposed regulations and
does not distinguish between the two.
The baseline assumes that the
recordkeepers currently performing
automatic portability transactions
continue to be the only recordkeepers
providing automatic portability
transactions in the future, therefore the
percent of plans and accounts covered
by automatic portability remains
unchanged at 65 percent. However, the
percent of plans and accounts covered
by automatic portability is expected to
increase in the post-rule and regulation
scenario, increasing from 65 percent to
90 percent by year 10.72 This is actually
a simplification, the average of a
number that likely would have grown
slightly in the absence of the Secure 2.0
Act. Before passage of the Act, in
October 2022, there were only three
recordkeepers who had joined the
automatic portability consortium. of
2022, the Secure 2.0 Act was signed in
late December 2022, and very soon
shortly thereafter other large
recordkeepers joined. While much of
this growth in consortium members is
likely related to the prospect and
enactment of legislation, there might
have been some growth even without
the legislation. The inclusion of
automatic portability in the Secure 2.0
Act increases awareness of the program
and that publicity may promote growth.
This assumption is based on 2016
testimony by RCH and EBRI before the
ERISA Advisory Council wherein they
stated that the ability to locate and
match accounts to conduct automatic
portability transfers is ‘‘highly
dependent on market adoption.’’ 73 As
the network grows, there is a greater
likelihood of being able to match a
separating participant with their new
employer’s plan. As a result, the
benefits of belonging to the network
increase, encouraging more
recordkeepers to join. It is anticipated
(January 27, 2023) at https://www.pionline.com/
retirement-plans/secure-20-enshrines-autoportability-law#:∼:text=
The%20SECURE%202.0%20
provision%20stipulates,sell
%20data%20relating%20to%20the.
72 In other words, for an affected participant who
changes jobs in year 10, there is a 90 percent chance
that their former plan has a recordkeeper that
belongs to PSN and also a 90 percent chance that
their new plan has a recordkeeper that belongs to
PSN. This means that 81 percent of the workers
who switch from one DC plan to another in year
10, have a small balance account, and do not take
any affirmative action, would experience an
automatic portability transaction.
73 Retirement Clearinghouse, LLC, Employee
Benefit Research Institute, and contributor Boston
Research Technologies. ‘‘Auto Portability Research
& Simulation: Automating Plan-to-Plan Transfers
for Small Accounts.’’ Consolidated Testimony in
front of the ERISA Advisory Council, June 8, 2016.
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that as a result of the legislation and the
reduced uncertainty, more
recordkeepers will join the consortium,
and this dramatic growth is reflected in
the post-rule estimates. Section 9
‘‘Uncertainty’’ provides an alternative
estimate reflecting growth in the
number of recordkeepers joining the
network in the baseline scenario. The
Department requests comment on the
portion of the expansion in
recordkeepers joining the network that
would be attributable to the proposal.
4. Affected Entities
4.1. Automatic Portability Providers
Retirement Clearinghouse (RCH),
originally founded as RolloverSystems
in 2001, was the first company to
approach the Department for subregulatory guidance and prohibited
transaction relief to offer an automatic
portability program to plans. RCH
asserted that its services would facilitate
automatic rollovers into Default IRAs
from accounts in plans of individuals’
former employers that are eligible for
mandatory distributions under Code
section 401(a)(31)(B), automatic
rollovers into Default IRAs of account
balances from terminated DC plans, and
automatic roll-in of funds held in
Default IRAs to an individual account
plan maintained by the IRA owner’s
new employer when the Default IRA
owner changes jobs and has an account
in their new employer’s DC plan. In
2019, the Department issued PTE 2019–
02, an individual prohibited transaction
exemption permitting RCH to receive
certain fees in connection with the
transfer of an individual’s Default IRA
to the individual’s account in a new
employer-sponsored plan, without the
individual’s affirmative consent.74
Since then, RCH’s footprint in the
automatic portability space has grown
with its formation of the Portability
Services Network (PSN). This network
currently consists of founding owning
members RCH and six recordkeepers:
Alight, Empower, Fidelity, Principal,
TIAA, and Vanguard, and it can
incorporate an unlimited number of
additional member recordkeepers.
While PSN operates as a separate entity
from RCH that is controlled by RCH’s
founding owning members, PSN solely
relies on the technological infrastructure
and operations established by RCH.75
PSN’s website currently states that it
does not charge a fee to recordkeepers
74 See 83 FR 55741 (Nov. 7, 2018) (proposed
exemption) and 84 FR 37337 (July 31, 2019)
(granted exemption).
75 Portability Services Network, Our Structure,
(2023), https://psn1.com/learning-center/aboutpsn/structure-of-psn.
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5639
or plan sponsors for its automatic
portability services; instead, it charges
participants a one-time fee when their
account balances are transferred into a
new employer’s plan. Currently, the
maximum transfer fee is $30, and the fee
could be lower for smaller accounts.76
The automatic portability provider
market is new and complex. Therefore,
there is significant uncertainty regarding
how many entities will offer automatic
portability services in the future and
how the automatic portability
marketplace will evolve. Barriers to
entry exist in the business model,
because entities must have sufficient
access to plan and IRA participant data
and information systems technology
that would allow it to match a worker’s
default IRA with their plan account and
transfer the employee’s Default IRA to
their new employer’s plan. The larger
the amount of data available to the
automatic portability provider, the more
successful it will be in matching
participants’ Default IRAs with their
active accounts in a new employer’s
plan.
Based on the best available data, the
Department estimates that PSN
currently covers more than 60 percent of
account holders in large DC plans 77 and
that its market share is likely to increase
further due to the new statutory
prohibited transaction exemption. Due
to the aforementioned barriers to entry
for potential automatic portability
providers, the Department is unaware of
any entities other than PSN that are
currently planning to become an
automatic portability provider in
reliance on Code section 4975(d)(25).78
Therefore, for purposes of this analysis,
the Department assumes that PSN will
be the only entity providing automatic
portability provider services pursuant to
the statutory exemption. The
Department assumes this will be the
case even though RCH was granted PTE
2019–02, because the individual
exemption has a limited five-year term
that expires on July 31, 2024, while the
76 Portability Services Network, Our Fees, (2023),
https://psn1.com/learning-center/about-psn/whatare-psns-fees#:∼:text=Key%20aspects%20of%20
PSN’s%20fee,be%20processed%20
at%20no%20charge.
77 Plans classified as large constitute nearly 90
percent of account holders in plans required to file
the Form 5500 and must submit the Schedule C of
the Form 5500, which covers service providers,
such as recordkeepers. Plans considered small do
not report this information. Calculation based on
tabulations of the 2021 EBSA Private Pension Plan
Bulletin Research File.
78 The Department is aware of one additional
entity that had expressed interest in becoming an
automatic portability provider; however, the
Department understands this entity is no longer
moving ahead with plans to become an automatic
portability provider.
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statutory exemption does not, and RCH
would have to request additional relief
from the Department to continue relying
on PTE 2019–02 after its five-year term
expires. If, counter to the Department’s
assumption, it turns out that there is
more than one automatic portability
provider, the Department anticipates
that the number of automatic portability
providers would be very small because
of the barriers to entry. They might
specialize by geography or by types of
plan; for example, one automatic
portability provider might specialize in
plans for government employees. It
seems likely that their networks would
overlap so both automatic portability
providers could be successful in making
many matches. The Department
welcomes comments regarding how
many automatic portability providers
there would be, as well as data and
other information that will allow the
Department to further assess how the
automatic portability marketplace will
develop.
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4.2. Recordkeepers
As discussed above, the Department
assumes that PSN will be the only
automatic portability provider in the
market. PSN is structured with seven
‘‘owner members,’’ who have board
control. It allows for open recordkeeper
membership without board control. In
September of 2023, PSN stated that the
owner members, which include Alight,
Empower, Fidelity, Principal, RCH,
TIAA, and Vanguard, were the only
members at that time.79 There is
significant uncertainty regarding how
many recordkeepers will join PSN. The
Department believes that automatic
portability transactions will be a
desirable feature for plan sponsors and
participants, which may drive growth in
recordkeeper participation.
Recordkeepers do not incur a direct cost
to join PSN. The Department requests
comment on how many recordkeepers
would choose to join PSN.
While this analysis assumes that PSN
will be the only automatic portability
provider, the Department acknowledges
that another automatic portability
provider may enter the market. Entry of
additional automatic portability
providers may impact the number of
affected recordkeepers and the manner
in which those recordkeepers are
affected by this proposed regulation.
According to the Department’s
analysis of 2021 Form 5500 data, there
were 1,951 recordkeepers providing
79 Portability Services Network, PSN Participating
Owner Members and Members, (2023), https://
psn1.com/auto-portability/regulatory-information/
participating-recordkeepers.
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services to private sector DC retirement
plans.80 As described in more detail in
subsection 3.1 above, the six
recordkeepers that are founding owner
members of PSN administer accounts
for over 60 percent of account holders
in large DC plans that file Form 5500.
The Department estimates that by the
end of the ten-year estimation period for
this analysis, roughly 90 percent of the
DC account holders in plans filing Form
5500 would be associated with
participating recordkeepers. As an
illustration, this level of recordkeeper
participation could be achieved if the
next 12 largest recordkeepers, in terms
of account holders serviced, fully
participated in the program. Because the
market is currently dominated by large
recordkeepers, the Department
anticipates that additional entry into the
market will be initially dominated by
other large recordkeepers. However,
because of the low cost to participate in
the PSN, it is possible that most
recordkeepers will eventually
participate in it. The Department solicits
comments on its assumptions and
estimates regarding recordkeeper
participation.
4.3. Plans, Plan Participants, and the
Number of Automatic Portability
Transactions
This section derives an estimate of the
number of automatic portability
transactions. It does so by (1) identifying
plans, participants, and assets covered
by PSN-participating recordkeepers, (2)
estimating the number of accounts
below the mandatory distribution
threshold, and (3) estimating
employment separations and postseparation behavior. It estimates these
figures under the baseline scenario and
under implementation of the statute and
regulation.
4.3.1. Plans, Participants and Assets
The proposed regulation has the
potential to affect participants with
account balances in any employersponsored retirement plan that is: (1) a
qualified trust; (2) an annuity plan
described in Code section 403(a); (3) an
eligible deferred compensation plan
described in Code section 457(b) which
is maintained by an eligible employer
described in Code section 457(e)(1)(A);
or (4) an annuity contract described in
Code section 403(b).81 Approximately
80 The analysis only included plans with nonzero
plan assets and nonzero participants. Calculations
based on the 2021 Form 5500.
81 While this rulemaking technically may apply to
separated, vested DB participants as well, the
Department believes that it is rare that they would
be affected by the rule and therefore does not
include them in its estimates. For further
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635,000 DC plans reported participants
with account balances on their 2021
Form 5500. These plans cover 86.6
million participants with total account
balances of $9.3 trillion.
To understand the number of plans,
participants and assets that could be
impacted one would need to know if the
plan’s recordkeeper is part of the PSN
network and if their account balance is
below the mandatory distribution
threshold ($5,000 baseline or $7,000
post statute and regulation) when they
separate from employment. To identify
plans with PSN-participating
recordkeepers the Department queried
Form 5500 Schedule C data, which has
information on a plan’s service
providers. The data has limitations. in
particular, only large plans are required
to submit the Schedule C, which means
the majority of plans do not have to file
the Schedule C. However, the group of
retirement plans required to submit the
Schedule C covers nearly 90 percent of
participants with account balances and
90 percent of assets, which are the main
variables of interest.
The query of Schedule C data showed
that the six recordkeepers that are
founding owner members of PSN
provided services to over 34,600 large
plans (40 percent of large plans) with 47
million account holders (61 percent of
account holders in large plans). These
plans held $5.5 trillion in assets (66
percent of large plan assets) in 2021.82
Some plans with participants that
may be impacted by the proposed rule
are not required to file the Form 5500,
for example state and local
governmental plans. Account holders
who participate in state and local
governmental plans that are not covered
by ERISA may also be affected by the
proposed rule if their plan sponsor
contracts with an automatic portability
provider to provide automatic
portability services. According to BLS
employment data, there are almost 20
million currently employed state and
local government workers in the United
States.83 The March 2021 National
Compensation Survey: Employee
Benefits in the United States indicates
that 18 percent of state and local
discussion, please see section 9. Uncertainty. The
number of participants is left static throughout the
ten-year time period of analysis. While this could
impact the overall estimate of the benefits and
costs, it does not impact the relative difference
between benefits and costs.
82 Tabulations presented are based on the 2021
EBSA Private Pension Plan Bulletin Research File.
83 BLS Series Report(s) from the Current
Employment Statistics program: CES9092000001 &
CES9093000001, Dec 2022 data element, data
accessed 10/2/2023 from: https://data.bls.gov/cgibin/srgate. 5,087,000 state employees and
14,370,000 local government employees.
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government workers participate in a
defined contribution plan.84 Without
more granular data, it is difficult for the
Department to determine a reasonably
specific proportion of these workers that
could be affected by the proposed rule.
However, the Department estimates that
up to 3.5 million state and local
government workers participate in a DC
plan that may also incorporate a
mandatory distribution provision for
small account balances.85
4.3.2. Accounts With Balances Less
Than the Mandatory Distribution
Amount
The proposed regulation directly
affects participants with account
balances less than $7,000 in a plan at
the time of separation from
employment, previously only $5,000.86
To estimate the number of affected
participants, the Department considered
the separation rate for participants
within this group and the proportion of
DC plan accounts with balances under
$7,000.
While the Department lacks data
specifically on DC accounts with less
than $7,000, there are related data that
are useful in the construction of an
estimate. The Employee Benefit
Research Institute (EBRI) reported that
in 2020, 40 percent of 401(k) plan
accounts with balances had less than
$10,000 in their accounts and 28
percent had less than $5,000 in their
account.87 The Department used this
data to estimate that approximately 33
percent of DC plan accounts will have
balances below the new mandatory
distribution threshold of $7,000.
Additionally, the Department estimates
that 28 percent of DC plan accounts
would have balances below the current
mandatory distribution threshold of
$5,000 that represent the baseline. The
Department requests comment on these
assumptions and this estimate.
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4.3.3. Affected Accounts
Table 1 shows the estimates of the
number of accounts, how the affected
accounts are identified, and how the
affected accounts are impacted in the
baseline scenario and post-rule scenario
for the first year in the estimation
period. This section explains the
assumptions and calculations used to
obtain the estimates in the table. A
similar table could be constructed for
each year, with the difference for each
year being the percent of accounts
covered by the automatic portability
network. A key takeaway from the table
is the increase in accounts in plans with
the automatic portability feature from
the baseline to the post-rule scenario.
The increase in these accounts is the
source of much of the benefits of the
rule. Bolded numbers at the bottom of
a table are numbers that flow into a
subsequent table.
TABLE 1—AFFECTED ACCOUNTS
Baseline
Defined Contribution Plan Account Holders ............................................................................................................
× Job Separation Rate Associated with Modest Account Balances .......................................................................
86,573,634
20%
86,573,634
20%
= Annual Account Churn .........................................................................................................................................
× Proportion with Balance of $7,000 or less ...........................................................................................................
17,314,727
33%
17,314,727
33%
= Affected Accounts ................................................................................................................................................
× Proportion of Separating Account Holders Subject to Mandatory Distribution ....................................................
5,713,860
85%
5,713,860
100%
= Accounts Subject to Mandatory Distribution 1 ......................................................................................................
Accounts Not Subject to Mandatory Distribution 1 ..................................................................................................
4,848,124
865,736
5,713,860
0
1 These
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Post-rule
values flow into Table 3.
A 2023 report by Vanguard suggests
that accounts with balances below
$10,000, which is the most similar
balance category that aligns with the
mandatory distribution limit and
therefore used as a proxy for this group,
are primarily held by participants with
household incomes of less than
$50,000.88 The Federal Reserve
Economic Well-Being of U.S.
Households Survey of Household
Economics and Decisionmaking (SHED)
survey provides data on voluntary and
involuntary employment separations by
income range. Based on SHED data from
2018–2022, the Department assumes a
separation rate of 20 percent for workers
with annual household incomes of less
than $50,000.89 The Department uses
this factor as the separation rate for
small balance plans in its estimations.
The Department is interested in the
post-separation behavior of both the
employer/plan sponsor and account
owner. A survey conducted by the
Callan Institute in 2022 found that 65
percent of DC plan sponsors sought to
retain assets of both retirees and
terminated participants, with 85 percent
seeking to retain assets of retirees and
65 percent seeking to retain assets of
other terminated participants.90 This
study also suggests that plan sponsors
seek to retain separating employees’
plan assets due to cost efficiencies,
although half of the responding plan
sponsors did not have a strategy in place
for asset retention. The Department
seeks comment from entities such as
plan sponsors and recordkeepers with
information on plan policies and
84 BLS, ‘‘National Compensation Survey:
Employee Benefits in the United States’’,
(September 2021), Employee Benefits in the United
States, March 2021 (bls.gov).
85 Calculated as: 18% × (5,087,000 state
employees + 14,370,000 local government
employees) = 3,502,260.
86 There are some accounts that could have
balances above the $7,000 threshold that are still
subject to a mandatory distribution. See Code
section 411(a)(11)(D) for circumstances where the
amount of a distribution may be greater than $5,000
if a participant made a previous roll-in to a plan
from an individual retirement plan. In such
circumstances, the roll-in funds are not considered
in determining the $5,000 vested accrued balance,
so a larger amount of assets could be subject to a
mandatory distribution under the terms of the plan.
87 Sarah Holden, Steven Bass, and Craig
Copeland. ‘‘401(k) Plan Asset Allocation, Account
Balances and Loan Activity in 2020,’’ EBRI Issue
Brief #576. November 29, 2022. Retirement
Clearinghouse, LLC, Employee Benefit Research
Institute, and contributor Boston Research
Technologies. ‘‘Auto Portability Research &
Simulation: Automating Plan-to-Plan Transfers for
Small Accounts.’’ Consolidated Testimony in front
of the ERISA Advisory Council, June 8, 2016.
88 Vanguard. ‘‘How America Saves.’’ 2023.
89 Federal Reserve. ‘‘Economic Well-Being of U.S.
Households in 2022.’’ (2023). https://
www.federalreserve.gov/publications/files/2022report-economic-well-being-us-households202305.pdf.
90 Callan Institute. ‘‘2023 Defined Contribution
Trends.’’ https://www.callan.com/research/2023defined-contribution-trends-survey/.
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participant behavior after job separation
related to small balance accounts.
Two recordkeepers servicing 8
million accounts, Alight and Vanguard,
published separate experience studies
regarding post-separation actions in
2023.91 These reports have informed the
Department’s understanding of the
disposition of small balance accounts.
As presented in table 2, the two studies
report similar rates of cashouts.
However, the proportion of accounts
rolling over and remaining with the
prior employer’s plan varied
significantly. These differences may be
attributable to differing economic
conditions, differing levels of financial
literacy, or by plan design elements
unique to the recordkeeper.
TABLE 2—POST-SEPARATION BEHAVIOR FOR SMALL BALANCE ACCOUNTS
[$1,000–$4,999]
Year
published
Recordkeeper
2023 ...............................
2023 ...............................
Vanguard .............................................................
Alight ....................................................................
Accounts
Remain in
plan
(%)
Cashout
(%)
Rollover
(%)
5,000,000
3,000,000
34
39
51
28
15
33
Behavior Assumptions without Automatic Portability Feature * ...................................................
Behavior Assumptions with Automatic Portability Feature (Based on RCH Pilot) .....................
36
27
42
42
22
31
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* Weighted average of values from Vanguard and Alight reports. Automatic portability is estimated to decrease cashouts by 25% across eligible
accounts, which increases rollovers by approximately 40%.
The Department developed its
estimates related to post-separation
actions using both studies to create
weighted averages based on the number
of accounts in each study. Therefore, the
Department estimates that 36 percent of
separations will result in a cashout in
the absence of the enhanced automatic
portability plan feature provided in this
proposal and statutory exemption. The
Department acknowledges that the
experience of these two service
providers may not be representative of
the experience for all plan
recordkeepers and requests comments
or additional data concerning this
assumption.
This proposal would affect plan
participants differently depending on
the size of their account balance. As
discussed above, under current law, a
separating employee with a DC plan
account balance of $7,000 or less can be
‘‘cashed out’’ of the plan by their
employer without their consent. A
separating employee with DC plan
savings between $1,001 and $7,000 can
only be ‘‘forced out’’ of their plan into
a Default IRA through an automatic
rollover if they do not provide
directions to the employer after
receiving a notice from the plan’s
administrator.92
Alternatively, this proposal would
allow for ‘‘automatic portability
transactions.’’ These are transactions in
which assets held in a Default IRA
established on behalf of an individual
from a mandatory distribution from an
employer-sponsored retirement savings
plan are subsequently transferred to an
eligible employer-sponsored plan in
which such individual is an active
participant, after such individual has
been given advance notice of the
transfer and has not affirmatively opted
out of such transfer. As shown above in
table 2, the Department estimates that
the statutory exemption would reduce
the propensity to cash out for separating
participants with small accounts by 25
percent. The basis for this estimate is a
pilot study of automatic portability
conducted by RCH which reduced
cashout rates for small balance account
holders by approximately 50 percent.93
The specific way the pilot study was
implemented, however, suggests that
this finding is larger than we would
observe under the statutory exemption.
The pilot study had a selected sample
of participants who had been matched
to a current, active account. Participants
received a letter encouraging them to
call and speak with someone who
would provide advice or guidance about
their options and offer to help them
implement a rollover.
Table 3 shows how the affected
accounts are sorted in the Department’s
estimation process for year one. For
both the baseline and the post-rule
scenario, the first step is to group the
accounts based on whether or not the
account belongs to a plan with the
automatic portability feature and
accounts subject to a mandatory
distribution requirement. There are
865,736 accounts that are not subject to
mandatory distribution in the baseline
because their balances are between
$5,001 and $7,000. These accounts are
subject to mandatory distribution in the
post-rule scenario. The assumptions
from table 2 are then applied to these
groups to estimate the share of small
accounts post-separation being cashed
out, remaining in the plan, and those
rolled over.94
91 Vanguard. ‘‘How America Saves.’’ 2023; Alight.
‘‘Universe Benchmarks Report.’’ 2023.
92 See Code section 401(a)(31)(B) as amended by
the SECURE 2.0 Act. Previously, this ‘‘force out’’
applied to a separating employee with DC plan
savings between $1,001 and $5,000.
93 Boston Research Technologies. ‘‘Eliminating
Friction and Leaks in America’s Defined
Contribution System.’’ 2013.
94 These estimates are calculated as follows: 36%
baseline cashout rate × 25% decline from automatic
portability = 9 percentage points. The estimated
post-rule cashout rate is the baseline cashout rate,
36%, minus 9%, which equals 22%. The estimated
post-rule rollover rate is the baseline rollover rate
of 22%, plus the 9% increase from automatic
portability, which equals 31%.
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TABLE 3—YEAR ONE DISPOSITION OF ACCOUNTS
Baseline 1
Accounts subject
to mandatory
distribution
Disposition of accounts
Post-rule
Accounts not
subject to
mandatory
distribution 1
Accounts subject
to mandatory
distribution
Total
Total
Accounts with Balances Below $7,000 ..
Cashout:
Number of Accounts .......................
Remain in Plan:
Number of Accounts .......................
Rollover:
Number of Accounts .......................
× Estimated Percent of Rollovers Going
into Default IRAs ................................
4,848,124
865,736
5,713,860
5,713,860
5,713,860
1,461,709
311,665
1,773,374
1,722,728
1,722,728
2,036,212
363,609
2,399,821
2,399,821
2,399,821
1,350,202
190,462
1,540,664
1,591,310
1,591,310
60%
0%
..............................
60%
60%
Total Default IRAs ..................................
× Year One Account Coverage by AP
Network 2 ............................................
810,122
0
810,122
954,786
954,786
65%
65%
65%
65%
65%
Automatic Portability Feature .................
No Automatic Portability Feature 3 .........
526,579
283,543
0
0
526,579
283,543
620,611
334,175
620,611
334,175
1 In the baseline, accounts with assets between $5,001 and $7,000 are not subject to mandatory distribution. In the post-rule scenario, all accounts with assets below $7,000 are subject to mandatory distribution.
2 Coverage by the AP network is expected to expand in the post rule scenario while the baseline is assumed to remain constant. The post rule
scenario is modeled using the following coverage assumptions: Ai = {65%, 72%, 78%, 82%, 84%, 86%, 88%, 89%, 90%, 90%}; where element i
= years 1 through 10.
3 35 percent of accounts are not assumed to be covered by the AP network in year one. The percent of accounts not covered by the AP network in subsequent years may be calculated as 1¥Ai.
Finally, the Department estimates the
number of default IRA accounts
expected to be generated from the roll
over activity in year one. Research finds
that approximately 60 percent of all
small account balance IRA rollovers
(default IRAs) are the result of automatic
rollovers of mandatory distributions.95
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95 Approximately 60% is an estimate of the share
of IRAs below the current mandatory distribution
threshold of $5,000, established from a rollover,
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The estimates of accounts rolling over
for the first year described in table 3 are
applied to the 60 percent factor to
generate the estimated number of
affected accounts expected to roll over
that remain fully invested in money market funds
after one year of opening. See Figure 6.8.
Investment Company Institute. ‘‘The IRA Investor
Profile: Traditional IRA Investors’ Activity, 2007–
2016.’’ (2018). Goodman, Mukherjee, and Ramnath,
‘‘Set It and Forget It,’’ 2023.
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into a default IRA. This is the group
where the automatic portability
transactions will occur. These
calculations continue into table 4,
where the number of Default IRAs is
shown over each of the first ten years,
followed by the number of Default IRAs
with automatic portability features, as
well as the number that ultimately
result in an automatic portability
transaction each year.
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810,122
526,579
337,484
Default IRAs ................................................................
Accounts with AP ........................................................
AP Transfers ...............................................................
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954,786
620,611
397,749
144,664
94,032
60,265
Default IRAs ................................................................
Accounts with AP ........................................................
AP Transfers ...............................................................
Differences between the Baseline and Post-Rule:
Default IRAs ........................................................
Accounts with AP ................................................
AP Transfers ........................................................
166,262
176,417
182,122
976,384
702,996
519,606
72%
810,122
526,579
337,484
65%
Year 2
184,775
249,441
293,101
994,897
776,020
630,585
78%
810,122
526,579
337,484
65%
Year 3
197,117
299,357
361,675
1,007,239
825,936
699,159
82%
810,122
526,579
337,484
65%
Year 4
203,288
324,685
386,934
1,013,410
851,264
724,418
84%
810,122
526,579
337,484
65%
Year 5
209,459
350,261
429,010
1,019,581
876,840
766,494
86%
810,122
526,579
337,484
65%
Year 6
215,630
376,083
471,876
1,025,752
902,662
809,360
88%
810,122
526,579
337,484
65%
Year 7
218,715
389,086
480,380
1,028,837
915,665
817,864
89%
810,122
526,579
337,484
65%
Year 8
221,801
402,152
502,295
1,031,923
928,731
839,779
90%
810,122
526,579
337,484
65%
Year 9
221,801
402,152
486,672
1,031,923
928,731
824,156
90%
810,122
526,579
337,484
65%
Year 10
1,983,512
3,063,666
3,654,330
10,084,732
8,329,456
7,029,170
8,101,220
5,265,790
3,374,840
Total
* The Department estimates that approximately 1.4% of all accounts that are matched for an automatic portability transaction will not be transferred due to account holder opt-out. The coverage/match rates can not
be applied directly to the estimates in the table to obtain other estimates in the table. The drop in Automatic Portability transfers from year 9 to year 10 is a function of the coverage/match rates being the same in both
years in the estimation model.
65%
Coverage/Match Factor ..............................................
Post-Rule (RCH/PSN Grows, $7,000 Distribution Limit)
65%
Coverage/Match Factor ..............................................
Year 1
TABLE 4—TEN YEAR COUNTS OF DEFAULT IRA AND AUTOMATIC PORTABILITY (AP) TRANSACTIONS
Baseline (RCH/PSN Operates, $5,000 Distribution Limit)
Estimation period
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5. Benefits
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This section describes the benefits of
the proposed regulation in comparison
to the baseline before the statutory
exemption for automatic portability
transactions was enacted by SECURE
2.0 Act. As previously stated, RCH/PSN
already relies on relief the Department
provided in PTE 2019–02, an
administrative individual exemption, to
provide automatic portability provider
services. In general, the benefits of the
proposed regulation are derived from
the removal of the uncertainty
associated with the need to rely on an
individual exemption. Moreover, RCH/
PSN will benefit from this proposed
regulation because they would not have
to request additional relief from the
Department when the five-year term of
PTE 2019–02 expires.
The establishment of a statutory
exemption encourages the growth of the
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market for automatic portability
providers. As previously stated, the
Department assumes that RCH currently
represents roughly 65 percent of the
accounts in the system and that they
have a success rate of 65 percent in
matching accounts in that system. This
results in roughly 337,000 automatic
portability transfers estimated to occur
each year in the baseline. This is
compared to the expansion that results
from the rule where the Department
estimates the number of automatic
portability transfers to grow to
approximately 825,000 at the end of the
estimation window. This estimate
represents automatic portability
coverage for approximately 90 percent
of the accounts in the DC system. This
is anticipated to result in $2.8 billion of
undiscounted benefits arising through:
• An increase in potentially affected
accounts due to the increase in the
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5645
mandatory distribution threshold from
$5,000 to $7,000;
• Projected account balance
appreciation and higher returns;
• Reduction of duplicative fees; and
• Consolidation of abandoned
accounts.
Retaining assets in retirement
accounts and avoiding cashouts is an
objective of the statute and proposed
rules. Table 5a shows the value of assets
retained in the retirement accounts
through a reduction of the amount of
assets cashed out. The impact of the rule
is the difference in the value of accounts
that cashout post-rule relative to the
baseline. This amount is not classified
as a benefit. Table 5b shows each
component of the quantified benefit
stream measured as improvements
between the baseline scenario and the
post proposed rule scenario. The
increase overtime in affected accounts is
incorporated into the values displayed.
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= Benefits .....................................................
Present Value of Benefits by Discount Rate:
3 Percent .............................................................
7 Percent .............................................................
= Benefits .....................................................
Annual Total:
Rule .....................................................................
¥Baseline ...........................................................
= Benefits .....................................................
Value of Abandoned Accounts Consolidated:
Rule .....................................................................
¥Baseline ...........................................................
= Benefits .....................................................
Value of Duplicated Account Fees:
Rule .....................................................................
¥Baseline ...........................................................
Value of Reallocation of Assets:
Rule .....................................................................
¥Baseline ...........................................................
Year
= Assets Retained ........................................
Present Value of Assets Retained by Discount Rate:
3 Percent .............................................................
7 Percent .............................................................
Retirement Assets Retained via Cashout Avoidance:
Rule .....................................................................
¥Baseline ...........................................................
Year
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39
28
17
14
5
27,846
27,609
237
224
207
29,247
29,273
¥26
¥26
¥25
16
10
2
12
10
10
222
¥31
3
$27,792
27,570
2
$29,218
29,249
1
244
226
123
118
343
306
375
$5,086
5,461
3
403
346
454
$5,007
5,461
4
426
352
494
$4,967
5,461
5
448
356
534
$4,926
5,461
6
364
325
398
26,464
26,066
9
19
10
22
65
43
367
$26,380
26,013
3
385
331
433
25,069
24,636
11
21
10
38
94
57
385
$24,954
24,569
4
[$ in millions]
337
278
390
23,701
23,310
12
22
10
54
125
71
325
$23,554
23,229
5
306
243
365
22,447
22,082
13
23
10
72
157
85
280
$22,267
21,987
6
TABLE 5B—VALUE OF AFFECTED ACCOUNTS
259
$5,202
5,461
2
127
$5,334
5,461
1
[$ in millions]
TABLE 5A—VALUE OF AFFECTED ACCOUNTS
267
205
329
21,273
20,944
14
24
10
92
191
99
223
$21,058
20,835
7
468
358
575
$4,886
5,461
7
209
154
265
20,155
19,890
14
25
10
112
225
113
139
$19,905
19,767
8
470
347
596
$4,865
5,461
8
162
115
211
19,125
18,913
15
25
10
133
261
128
63
$18,839
18,776
9
473
335
617
$4,844
5,461
9
114
78
153
18,162
18,009
15
25
10
153
295
142
¥15
$17,842
17,857
10
459
313
617
$4,844
5,461
10
2,342
1,911
2,756
233,488
230,732
110
211
101
689
1,469
780
1,957
$231,808
229,851
Total
3,856
3,059
4,647
$49,962
54,609
Total
5646
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Lastly, it should enhance the ability of
American workers to achieve their
retirement savings goals by
consolidating retirement funds into
fewer accounts and investing assets
consistent with their retirement needs.
These benefits are described in more
detail in the following subsections.
5.1. Benefits for Plan Participants
The Department expects that DC plan
participants with small account
balances that are subject to the Code’s
mandatory distribution rules would
benefit from increased access to
automatic portability transactions in
several ways. First, their retirement
account balances would be consolidated
in their new employer’s plan, which
would reduce participants’ exposure to
duplicative fees. Second, the incidence
of missing participants and abandoned
accounts would decrease as a result of
the automatic portability providers
matching a Default IRA with an
individual’s account in their new
employer’s plan. Third, moving assets
from a Default IRA to a DC plan would
likely provide greater investment
returns, on average, as the assets are
reallocated from being invested in
money market funds to target date funds
and other, more diversified investments.
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5.1.1. Account Consolidation
One potential outcome of a highly
mobile labor force (one in which
employees change jobs frequently) is the
proliferation of retirement accounts.
Data from the Federal Reserve indicates
that approximately 20 percent of
employees with a DC plan account and
household incomes below $50,000
changed jobs in the past year.96 As
participants change jobs, mandatory
distributions into a Default IRAs can
result in individuals owning several
retirement accounts.97 Once potential
outcome of multiple accounts is
individuals paying management or
recordkeeping fees for several accounts.
GAO reported a median annual recordkeeping flat fee of $42 per account.
Although modest, this fee can
contribute to an erosion of accumulated
retirement assets, especially if applied
to multiple, small-balance accounts.98
Thus, each account consolidation
96 Federal Reserve. ‘‘Economic Well-Being of U.S.
Households in 2022.’’ (2023). https://
www.federalreserve.gov/publications/files/2022report-economic-well-being-us-households202305.pdf.
97 Employee Benefit Research Institute. ‘‘EBRI
IRA Database: IRA Balances, Contributions,
Rollovers, Withdrawals, and Asset Allocation, 2017
Update.’’ (2020).
98 Government Accountability Office. ‘‘401(k)
Plans: Greater Protections Needed for Forced
Transfers and Inactive Accounts.’’ (2014).
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provides a benefit to participants equal
to the value of any associated fees or
expenses arising from maintaining an
additional retirement account that
would be eliminated through
consolidation net of the transfer fee
discussed in section 6.4 of the Costs
section below. Accordingly, the
Department estimates that over the 10year estimation window, account
consolidations will total approximately
3.7 million additional accounts when
compared to the baseline, yielding
approximately $689 million in
undiscounted benefits for participants
accruing from the reduction of
duplicative fees for multiple accounts
over the 10-year estimation period.99
5.1.2. Missing Participants and
Abandoned Accounts
Another consequence of the
proliferation of small-balance accounts
is the potential for a high volume of
retirement assets that are ‘‘abandoned’’
by participants. Over time, DC plan
account holders that have separated
from their employers may become
disconnected from their retirement
assets as a result of mandatory
distributions into Default IRAs.
Abandonment of these accounts may be
attributable to any number of reasons
but are often the result of participants
that are missing (cannot be found by the
plan provider), unresponsive (failing to
respond to communications from the
plan provider), or unaware that an
account has been established on their
behalf. Goodman, Mukherjee, and
Ramnath (2023) found that 0.4 percent
of retirement-aged IRA owners
abandoned their IRAs, amounting to $66
million (in 2016 dollars).100 Because
this figure only relates to retirees, it
represents only a fraction of the assets
that exist in abandoned IRAs for the
larger pool of IRA owners of all ages; a
portion of these IRA owners would have
been impacted by mandatory
distributions. The Department estimates
that 1.0 percent of Default IRA owners
will abandon their IRAs, which is
consistent with Goodman, Mukherjee,
and Ramnath (2023).101 It seems likely
99 The estimate is calculated as follows: 3,654,330
account consolidations × $42 = $153,481,860 in
benefits. $153,481,860 × average of 4.5 years
receiving benefit per account = $689,003,322 in
total benefits. At a discount rate of 3 percent, this
results in $552,051,586 in total benefits. At a
discount rate of 7 percent, this results in
$417,450,008 in total benefits.
100 In this study, account abandonment is proxied
by a failure to claim the account over ten years after
a legal requirement to do so; specifically, the
required minimum distribution requirement.
Goodman, Mukherjee, and Ramnath, ‘‘Set It and
Forget It,’’ 2023.
101 Id.
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that IRA owners who experienced forceouts may have higher abandonment
rates than other IRA owners. Owners
who experienced force-outs allowed
themselves to be defaulted into an IRA
instead of taking action to perform a
rollover or obtain a cashout, indicating
they may have a tendency to be unaware
or passive, characteristics that may
increase the likelihood of abandonment.
From FY 2017 through FY 2023, EBSA
benefit advisors have located 4,732
participants through a joint initiative
with the Pension Benefit Guaranty
Corporation (PBGC) to connect
individuals with retirement benefits
valued at $227.6 million.
Given the threshold for mandatory
distributions increases to $7,000 in 2024
while the adoption of auto-enrollment
policies by plan sponsors continues to
expand, there will be an increased
number of potential Default IRAs, and,
as a result, the number of accounts that
might be abandoned or have missing
participants will also increase.102
However, over time the Department
estimates a minimum of approximately
37,000 accounts will be saved from
abandonment with the statutory
exemption over the 10-year estimation
period (1.0 percent of the approximately
3.6 million accounts that will be
consolidated through automatic
portability transactions when compared
to the baseline). The Department further
estimates the consolidation of
abandoned accounts would provide
approximately $109.6 million in
undiscounted benefits for participants
over the 10-year estimation window
when compared to the baseline.103 The
Department requests comment on these
estimates.
5.1.3. Improve Asset Allocation
Upon job separation, some employees
with small-balance accounts between
$1,001 and $7,000 (in 2024) 104 can be
forced out of their previous employer’s
plan by a mandatory distribution of
102 Id.
103 The estimate is calculated as follows:
3,654,330 account consolidations from automatic
portability transactions × 1% of retirement accounts
that are abandoned = 36,544 abandoned accounts
consolidated. 36,544 accounts × $3,000 average
account balance for Default IRAs = $109,632,000. At
a discount rate of 3 percent, this results in
$90,685,800 in total benefits. At a discount rate of
7 percent, this results in $71,592,717 in total
benefits.
104 See Code section 411(a)(11)(D) for
circumstances where the amount of a distribution
may be greater than $5,000 ($7,000 beginning in
2024) if a participant made a previous roll-in to a
plan from an individual retirement plan. In such
circumstances, the roll-in funds are not considered
in determining the $5,000 vested accrued balance,
so a larger amount of assets could be subject to a
mandatory distribution under the terms of the
plan.’’
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their accumulated retirement assets that
is automatically rolled over to a Default
IRA.105 The Department has issued
regulations providing a safe harbor that
requires the employee’s former
employer to invest amounts held in a
Default IRA in an investment product
that preserves principal and provides a
reasonable rate of return.106 In practice,
many plans seek to implement the safe
harbor by investing in money markets
funds; however, the tradeoff for relative
safety is potential returns. A 2014 GAO
study reported that the average return
for money market funds in the
preceding 10 years was 1.5 percent,
considerably lower than the average 6.3
percent return for target date funds
common among 401(k) plans.107
Moreover, few participants take action
to reallocate these default investments
away from money market funds.108
The difference in the average rate of
return between these two typical
investment strategies could have a
substantial impact on the value of
retirement assets for investors with
small-balance accounts, which are
susceptible to capital erosion from fees
and inflation. GAO projected
investment outcomes over 30 years and
found that an initial balance of $1,000
was estimated to be valued at over
$2,700 under the average returns for
target-date funds (6.3 percent) but $0
under the average returns for money
market funds (1.5 percent), largely as a
result of account fees outweighing
minimal returns.109 This suggests that
assets transferred into Default IRA
accounts, which are typically invested
in low-risk money market funds, could
be better preserved and invested
elsewhere.110 Consolidating these assets
in a DC plan could improve the asset
allocation of, and potentially better
preserve, retirement assets for many
retirement investors.
As presented in table 4 of the Affected
Entities section, the Department
estimates that just over 10 million
Default IRAs will be created in the ten105 Code section 401(a)(31)(B); see SECURE 2.0
Act, Sec. 304, Updating Dollar Limit for Mandatory
Distributions.
106 29 CFR 2550.404a–2(c)(3)(i).
107 Government Accountability Office (GAO).
‘‘401(k) Plans: Greater Protections Needed for
Forced Transfers and Inactive Accounts.’’ (2014).
108 Goodman, Mukherjee, and Ramnath, ‘‘Set It
and Forget It,’’ 2023. Investment Company Institute.
‘‘The IRA Investor Profile.’’ 2018. 80% is an
estimate of the share of IRAs below the current
mandatory distribution threshold of $5,000,
established from a rollover, that remain fully
invested in money market funds after one year of
opening. See Figure A.2 in the Appendix.
109 Government Accountability Office (GAO).
‘‘401(k) Plans: Greater Protections Needed for
Forced Transfers and Inactive Accounts.’’ (2014).
110 Id.
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year estimation period, compared to 8.1
million in the baseline, a change of
approximately 2.0 million accounts. Of
these 10 million Default IRAs, 8.3
million are assumed to be in the
automatic portability network under the
rule (compared with 5.3 million at the
baseline). The results are that 7.1
million accounts will be moved into a
new employer’s DC plan via automatic
portability, compared with 3.4 million
in the baseline, an improvement of 3.7
million between the two scenarios. This
results in an asset allocation with a
more favorable return for account
owners.
Similar to the GAO analysis, the
Department utilized updated data
covering the 15 most recent years to
estimate the returns to money market
funds characteristic of Default IRAs and
for target-date funds (TDFs) typical of
DC plans, further supporting an analysis
of how the change in asset allocation
might potentially alter investment
outcomes as a result of automatic
portability transactions. Returns to
money market funds from 2008 to 2022
averaged 0.7 percent, while returns to
TDFs averaged 8.1 percent over the
same period.
The Department estimates that this
reallocation of assets from Default IRAs
to DC plans would result in
approximately $2.0 billion in additional
benefits when compared to the baseline
value.111
5.1.4. Reduced Participant Benefits
Because More Participants Are Subject
to Mandatory Distributions
The increase in the mandatory
distribution threshold from $5,000 to
$7,000 means that some separating
participants will have fewer choices
about how to deal with their account.
This reduces the net benefits for those
plan participants. Prior to the passage of
the SECURE 2.0 Act, many separating
participants in this account balance
range would have left their account in
their former employer’s plan, but some
of those participants would now be
subject to a mandatory distribution into
a Default IRA. If the account assets end
up in a Default IRA, the Department
111 Returns from DC plans are estimated using an
asset distribution characteristic of typical default
investments for TDFs, 80% stocks (S&P 500 annual
returns) and 20% bonds (Baa Corporate returns).
Returns for Default IRAs are estimated using an
asset distribution characteristic of typical default
investments for Default IRAs, 98% Treasury Bills
and 2% Treasury Bonds. NYU Stern School of
Business. Historical Returns on Stock, Bonds, and
T-Bills: 1928–2022. Accessed: https://
pages.stern.nyu.edu/∼adamodar/New_Home_Page/
data.html. At a discount rate of 3 percent, this
results in $1,699,169,773 in benefits. At a discount
rate of 7 percent, this results in $1,422,157,975 in
benefits.
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expects that the participant would
generally be worse off than in their
former employer’s plan because the
assets would be subject to little or no
growth given that they typically would
be invested in money market funds and
subject to relatively high fees. Other
separating participants in the $5,000 to
$7,000 range may end up being rolled
into a new employer’s plan; they would
be better or worse off depending on how
the services, products, and fees in the
new employer’s plan compared to the
former employer’s plan and depending
on how long the assets lingered in the
Default IRA before being rolled over into
the new employer’s plan. Overall, the
affected participants would be worse off
on average.
5.2. Benefits for Plans, Automatic
Portability Providers, and Other Service
Providers
The estimated benefits for
participants that are described in the
preceding subsection result from the
predictability the proposed rule
provides to the marketplace. This
predictability is intended to encourage
the growth and efficiency of the
automatic portability market. RCH/PSN
will no longer need an administrative
individual exemption or to apply to the
Department for additional relief when
the term PTE 2019–02 expires in 2024.
For the same reason, the proposed rule
removes barriers to entry for potential
future automatic portability providers.
The proposed rule will bring increased
certainty to the robust network of
entities involved in automatic
portability arrangements, consisting of
the automatic portability provider(s),
recordkeepers, plans and plan sponsors,
and plan participants and Default IRA
owners, which will increase the reach,
efficiency, and long-term viability of
automatic portability transactions.
5.3. Benefits for Financial Institutions
Financial institutions would benefit
from more assets being kept in
consolidated, retirement savings
accounts and being invested rather than
being cashed out because the financial
institutions would earn more fees.
Cashouts from small balance accounts
are typically taken as cash and spent.
The loss of retirement assets associated
with cashing out small balance accounts
and Default IRAs will be considerably
curtailed with the adoption of automatic
portability programs by plans sponsors
and recordkeepers. At job separation, a
small balance account holder (who has
an account with $5,000 or less, or
beginning in 2024, an account with
$7,000 or less) can be forced out of their
former employer’s retirement plan.
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While a rollover may result in
procedural or paperwork burdens for
the participant, a cashout is often the
most straightforward option. Automatic
portability programs, however, have the
potential to reduce such burdens for
likelihood of cashouts at future job
separations is expected to decrease as
more assets remain in an individual’s
DC plan account, compounding the
benefits of automatic portability
transactions over time.
participants, resulting in a higher
volume of rollovers and fewer cashouts.
Because cashouts are negatively
correlated with the size of account
balances (i.e., small account balances
are more likely to be cashed out), the
TABLE 6—ACCOUNTING STATEMENT
Benefits:
Non-Quantified:
• Increased mandatory distribution threshold leads to cost savings for plans but reduced benefits for separating participants.
• Increased ease of retirement planning due to account consolidation.
Estimate
(primary)
Annualized Monetized ($ Millions/Year) ...........................................................................................
Year dollar
Discount rate
(%)
Period
covered
$191.12
234.19
2023
2023
7
3
2024–2033
2024–2033
$1.21
1.42
2023
2023
7
3
2024–2033
2024–2033
Costs:
Annualized Monetized ($ Millions/Year) ....................................................................................
Transfers:
Non-Quantified:
• Requiring automatic portability providers to offer the same terms to any plan will ensure sponsors not be restricted from engaging with more than one
provider. This reduces barriers to entry, which is a transfer to providers entering the market, and encourages lower fees, which is a transfer to participants.
• Increasing the mandatory distribution threshold will reduce participant choice in how they handle their accounts. Conversely, this will give sponsors increased latitude in how they handle accounts. No longer having to administer small accounts is a transfer from participants to sponsors.
• Decreasing the number of Default IRA accounts will affect financial institutions that service these accounts. This will represent a transfer to institutions
that service employer plans.
Annualized Monetized ($ Millions/Year) ...........................................................................................
6. Costs
This analysis estimates the changes to
cost burdens associated with the
provision of automatic portability
services under the proposed rule when
compared to a baseline where the
automatic portability provider operates
under PTE 2019–02. The costs
presented can be generally grouped into
two categories: start-up and ongoing.
52.00
65.55
The start-up costs are associated with
updating processes or documents to
bring existing practices into compliance
with the proposed rule where there is a
difference between operations under the
PTE when compared to the proposed
rule. The ongoing costs generally
represent costs incurred due to both the
increase in the threshold from $5,000 to
$7,000 which is expected to create more
default IRA accounts which is the group
2023
2023
7
3
2024–2033
2024–2033
that automatic portability transactions
occur within, and the growth of the
automatic portability system which is
assumed to result from the proposed
rule. Over the first 10 years, the
Department estimates an undiscounted
cost of approximately $16,206,196,
annualized to $1,620,620.112 The
undiscounted stream of estimated costs
is presented in table 7 below.
TABLE 7—ESTIMATED COSTS ASSOCIATED WITH RULE
[$ in thousands]
Year
1
2
3
5
6
7
8
9
10
Total
Materials and Postage ..........
Labor Costs ...........................
$2
6,206
$3
88
$9
572
$14
895
$16
1,041
$19
1,226
$21
1,415
$22
1,483
$24
1,580
$23
1,547
$154
16,052
Total All Cost .................
Present Value of Total Cost:
3 Percent ........................
7 Percent ........................
6,208
90
581
909
1,057
1,245
1,436
1,505
1,604
1,570
16,206
6,027
5,802
85
79
532
474
808
693
912
754
1,042
829
1,168
894
1,188
876
1,229
872
1,168
798
14,160
12,073
6.1. Preliminary Assumptions and Cost
Estimate Inputs
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4
For purposes of this analysis, the
Department assumes that the percent of
retirement investors receiving electronic
disclosures would be similar to the
112 Using a 3 percent discount rate results in a
cost savings of approximately $14,160,023,
annualized to $1,416,002. Using a 7 percent
discount rate results in a cost savings of
approximately $12,073,029, annualized to
$1,207,303.
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percent of plan participants receiving
electronic disclosures under the
Department’s 2002 and 2020 electronic
disclosure safe harbors.113 Accordingly,
the Department estimates that 96.1
percent of the disclosures sent to plan
participants would be sent
113 67
FR 17264, 85 FR 31884.
Department estimates 96.1 percent of
retirement investors receive disclosures
electronically. This is the sum of the estimated
share of retirement investors receiving electronic
114 The
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electronically, and the remaining 3.9
percent would be sent by mail.114 For
disclosures sent by mail, the
Department estimates that entities will
disclosures under the 2002 electronic disclosure
safe harbor (58.3 percent) and the estimated share
of retirement investors receiving electronic
disclosures under the 2020 electronic disclosure
safe harbor (37.8 percent).
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incur a cost of $0.66 115 for postage and
$0.05 per page for material and printing
costs.
Additionally, the Department assumes
that several types of personnel would
perform the tasks associated with
information collection requests at an
hourly wage rate of $63.45 for clerical
personnel, $128.11 for a top executive,
$116.86 for an auditor, $132.93 for a
plan fiduciary, $155.61 for a web
designer, $159.34 for a legal
professional, and $190.63 for a financial
manager.116
6.2. Acknowledgement of Fiduciary
Status
Pursuant to the statutory text
authorizing the Secretary to specify the
time and format of such an
acknowledgment, § 2550.4975f–12(b)(1)
of this proposed regulation requires the
automatic portability provider to
acknowledge in writing that it is a
fiduciary as defined in Code section
4975(e)(3) upon being engaged by a plan
fiduciary, as well as in the required
notices and disclosures to plan
participants and IRA owners that are
described below.
The automatic portability provider’s
acknowledgment of its fiduciary status
may include a description of the scope
of the fiduciary status of the automatic
portability provider and may explain
that the automatic portability provider
is not a fiduciary, consistent with Code
section 4975(e)(3), with respect to any
assets or administration of the plan or
IRA with respect to which the automatic
portability provider does not (1) have
any discretionary authority,
discretionary control or discretionary
responsibility, (2) exercise any authority
or control, and (3) render investment
advice for a fee or other compensation,
nor have any authority or responsibility
to render such investment advice.
Although PTE 2019–02 discussed
RCH’s fiduciary status, it did not
explicitly require a fiduciary
acknowledgement as a condition of the
exemption. Therefore, the proposed
regulation has the potential to
incrementally increase the costs to RCH/
PSN. The Department assumes the time
it would take to draft the fiduciary
acknowledgment would be minimal and
anticipates that a single standard
acknowledgement would be included in
115 United States Postal Service. ‘‘First-Class
Mail.’’ (2023). https://www.usps.com/ship/firstclass-mail.htm.
116 Internal DOL calculation based on 2023 labor
cost data. For a description of the Department’s
methodology for calculating wage rates, see https://
www.dol.gov/sites/dolgov/files/EBSA/laws-andregulations/rules-and-regulations/technicalappendices/labor-cost-inputs-used-in-ebsa-opr-riaand-pra-burden-calculations-june-2019.pdf.
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contracts with plan sponsors. If
language is not already included in
contracts, the Department estimates that
RCH/PSN would send a one-page
supplemental acknowledgement to each
plan sponsor with an estimated cost of
$159 in legal costs to develop the
supplemental acknowledgement and
$391,275 in clerical costs 117 to provide
the notices to the estimated 185,000
plans RCH/PSN currently services at an
incremental cost of $2.12 per plan.
Contracts executed after the date of a
final rule would likely incorporate the
acknowledgement for a de minimis
additional cost.
The Department also anticipates the
acknowledgement in each of the three
notices to plans participants/IRA
owners (initial enrollment, pretransaction, and post-transaction
notices) would use a standardized and
identical acknowledgment. The
Department requests information about
other costs associated with the
requirement to disclose fiduciary status.
between $15 and $30 per transferred
account, depending on the account
balance. This fee is applied only when
a transfer occurs and is deducted from
the funds in the account being
transferred. The Department estimates
there to be an additional 60,265
transactions in year one, and an average
of 399,341 transactions annually in
years two through ten. The Department
uses the mid-point of the fee range
stated, $22.50, as the expected average
fee. Therefore, the Department estimates
the aggregate transaction fees to be
approximately $1.4 million in year one,
and period two through ten to have
aggregate fees on average of nearly $9
million per year.118
6.5. Notices and Disclosures
6.4. Cost of Transactions Fees
As previously discussed, there is a
transaction fee stated to be roughly
6.5.1. Notice to the Secretary of Labor
Under the proposed regulation,
within 90 calendar days of the date that
the automatic portability provider
begins operating an automatic
portability transaction program that is
intended to rely on prohibited
transaction relief provided by Code
section 4975(d)(25), the automatic
portability provider must notify the
Secretary at auto-portability@dol.gov
that it is operating as an automatic
portability provider in accordance with
Code section 4975(d)(25). The automatic
portability provider must report the
legal name of each business entity
relying upon the exemption and any
name (e.g., trade or DBA name) the
business entity may be operating under.
This notification needs to be updated to
report a change to the legal or operating
name(s) of the automatic portability
provider that is relying upon the
exemption.
Because PTE 2019–02 was issued to a
single entity, there was no such
requirement in the exemption. However,
the Department believes based on the
small number of expected automatic
portability providers entering the
market, that the possible cost burden
associated with submitting the simple
notice via email to the Department to be
roughly $16, which is estimated as 15
minutes of a clerical worker’s time with
an hourly wage rate of $63.45. While
this notification would need to be
updated to report a change to the legal
or operating name(s) of the automatic
portability provider that is relying upon
the exemption, the Department expects
that such a change would be rare and
thus does not estimate an associated
cost.
117 The hour burden is estimated as: 185,000 plan
fiduciaries × 2/60 hours = 6,167 hours. The
equivalent cost is estimated as: 185,000 plan
fiduciaries × 2/60 hours × $63.45 = 391,275.
118 60,265 additional transactions × $22.50
transaction fee = $1,355,963 in year 1. In years 2–
10, an average of 399,341 additional transactions ×
$22.50 per transaction = $8,985,163.
6.3. Data Usage and Protection
The statutory exemption specifically
prohibits the automatic portability
provider from marketing or selling data
relating to the IRA or to the plan
participants. Section 2550.4975f–
12(b)(3) of the proposed regulation
parallels the statutory language by not
permitting the use of data for any
purpose other than the execution of
automatic portability transactions or
locating missing participants. The
Department is not proposing any
exceptions to this restriction. A similar
restriction was placed on RCH in PTE
2019–02, so the Department does not
expect an additional cost to RCH/PSN
due to the proposal.
The Department, however, did not
include an express data protection
condition in PTE 2019–02 similar to
that included in the proposed
regulation. Therefore, compared to
existing requirements on RCH/PSN, the
Department expects that the proposed
regulation could add costs. However,
the Department also expects that these
costs would fall under normal operating
expenses borne by businesses when
dealing with the types of sensitive data
necessarily required to execute
automatic portability transactions. The
Department requests comment on this
assumption.
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6.5.2. Fee and Compensation Disclosure
The proposed regulations incorporate
the existing standard regarding
reasonable compensation for the
provision of services found at 26 CFR
54.4975–6(e). This proposed regulation
mirrors the text of the statutory
exemption by requiring the automatic
portability provider to disclose the
information that a service provider to
the plan would be required to disclose
under 29 CFR 2550.408b–2(c) to a
responsible plan fiduciary of the
transfer-in plan. For purposes of this
requirement, the disclosures would
relate to the automatic portability
provider’s services performed as an
automatic portability provider but not to
other services that may be provided.
The proposed regulation includes text
that mirrors the statutory text allowing
a direct fee to be paid by a plan sponsor
if it is in lieu of a fee imposed on an
IRA owner. The proposed regulation
includes one exception to the general
restriction on third-party compensation.
Specifically, under the proposal, an
automatic portability provider would be
able to share a portion of its fee or
compensation with another automatic
portability provider as long as the
overall fee paid, directly or indirectly,
by the plan or IRA does not increase as
compared to the fees disclosed to plan
fiduciaries, plan participants, and IRA
owners.
PTE 2019–02 requires RCH to fully
disclose fees to a plan fiduciary and
receive written approval from the plan
fiduciary. Therefore, the Department
expects that no change in cost will
occur as a result of this requirement in
the proposed regulation.
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6.5.3. Initial Enrollment Notice
The Department proposes that the
initial enrollment notice would include
a variety of information regarding the
nature of the automatic portability
transaction and additional aspects of the
IRA arrangement (the same information
to be included in the pre-transaction
notice), discussed below. The
Department anticipates that this notice
requirement could be satisfied by
including the information in the notice
otherwise required under Code section
401(a)(31)(B) upon the establishment of
a Default IRA.
PTE 2019–02 requires a ‘‘Mandatory
Distribution Letter’’ be sent to
participants before establishing a
Default IRA. PTE 2019–02 also requires
a ‘‘Welcome Letter’’ to be sent to the
same individual no later than three
business days after the Default IRA
receives the distributed assets. Together,
these two letters must include all the
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information required in the initial
enrollment notice in the proposed
regulation. The Department estimates
the revision and combination of these
documents to satisfy the proposed rule
will take an hour of an attorney’s time
at a wage rate of $159.34 resulting in a
total cost of $159.34 to RCH/PSN.
Because RCH/PSN is permitted to
consolidate the two notices required
under PTE 2019–02 into a single notice,
a burden savings of 22,182 hours in the
first year and 20,194 hours in
subsequent years of a clerical worker’s
time with an equivalent cost savings of
approximately $1.3 million each year
would result.119
The mailing and material costs are
also expected to be reduced due to the
combination of two notices into one. As
previously noted, the Department
assumes that 3.9 percent of recipients
enumerated in the previous paragraph
will receive mailed notices, and that the
remainder will receive notices
electronically, resulting in roughly
665,458 fewer notices in the first year
and on average 605,806 fewer in
subsequent years being mailed. since
the initial enrollment notice provides an
opportunity for RCH/PSN to consolidate
two notices into one. This reduction of
notices being sent has an associated
estimated cost savings of nearly $23,600
in the first year and $21,500, on average,
in subsequent years.120
6.5.4. Pre-Transaction Notice
Section 2550.4975f–12(b)(5)(iv) of the
proposed regulation incorporates the
statutory provisions of Code section
4975(f)(12)(B)(v). The proposed
regulation provides additional
clarification regarding the timing of the
pre-transaction notice by requiring that
the notice be sent no earlier than 90
days in advance of the automatic
portability transaction.
119 The Department assumes RCH will combine
these notices as a cost savings measure, resulting in
6,117,708 fewer notices needing to be prepared and
sent over the 10-year period. The cost savings is
calculated as –6,117,708 notices × 2/60 hours to
prepare each notice on average × $63.45 wage rate
for clerical staff = ¥$12,938,952.42, annualized to
$1,293,895.24.
120 The materials and mailing burden is
calculated as: Year one—665,458 fewer notices
required × 3.9% mailed = 25,953 fewer notices.
Each notice is estimated as 5 pages and mailed first
class at a cost of $0.66 per notice. The cost is (5
pages × $0.05 per page) = $0.25 per notice + $0.66
for postage, resulting in a cost of $0.91 per notice.
$0.91 × –25,953 fewer notices = a savings of
S23,617.10. Subsequent years average: 605,806
fewer notices required × 3.9% mailed = 23,626
fewer notices. Each notice is estimated as 5 pages
and mailed first class at a cost of $0.66 per notice.
The cost is (5 pages × $0.05 per page) = $0.25 per
notice + $0.66 for postage, resulting in a cost of
$0.91 per notice. $0.91 × 23,626 fewer notices = a
savings of $21,500.04.
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PTE 2019–02 included a pretransaction notice, referred to as a
‘‘Consent Letter.’’ The letter is required
to be sent before moving Default IRA
assets into a transfer-in plan after the
locate and match service makes a match.
The content of the Consent Letter is
substantially the same as the pretransaction notice required by the
statute and incorporated into the
proposed regulation. The Department
believes there will be a minimal
transition cost to RCH/PSN attributable
to bringing the ‘‘Consent Letter’’ into
compliance to serve as the pretransaction notice. This is estimated to
take one hour of a legal professional’s
time at a wage rate and total cost of
$159.34.
The Department estimates that there
will be a 61,121 increase in pretransaction notices in the first year and
that there will be, on average, 384,265
additional notices in subsequent years.
This increase will result in roughly
2,037 hours in year one and, on average,
12,809 hours in subsequent years of
clerical workers’ time at 2 minutes per
notice on average, at a rate of $63.45 for
a total net cost of roughly $129,271 in
year one and, on average, $812,720 in
subsequent years. The notices are
expected to consist of no more than two
pages. The mailing and materials cost
associated with the pre-transaction
notices are estimated as 2,384 notices
being sent in the first year at an
estimated cost of $1,812 and, on
average, 14,986 notices sent in
subsequent years with an estimated
average cost of $11,390.121
6.5.5. Post-Transaction Notice
This post-transaction notice, which
would occur after a transfer-in plan
receives an individual’s IRA funds, is
the last notice that the automatic
portability provider would be required
to provide to the IRA owner or plan
participant. Section 2550.4975f–
12(b)(5)(v) of this proposed regulation
incorporates the statutory requirements.
The statute requires that no later than
three business days after the completion
of an automatic portability transaction,
the automatic portability provider shall
121 The materials and mailing burden is
calculated as: Year one 61,121 notices × 3.9%
mailed = 2,384 notices. Each notice is estimated as
2 pages and mailed first class at a cost of $0.66 per
notice. The cost is (2 pages × $0.05 per page) =
$0.10 per notice + $0.66 for postage, resulting in a
cost of $0.76 per notice. $0.76 × 2,384 notices =
S1,811.63. Subsequent years average: 384,265 ×
3.9% mailed = 14,986 notices. Each notice is
estimated as 2 pages and mailed first class at a cost
of $0.66 per notice. The cost is 2 pages × $0.05 per
page) = $0.10 per notice + $0.66 for postage,
resulting in a cost of $0.76 per notice. $0.76 ×
14,986 notices = $11,389.60.
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provide notice to the IRA owner of the
actions taken by the automatic
portability provider with respect to the
IRA. The statute also requires the notice
to include all relevant information
regarding the location and amount of
any transferred assets, a statement of
fees charged against the IRA or transferin plan account in connection with the
transfer, and a customer service contact
phone number for the automatic
portability provider.
PTE 2019–02 did not require a posttransaction notice. Therefore, as
compared to the statutory requirements,
this new requirement has the potential
to add cost to PSN/RCH as an automatic
portability provider. The Department
estimates the development of a model
notice will take a legal professional two
hours at an hourly wage rate of $159.34
for a total cost of $319 in the first year.
The Department estimates that in the
first year 397,749 notices will be sent to
account owners and, on average,
736,825 notices to IRA owners
subsequent years within the projection
window creating an hour burden of
13,258 and 24,561 respectively,
assuming 2 minutes per notice, on
average, of clerical workers’ time. The
post-transaction notice is expected to be
no longer than two pages. Therefore, the
Department estimates an equivalent cost
of approximately $0.8 million in the
first year and an average of $1.6 million
in each subsequent year within the
projection window.122
As discussed at the beginning of this
section, the Department estimates that
3.9 percent of the notices would be sent
by mail. The Department estimates that
an automatic portability provider would
incur a cost of $0.76 to send each
disclosure, which is comprised of $0.66
for postage and $0.10 for the paper and
printing costs of two pages. Therefore,
the materials and postage costs are
estimated as 15,512 notices at $0.76 per
notice totaling $11,789 in the first year
and an average of 28,736 notices at
$0.76 per notice totaling $21,839, on
average, in years 2 through 10.
6.5.6. Culturally and Linguistically
Appropriate Notices
The proposed regulation would
require that notices and disclosures to
participants and IRA owners be
provided in a culturally and
linguistically appropriate manner if
their address is in a county where 10
percent or more of the population is
literate only in the same non-English
language. To determine whether a
county meets this threshold, the
Department relies on American
Community Survey (ACS) data
published by the United States Census
Bureau. In the 2016–2020 ACS data, 230
counties or county equivalents met or
exceeded the 10 percent threshold
(rounded to the nearest percent).123
In these counties, the automatic
portability provider must include in the
English versions of all required notices
and disclosure, a statement prominently
displayed in any applicable non-English
language, which clearly indicates how
to access the language services provided
by the automatic portability provider.
The Department estimates that
satisfying this requirement would result
in a de minimis cost. The automatic
portability provider would also be
required to provide oral language
services (such as a telephone customer
assistance hotline) that include
answering questions in any applicable
non-English language and providing
assistance with automatic portability
transactions in any applicable nonEnglish language.
Additionally, the automatic
portability provider would be required
to provide, upon request, a notice or
disclosure in any applicable, nonEnglish language. In the 2016–2020
ACS, the Department identified eight
languages that met the 10 percent
threshold in at least one county. The
eight languages were Spanish, Chinese,
Navajo, Tagalog, Samoan, Carolinian,
and Chamorro. For the purposes of this
analysis, the Department estimates that
an automatic portability provider will
need to translate the notices into eight
languages. Document translation costs
vary depending on the length of the
document, the complexity of the
document, and the complexity of the
language.124 One source estimates that
the average translation cost per page
ranges between $20 and $130.125 Due to
the potential complexity of the
documents, the Department assumes the
cost will be towards the higher-end of
the range and therefore, on average, it
will cost $100 per page to translate the
notices in this proposal. The
Department requests comment on this
cost assumption. The translation costs
for the initial enrollment notice, pretransaction notice, and the posttransaction notice are summarized in
the table below.
TABLE 8—TRANSLATION COSTS
ddrumheller on DSK120RN23PROD with PROPOSALS2
Languages
Pages
Cost per page
Cost
Initial Enrollment Notice ...................................................................................
Pre-Transaction Notice ....................................................................................
Post Transaction Notice ..................................................................................
8
8
8
5
2
2
$100
100
100
$4,000
1,600
1,600
Total ..........................................................................................................
........................
9
........................
7,200
A similar analysis conducted by the
Department estimated that the average
requests for translations of written
documents averages 0.098 requests per
1,000 health benefit plan members.126
For the purposes of this analysis, the
Department assumes that recipients of
the notices in this proposal would
request translations at the same rate.
The estimated number of translated
notices requested is summarized in the
table below. The Department requests
comment on how frequently translations
would be requested for such notices.
122 Values calculated as follows: Year 1—397,749
notices × 2/60 clerical hours = 13,258 burden hours.
$63.45 clerical worker wage × 13,258 burden hours
= $841,239. Subsequent years: 736,825 notices × 2/
60 clerical hours = 24,561 burden hours. $63.45
clerical worker wage × 25,572 burden hours =
$1,558,384.
123 The relevant ACS data set used is the U.S.
Census, 2016–2020 American Community Survey 5-
Year Estimates, Table B16001, Language Spoken at
Home by Ability to Speak English for the
Population 5 Years and Over, available at https://
data.census.gov/cedsci/table?tid=ACSDT5Y20
20.B16001.
124 American Translators Association, How Much
Does a Translation Cost? (May 2023), https://
www.atanet.org/client-assistance/how-much-doestranslation-cost/.
125 Lettier, Mariel, Translation Rates in 2023—A
Complete Guide, Rush Translate, (2023), https://
rushtranslate.com/blog/translation-rates#:∼:text=
for%201000%20words.-,What%20
is%20the%20average%20rate
%20for%20translation%20
per%20page%3F,certified%20
translation%20and%20charges%20%2424.95.
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TABLE 9—TRANSLATED NOTICES REQUESTED
Years 2–10
(average)
Year 1
Initial Enrollment Notice:
Total Initial Enrollment Notice ..........................................................................................................................
× Percent Requesting Translated Notice .........................................................................................................
= Translated Notices Distributed ......................................................................................................................
Pre-Transaction Notice:
Total Pre-Transaction Notice ............................................................................................................................
× Percent Requesting Translated Notice .........................................................................................................
= Translated Notices Distributed ......................................................................................................................
Post-Transaction Notice:
Total Post-Transaction Notice ..........................................................................................................................
× Percent Requesting Translated Notice .........................................................................................................
= Translated Notices Distributed ......................................................................................................................
954,786
0.0098%
94
1,014,438
0.0098%
100
403,397
0.0098%
40
747,287
0.0098%
74
397,749
0.0098%
39
736,825
0.0098%
73
173
246
Total Translated Notices Distributed .......................................................................................................................
Note: Components may not sum to parts due to rounding.
The Department assumes that it
would take a clerical professional two
minutes to prepare and send each
disclosure. The Department assumes
that all of the translated notices would
be sent by mail. The Department
requests comment on this assumption.
Additionally, the Department estimates
that an automatic portability provider
would incur a cost of $0.76 to send each
disclosure, including $0.66 for postage
and $0.05 for the printing costs of each
page. The hour burden, equivalent cost,
postage, and material costs are
summarized in the table below.
TABLE 10—BURDEN TO PREPARE AND SEND TRANSLATED DISCLOSURES
Year 1
Prepare and Send Notice (automatic portability provider):
Number of Notices ............................................................................................................................................
× Annual Hour Burden per Transaction (Hours) ..............................................................................................
= Total Hours ....................................................................................................................................................
× Labor Cost (Clerical Professional) ................................................................................................................
= Equivalent Cost .............................................................................................................................................
Material and Postage Cost (automatic portability provider):
Initial Enrollment Notices:
Number of Notices Sent by Mail ......................................................................................................................
× Postage and Material Cost per Notice (5 Pages) .........................................................................................
= Postage and Material Cost ...........................................................................................................................
Pre-Transaction Notices:
Number of Notices Sent by Mail ......................................................................................................................
× Postage and Material Cost per Notice (2 Pages) .........................................................................................
= Postage and Material Cost ...........................................................................................................................
Post-Transaction Notices:
Number of Notices Sent by Mail ......................................................................................................................
× Postage and Material Cost per Notice (2 Pages) .........................................................................................
= Postage and Material Cost ...........................................................................................................................
Total Hour Burden ...................................................................................................................................................
Total Equivalent Cost ..............................................................................................................................................
Total Postage and Material Cost .............................................................................................................................
Years 2–10
(average)
173
2/60
5.8
$63.45
$366
246
2/60
8.2
$63.45
$528
94
$0.91
$86
100
$0.91
$91
40
$0.76
$30
74
$0.76
$56
39
$0.76
$30
73
$0.76
$55
6
$366
$146
8
$528
$202
Note: Components may not sum to parts due to rounding.
ddrumheller on DSK120RN23PROD with PROPOSALS2
6.5.7. Summary Plan Description
The Department proposes a
requirement that the automatic
portability provider provide the
administrator of participating plans
with a model description of the
automatic portability program,
including fees and expenses, that the
administrator could use in fulfilling its
SPD obligations, as applicable.
PTE 2019–02 included an SPD
condition but was silent on which party
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had the obligation to ensure
compliance. However, given the fact
that RCH was the entity in control of the
fees, the Department expects that the
SPD condition of PTE 2019–02 would
have been fulfilled in a manner similar
to that in the proposed regulation.
Therefore, the Department estimates no
additional incremental burden to RCH/
PSN as a result of the proposed
regulation.
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6.6. Searches
The proposed regulation parallels the
Code section 4975(f)(12)(B)(viii)
requirement that the automatic
portability provider query on at least a
monthly basis whether any individual
with an IRA has an account in a
transfer-in plan. Under the proposal, the
automatic portability provider must
perform ongoing participant address
validation searches via automated
checks of National Change of Address
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records, two separate commercial
locator databases, any internal databases
maintained by the automatic portability
provider, and a manual internet-based
search if a valid address is not obtained
from the automated checks. The
proposal would require these
verification steps to be performed at
least twice in the first year an account
is entered into the automatic portability
provider system and once a year
thereafter.
PTE 2019–02 included an identical
requirement regarding monthly
searches. The Department assumes that
this process is automated via technology
and has de minimis marginal cost with
respect to number or records being
searched; therefore, this aspect of the
proposal is not expected to add
additional cost to RCH/PSN. PTE 2019–
02 also included a general requirement
to take ‘‘all prudent actions necessary to
reasonably ensure that the Plan’s
participant and beneficiary data is
current and accurate.’’ Although RCH
represented to the Department that it
would perform address validation
searches in line with the requirement in
the proposed regulation, the condition
in PTE 2019–02 did not specify the
frequency of those searches nor the
additional parameters in the proposal
regarding participant address validation
searches. The Department believes, due
to the representation from RCH in
connection with the individual
exemption, that the proposed regulation
will therefore not add additional cost.
However, the Department requests
comment on whether the current
framework for executing automatic
portability transactions of RCH/PSN is
expected to include a process for
ongoing address validation searches for
Default IRAs that are included in the
arrangement (i.e., those which are
eligible to be moved into a transfer-in
plan through the execution of an
automatic portability transaction).
6.7. Monitoring Transfers
Section 2550.4975f–12(b)(7) of the
proposed regulation requires that the
automatic portability provider ensure
that each transfer-in plan for whom the
automatic portability provider performs
automatic portability transactions
designates a plan official responsible for
monitoring transfers into the plan and
confirming that amounts received on
behalf of a participant are invested
properly.
Although the Department believes
that monitoring transfers is a necessary
component of an automatic portability
arrangement, PTE 2019–02 did not
include a condition explicitly
mandating that a plan official monitor
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transfers into the plan. As compared to
PTE 2019–02, the Department does not
believe the proposed requirement
regarding monitoring transfers will
likely add cost because that should be
a normal act of routine plan
administration when assets are rolled
into a plan.
6.8. Policies and Procedures
Section 2550.4975f–12(b)(9)
incorporates the statutory limitation on
discretion and expands upon the
statutory text by specifying that an
automatic portability provider will be
deemed to satisfy the limited discretion
requirement if it establishes, maintains,
and follows policies and procedures
regarding the process for executing
automatic portability transactions.
PTE 2019–02 included a condition on
the limitation of discretion but did not
include a policies and procedures
component that would result in the
condition being satisfied. The
Department believes that it would be
standard business practice for RCH/PSN
to have policies and procedures in place
to govern the various conditions of PTE
2019–02 to ensure that all automatic
portability transactions are executed
consistently and in a manner that can be
independently audited. Although an
automatic portability provider is not
required to establish the policies and
procedures to satisfy the limited
discretion aspect of the statute and
proposed regulation, the Department
anticipates that RCH/PSN will choose to
take advantage of the ‘‘deemed
satisfied’’ aspect of the proposed
regulation. The Department assumes
that a legal professional with a wage rate
of $159.34 will spend 10 hours
reviewing the existing policies and
procedures to ensure compliance with
the requirements in the proposed rule,
resulting in an equivalent cost of
$1,593.40.127 In subsequent years, 2
hours is assumed for a legal professional
to review and update the procedures at
an estimated cost of $319 per annum.128
6.9. Audit
Code section 4975(f)(12)(B)(xi)
includes an annual audit requirement to
be conducted in accordance with
regulations promulgated by the
Secretary. The statute requires that an
audit be conducted that demonstrates
127 The hour burden is estimated as: 1 automatic
portability provider × (10 hours) = 10 hours. The
equivalent cost is estimated as: 1 automatic
portability provider × (10 hours) × $159.34 =
$1,593.40, rounded to $1,593.
128 The hour burden is estimated as: 1 automatic
portability provider × (30/60 hours) = 30/60 hours.
The equivalent cost is estimated as: 1 automatic
portability provider × (2 hours) × $159.34 =
$318.69, rounded to $319.
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compliance with Code section
4975(f)(12) and any regulations
thereunder and that identifies any
instances of noncompliance with the
statute or such regulations. The statute
requires the automatic portability
provider to submit a copy of the
auditor’s report to the Secretary in such
form and manner as specified by the
Secretary.
PTE 2019–02 required an annual
audit conducted by an independent
auditor. The auditor is required to
review a representative sample of
transactions and related undertakings,
sufficient for the auditor to make a
variety of determinations regarding
compliance with PTE 2019–02. Those
findings must then be included in a
report that is sent to the Office of
Exemption Determinations at the
Department, the cost of which is
discussed below.
The timing for submission of the audit
report in the proposed regulation
follows the timing from PTE 2019–02.
However, as compared to PTE 2019–02,
the proposed regulation has a minor
difference as a result of the proposed
correction provisions. Rather than have
the auditor submit the report directly to
the Department as was the case under
PTE 2019–02, the proposed regulation
requires that the audit report shall be
provided first to the automatic
portability provider, who will thereafter
submit the report to the Department
after reviewing the audit report and
certifying that it has done so.
The parameters of the audit in the
proposed regulation, while intended to
align with the PTE 2019–02 audit,
provide more detail regarding the form
and content of the audit, in
consideration of the statutory
requirements and other areas where the
Department has proposed requirements
for the purposes of regulatory clarity.
The audit requirement of the proposed
regulation also accounts for the
corrections that may occur in
accordance with this proposal. PTE
2019–02 did not specifically include
correction parameters. The cost
associated with the proposed correction
mechanisms is described in the next
section.
The Department anticipates the audit
parameters of the proposed regulation
will add cost to RCH/PSN as compared
to what they might otherwise have
incurred under PTE 2019–02. First, the
proposed regulation requires the audit
report to include the total number of
completed automatic portability
transactions during the audit period.
Second, the proposed regulation
requires the audit report to address
specifically whether, in the reviewed
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sample, the appropriate accounts in the
transfer-in plan received all the assets
due as a result of the automatic
portability transaction.
Due to the increase in required
actions for the audit, the Department
estimates the proposed regulation will
increase the cost of performing the audit
by roughly 20 percent. The Department
estimates audit costs in the absence of
the proposed rule to be close to $25,000
per year. Therefore, the Department
estimates that the proposed rule will
increase audit costs by approximately
$5,000 per year. The Department seeks
comment on this estimate.
There are several actions the
automatic portability provider will need
to take in support of the audit
requirements, which are outlined below.
To ensure the accuracy of certain
information that the Secretary is
required to provide to Congress
periodically, the proposed regulation
requires the audit report to include
information that was not specifically
contemplated under PTE 2019–02, and
which may not be directly in the
automatic portability provider’s
possession. If the information is not in
the possession of the automatic
portability provider, the proposed
regulation requires the automatic
portability provider to require
contractually that the information to be
provided in connection with its services
as an automatic portability provider. If
this obligation is not already included
in RCH/PSN’s contracts with
recordkeepers and plans, RCH/PSN may
need to update those agreements. The
Department estimates updating the
standardized contracts would take a
lawyer one hour at a wage rate and total
cost of $159.34. Assuming that all
185,000 plans currently covered by the
automatic portability provider would
have their contracts updated with the
standard contract, the Department
estimates that a plan fiduciary will
spend 15 minutes to execute the
updated contract. This results in a
burden of 46,250 hours of plan
fiduciaries’ time, at a wage rate of
$134.93, resulting in a total cost of
$6,240,513.129 Combining these two
components of this portion of the
proposed rule results in an equivalent
cost of $6,240,672.
Although anticipated under PTE
2019–02, there was not an explicit
condition for the automatic portability
provider to include a certification filed
129 The cost to update the contracts is calculated
as: 185,000 participating plans × (15/60) hours ×
$134.93 plan fiduciary wage rate = $6,240,512.50.
Accounting for the $159.34 cost for a lawyer to
update the contract results in a total of
$6,240,671.84, which is rounded in the text.
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with the written audit report, under
penalty of perjury, that the automatic
portability provider has reviewed the
audit report. Nor was there a condition
requiring the automatic portability
provider to certify that it has addressed,
corrected, or remedied any
noncompliance or inadequacy in its
compliance or has an appropriate
written plan to address any such issues
identified in the audit report. Because
the Department believes RCH/PSN
would necessarily be reviewing the
audit under PTE 2019–02, it has not
attributed a cost to that specific aspect
of the proposed regulation. However,
with respect to the certifications, the
Department estimates that it will take a
legal professional 3 hours to draft the
certifications and a senior executive 30
minutes to execute the certification, for
an added cost of $542 in the first year
and $64 in subsequent years.130
Finally, there would be additional
resources expended in collecting and
providing the additional records and for
the plan to submit the audit report to
the Department in place of the auditor.
The Department estimates a clerical
worker with a wage rate of $63.45
would spend an additional 5 hours
collecting and providing documentation
and records for the audit and
approximately 15 minutes sending the
report once finalized. The resulting cost
burden for these actions is $333.131
6.10. Corrections
To effectuate the intent of this
provision, the Department is proposing
three components for corrections in the
event the auditor determines the
automatic portability provider was not
in compliance with the statute and
related regulations: an opportunity for
an automatic portability provider to
make certain self-corrections; additional
recommendations from the auditor; and
the Secretary requiring an automatic
portability provider to submit to
supplemental audits and corrective
actions if significant compliance issues
are uncovered.
Although PTE 2019–02 did not
include any correction provisions, the
Department believes the availability of
self-correction will generally provide a
benefit to RCH/PSN as opposed to a
130 The cost to draft the certification is a one-time
cost calculated as: 3 hours × $159.34 lawyer wage
rate = $478.02, rounded to $478. A senior executive
would need to execute the certification annually.
The certification cost is calculated as (30/60) hours
× $128.11 sr. executive wage rate = $64.06, rounded
to $64. Therefore, the first year cost is $478.02 +
$64.06 = 542.08.
131 The cost to support and transmit the audit by
a clerical worker is estimated as: (5 hours × $63.45
wage = $317.25) + ((15/60) hours × $63.45 wage rate
= $15.86) = $333.11.
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5655
cost. However, in connection with the
proposed regulation’s correction
provisions, the automatic portability
provider must establish policies for the
corrections permitted by the proposal.
The Department expects that RCH/PSN
will need to develop policies related to
corrections that may not already be
included in other pre-existing policies
and procedures governing their
program. The Department assumes the
policies would be developed by an inhouse attorney with a wage rate of
$159.34 and would take roughly 20
hours resulting in a one-time cost of
$3,187.
Additionally, the proposed regulation
also includes provisions relating to the
auditor’s review of the automatic
portability provider’s compliance that
were not specifically included in PTE
2019–02. If the auditor identifies any
instances of noncompliance, then RCH/
PSN would be required by the proposal
to correct those issues as soon as
reasonably practicable. The Department
believes there may be some added cost
associated with remediating compliance
issues. The Department lacks the
information necessary to identify the
extent of noncompliance issues that
might be uncovered. However, in order
to correct issues, the Department
assumes that both a Senior Executive
and a lawyer would likely be involved.
The Department estimates each would
spend 10 hours considering and
developing remedies to audit findings.
The cost for the lawyer is estimated as
10 hours at a wage rate of $159.34
resulting in a cost of $1,593. The cost for
the Senior Executive is similarly
estimated as 10 hours at a wage rate of
$128.11 resulting in a cost of $1,281.10.
Lastly, a summary of the corrective
actions taken is to be sent to the auditor.
The Department assumes that a clerical
worker with a wage rate of $63.45 will
spend two hours organizing and
communicating the summary to the
auditors, at a cost of $127. The total
annual cost to address audit findings
and communicate the summary of
actions taken is estimated as the sum of
these three costs, $3,001.
The ability of the Department to
impose additional supplemental audits
and corrective actions could also add
cost. For instance, if the Department
were to impose a supplemental audit,
the expected cost to RCH/PSN would
likely be the same as the cost of the
required annual audit. The Department
estimates that no more than one
supplemental audit would be imposed
in any particular year, but also expects
the imposition to be rare. To account for
the possibility, the Department assumes
one supplemental audit would occur in
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the fifth year of the estimation window
at a cost of $30,000, which is the
estimated cost of the annual audit.
If the Department were to impose a
temporary prohibition on relying upon
the statutory exemption, the cost to
RCH/PSN associated with that would
generally be a function of the number of
automatic portability transactions
multiplied by the revenue per
transaction for the period in which they
could not use the exemption. Due to the
novelty of the arrangement, the
Department currently lacks data to
estimate the magnitude of this cost.
6.11. Website
The proposed regulation in paragraph
(d) parallels the statutory language in
Code section 4975(f)(B)(xii) requiring
the automatic portability provider to: (1)
maintain a website which contains a list
of recordkeepers with respect to which
the automatic portability provider
carries out automatic portability
transactions; (2) list all fees paid to the
automatic portability provider; and (3)
indicate the number of plans and
participants covered by each
recordkeeper. Under the proposed
regulation, the list would have to
include the fees and the identity of the
party or account that is paying the
particular fee. The proposal would also
require the website to display automatic
portability transaction-related
information in a way that differentiates
that information from other information
or elements of the website (e.g.,
separately identifying the automatic
portability transaction fees and services
from fees and services in connection
with establishing and maintaining
custody of a Default IRA).
PTE 2019–02 required a website that
includes a list of all participating
recordkeepers but did not require the
additional detail regarding a list of all
fees paid to the automatic portability
provider, or the number of plans and
participants covered by each
recordkeeper. The Department
anticipates that this information will be
readily available to RCH/PSN and that
they will update their website to
include all the information in a format
that meets the requirements in the
proposed rule.
The Department estimates that a
Senior Executive would spend one hour
providing a web designer the
requirements for the disclosures in the
first year, resulting in an equivalent cost
of $128.132 Additionally, the
132 The hour burden is estimated as: 1 automatic
portability provider × (1 hour) = 1 hour. The
equivalent cost is estimated as: 1 automatic
portability provider × (1 hour) × $128.11 = $128.11,
rounded to $128.
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Department estimates that it would take
a web designer five hours to update and
test the website in the first year,
resulting in an equivalent cost of
$778.133 The Department estimates that
it would take a web developer one hour
in subsequent years to make any
necessary revisions or updates to the
disclosures, resulting in an equivalent
cost of $156.134
6.12. Limitations on Exculpatory
Provisions
The limitation on exculpatory
provisions in the proposed regulation is
substantially identical to the limitation
in PTE 2019–02. Therefore, the
Department anticipates no additional
cost to RCH/PSN.
6.13. Record Retention
This proposed regulation incorporates
the statutory language in Code section
4975(f)(12)(xi)(I) regarding record
retention by requiring an automatic
portability provider to maintain, for not
less than six years, records sufficient to
demonstrate compliance with the
requirements of the statute and this
proposed regulation and make them
available to authorized employees of the
Department and the Department of the
Treasury within 30 calendar days of a
written request.
PTE 2019–02 had a broader
recordkeeping provision with respect to
who could request records as compared
to the statutory provision. The
Department believes this could result in
cost savings to RCH/PSN because plan
fiduciaries and IRA owners can no
longer request the records. However, the
Department does not believe this will
change the cost of retaining the records.
The Department does not know how
many plan fiduciaries or IRA owners
would request records, but expects it
would be infrequent, resulting in a de
minimis cost reduction to RCH/PSN.
portability transactions on the same
terms to any transfer-in plan. The
Department is also proposing that open
participation would require that the
automatic portability provider not
restrict or limit the ability of an
employer-sponsored retirement plan,
IRA custodian or IRA provider, or
recordkeeper to engage other automatic
portability providers to execute
automatic portability transactions. PTE
2019–02 required RCH to offer the
program in a functionally identical
manner as the open participation
requirement of the statute. However, it
did not include a condition similar to
the proposed regulation requirement
that ensures a plan sponsor is not
restricted from engaging more than one
automatic portability provider. Since
this requirement reduces barriers to
entry, it will tend to encourage RCH/
PSN to keep its fee low to discourage
other automatic portability providers
from competing in the market. This
would represent a transfer from RCH/
PSN to participants in the form of lower
fees and to other automatic portability
providers (if others enter the market), in
the form of lower barriers to entry.
7.1. Transfers Resulting From Open
Participation
Section 2550.4975f–12(g) of this
proposed regulation parallels Code
section 4975(f)(12)(B)(iv) by requiring,
as a condition of the availability of the
exemption, that the automatic
portability provider offer automatic
7.2. Transfer of Foregone Government
Revenue to Participants
Assets that stay in the tax-preferred
retirement system rather than being
cashed out will not be subject to regular
income tax until a future date when
they are distributed. They will also
avoid altogether the 10 percent penalty
tax on early distributions that would
have applied to many cashouts. As the
participants pay less in taxes, this
represents a transfer from the
government to participants in the form
of increased tax expenditures
supporting the retirement system.
The Department estimates that over
the ten-year estimation period the
proposed rule will lead to 1.5 million
fewer cashouts with a value of
approximately $4.6 billion. The
Department assumes that the marginal
income tax rate for small account
holders would be 12 percent.135 The
Department also assumes that a 10
percent tax penalty applies to half of the
foregone cashouts. The other foregone
cashouts are assumed to fall under one
of the exceptions; for example, the
separating participant turns 55 or older
133 The hour burden is estimated as: 1 automatic
portability provider × (5 hours) = 5 hours. The
equivalent cost is estimated as: 1 automatic
portability provider × (5 hours) × $155.61 =
$778.05, rounded to $778.
134 The hour burden is estimated as: 1 automatic
portability provider × (1 hour) = 1 hour. The
equivalent cost is estimated as: 1 automatic
portability provider × (1 hour) × $155.61 = $155.61,
rounded to $156.
135 U.S. Internal Revenue Service, ‘‘IRS Provides
Tax Inflation Adjustments for Tax Year 2024’’
website at https://www.irs.gov/newsroom/irsprovides-tax-inflation-adjustments-for-tax-year2024#:∼:text=Marginal%20rates%3A%20
For%20tax%20year,for%20
married%20couples%20filing%20jointly).&text=
The%20lowest%20rate%20is
%2010,for%20married%20couples
%20filing%20jointly).
7. Transfers
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in the calendar year in which they take
the distribution, or they are disabled, or
they have certain medical expenses.136
The Department estimates that the
amount of the transfer from the
government to participants would be
about $790 million.137
8. Regulatory Alternatives
Section 6(a)(3)(C)(iii) of Executive
Order 12866 requires a significant
regulation, and encourages other
regulations, to include an assessment of
the costs and benefits of potentially
effective and reasonable alternatives to
the planned regulation. The Department
considered several alternative
approaches in developing this proposed
regulation which are discussed below.
8.1. Do Not Issue Regulations—Rely
Only on Sub-Regulatory Guidance
The Department considered not
proposing regulations with respect to
the automatic portability provision
included in section 120 of the SECURE
2.0 Act. Section 120(c) directs the
Secretary of Labor to ‘‘issue such
guidance as may be necessary to carry
out the purposes of the amendments
made by this section, including
regulations or other guidance’’ no later
than 12 months after the enactment of
the statute. To this end, the Department
has considered whether its
responsibilities under section 120(c)
could be satisfied by issuing only subregulatory guidance. The Department
considered issuing guidance stating that
compliance with the individual
exemption would be sufficient to
comply with the statutory exemption.
However, since the Department
anticipates that entities not engaging in
automatic portability transactions may
wish to enter the automatic portability
market in the future, the Department
maintains that issuing the proposed
regulation would address any
uncertainty on complying with the
statutory exemption in a manner that is
consistent with directives expressed in
section 120(c).
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8.2. Issue More Limited Regulations
The Department considered issuing
limited regulations concerning only the
portions of section 4975(f)(12) focused
on the audit and the acknowledgement
136 U.S. Internal Revenue Service, ‘‘401(k)
Resource Guide—Plan Participants—General
Distribution Rules’’ website, at https://www.irs.gov/
retirement-plans/plan-participant-employee/401kresource-guide-plan-participants-generaldistribution-rules#tax-on-early-distributions.
137 ($4,646,579,157 * 12%) + ($4,646,579,157 *
50% * 10%) = $789,918,457. Using a 3 percent
discount rate, this results in transfers totaling
$655,539,147. Using a 7 percent discount rate, this
results in transfers totaling $519,964,549.
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of fiduciary status, both of which called
on the Department to promulgate
regulations to determine compliance. In
so doing, the Department could have
issued sub-regulatory guidance with
respect to compliance with the rest of
the exemption. The Department did
ensure that these proposed regulations
provide the necessary blueprint for
completing a comprehensive audit and
sufficient acknowledgement of fiduciary
status. However, given that regulations
were to be proposed, the Department
believes that more comprehensive
regulations ensure that automatic
portability transactions are protective of
plan participants and beneficiaries.
Furthermore, the Department believes
that the novel nature of automatic
portability transactions necessitates
comprehensive proposed regulations
followed by a notice-and-comment
process in which stakeholders can
provide input.
8.3. Do Not Require an Initial
Enrollment Notice
The Department considered not
including a requirement for an initial
enrollment notice in the proposed
regulations. The statute only requires
that an automatic portability provider
furnish IRA owners with a pretransaction notice and a post-transaction
notice. However, section 120(c)(1) gives
the Department the statutory authority
to require that automatic portability
providers furnish a notice ‘‘in advance
of’’ the pre-transaction notice. The
Department was not mandated to
require additional notices and could
have considered the pre-transaction
notice sufficient to provide IRA owners
with information regarding the
automatic portability transactions.
However, the Department determined
that the initial enrollment notice helps
to ensure the IRA owner’s awareness
and understanding of the automatic
portability transaction, including but
not limited to, the individual’s right to
affirmatively elect not to participate in
the transaction, the other available
distribution options, the procedures to
take advantage of such options, and the
procedures for doing so.
8.4. Audit Does Not Have To Be
‘‘Independent’’
The Department considered proposing
an audit that could be conducted as an
internal audit. However, the Department
determined that the factors which led to
the inclusion of an independent audit in
PTE 2019–02 still exist with respect to
the execution of automatic portability
transactions, even under the new
statutory exemption. The novelty of
these types of transactions leads the
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Department to believe that the enhanced
oversight and credibility associated with
an independent audit favors the
Department’s approach in the proposed
regulation.
8.5. Exemptive Relief for Default IRAs
Involving Rollovers of Accounts With a
Value of $1,000 or Less
In section E of the preamble the
Department is requesting comments on
whether it should exercise its general
exemption authority under ERISA
section 408(a) to provide the same
exemptive relief to mandatory
distributions with a value of $1,000 or
less that the statutory exemption
provides to mandatory distributions
described in Code section 401(a)(31)(B)
with a value between $1,001 and
$7,000. The estimated benefits and costs
in the regulatory impact analysis for this
proposed rule include all accounts with
balances of $7,000 or less. As discussed
in section E, that analysis aligns with
the scope of Department’s safe harbor
regulation at 29 CFR 2550.404a–2 for
automatic rollovers to individual
retirement plans and with PTE 2019–02.
Excluding accounts with balances of
$1,000 or less from the regulatory
impact analysis for the proposed rule
results in a reduction in the ten-year
undiscounted total estimated benefit to
$1.7 billion 138 (compared to $2.8 billion
in the main analysis),139 reduction in
incremental costs to $12.6 million 140
(compared to $16.2 million in the main
analysis),141 and an increase of 2.3
million automatic portability
transactions (compared to an increase of
3.7 million in the main analysis). This
results in lower net benefits, but those
net benefits are still substantial.
The Department has substantial
uncertainty surrounding these estimates
and made simplifying assumptions to
obtain the estimates. The Department
seeks comment and data on the
following issues. The number of
mandatory distributions or accounts
with a balance of $1,000 or less is not
certain. The most relevant data available
comes from a 2023 Public Retirement
Research Lab report concerning public
138 Using a 3 percent discount rate, this results in
total benefits of $1,451,914,016. Using a 7 percent
discount rate, this results in total benefits of
$1,184,887,753.
139 Using a 3 percent discount rate, this results in
total benefits of $2,341,907,159. Using a 7 percent
discount rate, this results in total benefits of
$1,911,200,700.
140 Using a 3 percent discount rate, this results in
total costs of $11,259,790. Using a 7 percent
discount rate, this results in total costs of
$9,869,114.
141 Using a 3 percent discount rate, this results in
total costs of $14,160,023. Using a 7 percent
discount rate, this results in total costs of
$12,073,029.
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defined contribution plans which
indicated that 16 percent of all account
balances were $1,000 or less. The report
also found that 42 percent of all
accounts had balances less than
$7,000.142 The primary analysis
assumes that all accounts below the
distribution threshold are treated the
same and the account owners respond
similarly regardless of the account
balance. The Department seeks data on
whether mandatory distributions with
$1,000 or less are treated differently by
plan sponsors and how the account
owners’ responses may differ.
9. Uncertainty
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The Department acknowledges that
there is significant uncertainty in how
the automatic portability provider
market will develop in the future. The
Department requests comments on these
sources of uncertainty. For instance,
there may be only one automatic
portability provider in the future, PSN,
or there may be multiple automatic
portability providers, which would
allow for specialization on the part of
the automatic portability providers. If
additional firms ultimately enter the
market as automatic portability
providers, resulting in a less
concentrated market with more
competitors, that would likely lead to
lower fees, better quality service, and
less profits for RCH/PSN. These benefits
and transfers would accrue to the other
automatic portability providers and to
participants.
In the baseline scenario, the number
of recordkeepers joining PSN was
expected to be flat. However, additional
recordkeepers could join the network.
The model was adjusted to have the
number of recordkeepers increase at half
the rate as was used for the post-statute
and regulation scenario. Changing this
assumption led to a ten-year
undiscounted total estimated benefit of
$615.0 million 143 (compared to $2.8
billion in the main analysis),144 $9
million in incremental costs 145
(compared to $16.2 million in the main
142 Public Retirement Research Lab, Secure 2.0
Act Low-Balance Distribution Limit Changes: A
Look by Age and Tenure, (2023), SECURE 2.0 Act
Low-Balance Distribution Limit Changes: A Look by
Age and Tenure (ebri.org).
143 Using a 3 percent discount rate, this results in
total benefits of $529,400,846. Using a 7 percent
discount rate, this results in total benefits of
$439,280,667.
144 Using a 3 percent discount rate, this results in
total benefits of $2,341,907,159. Using a 7 percent
discount rate, this results in total benefits of
$1,911,200,700.
145 Using a 3 percent discount rate, this results in
total costs of $8,265,330. Using a 7 percent discount
rate, this results in total costs of $7,488,188.
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analysis),146 and an increase of 1.3
million automatic portability
transactions (compared to an increase of
3.7 million in the main analysis).
Changing this assumption results in
lower net benefits, but those net benefits
are still substantial.
There is uncertainty about the number
of future automatic portability
transactions, in large part because the
Department is unclear how the
proposed rule will impact DB plans and
participants. While the Department
believes that the statutory regulation
applies to both DB and DC plan
participants, the Department assumes
that DB plan participants will rarely be
affected by this proposed rule. DB plan
benefits are generally derived from a
formula based on an employee’s wages
and years of service, which an employee
is only entitled to once they are fully
vested. Vesting periods vary, however,
with five-year ‘‘cliff’’ vesting being very
common and for which few vested
participants would separate from
service with benefits that are less than
$7,000. However, participants in DB
plans with graded vesting would be
more likely to have accrued benefits
below the threshold. The Department
requests comments on the number of DB
plans and participants that would be
affected by this statutory exemption and
how they would be impacted.
While the share of workers covered by
DB plans has continued to decline,
those covered by DC plans have
increased substantially, with 45 percent
of civilian workers participating in DC
plans compared to just 19 percent
participating in DB plans.147 If DC plan
coverage continues to increase in the
future, the amount of automatic
portability transactions will likely also
increase.
Workers affected on the margin by
increased retirement plan coverage
would likely have a lower income on
average than workers currently covered
by a retirement plan and therefore
would tend to contribute less to their
plan. Employers sponsoring new plans
may also contribute less. These factors
would lead to more small balance
accounts that would be subject to forced
transfers into Default IRAs. These
workers would also be more likely to
experience a larger number of job
turnovers on average, so there would be
more Default IRA owners. Under the
assumption that DC plan coverage will
increase in the future, Default IRA
146 Using a 3 percent discount rate, this results in
total costs of $14,160,023. Using a 7 percent
discount rate, this results in total costs of
$12,073,029.
147 U.S. Bureau of Labor Statistics, National
Compensation Survey, (March, 2023).
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owners would be more likely to have
coverage at their new jobs, leading to
more automatic portability transactions.
There are also many factors at the
level of individual employee behavior
that will affect the impact of the
statutory exemption and any
accompanying regulations. This
includes employee decisions about
whether to contribute to their DC plan,
which will be influenced by plan
designs that have automatic enrollment.
Furthermore, employee decisions about
how to handle their account when
separating from a job will be key. It is
difficult to know what the trends will be
around such decisions in the future
since they may be affected by financial
advice, and any possible changes to the
scope of coverage under DB pension
plans and Social Security. While the
scale of such developments is difficult
to predict, they will surely have a
substantial impact on the scope of
automatic portability transactions, the
number of participants, plans, and
financial institutions affected, as well as
the size of the benefits and costs.
G. Paperwork Reduction Act
As part of its continuing effort to
reduce paperwork and respondent
burden, the Department conducts a
preclearance consultation program to
allow the general public and Federal
agencies to comment on proposed and
continuing collections of information in
accordance with the Paperwork
Reduction Act of 1995 (PRA). This helps
ensure that the public understands the
Department’s collection instructions,
respondents can provide the requested
data in the desired format, reporting
burden (time and financial resources) is
minimized, collection instruments are
clearly understood, and the Department
can properly assess the impact of
collection requirements on respondents.
The Department is soliciting
comments regarding the information
collection request (ICR) included in the
NPRM. To obtain a copy of the ICR,
contact the PRA addressee below or go
to RegInfo.gov. The Department has
submitted a copy of the rule to the
Office of Management and Budget
(OMB) in accordance with 44 U.S.C.
3507(d) for review of its information
collections. The Department and OMB
are particularly interested in comments
that:
• Evaluate whether the collection of
information is necessary for the
functions of the agency, including
whether the information will have
practical utility;
• Evaluate the accuracy of the
agency’s estimate of the burden of the
collection of information, including the
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validity of the methodology and
assumptions used;
• Enhance the quality, utility, and
clarity of the information to be
collected; and
• Minimize the burden of the
collection of information on those who
are to respond, including through the
use of appropriate automated,
electronic, mechanical, or other
technological collection techniques or
other forms of information technology
(e.g., permitting electronically delivered
responses).
Commenters may send their views on
the Department’s PRA analysis in the
same way they send comments in
response to the proposed rule as a
whole (for example, through the
www.regulations.gov website), including
as part of a comment responding to the
broader proposed rule. Comments are
due by March 29, 2024 to ensure their
consideration.
ICRs are available at RegInfo.gov
(reginfo.gov/public/do/PRAMain).
Requests for copies of the ICR can be
sent to the PRA addressee:
By mail: James Butikofer, Office of
Research and Analysis, Employee
Benefits Security Administration, U.S.
Department of Labor, 200 Constitution
Avenue NW, Room N–5718,
Washington, DC 20210
By email: ebsa.opr@dol.gov
1. Preliminary Assumptions and Cost
Estimate Inputs
For the purposes of this analysis, the
Department assumes that the percent of
retirement investors receiving electronic
disclosures would be similar to the
percent of plan participants receiving
electronic disclosures under the
Department’s 2002 and 2020 electronic
disclosure safe harbors.148 Accordingly,
the Department estimates that 96.1
percent of the disclosures sent to
retirement investors would be sent
electronically, and the remaining 3.9
percent would be sent by mail.149 For
disclosures sent by mail, the
Department estimates that entities will
incur a cost of $0.66 150 for postage and
$0.05 per page for material and printing
costs.
Additionally, the Department assumes
that several types of personnel would
perform the tasks associated with
information collection requests at an
hourly wage rate of $63.45 for clerical
personnel, $128.11 for a Senior
Executive, $134.93 for a plan fiduciary,
$155.61 for a web developer, and
$159.34 for a legal professional.151
2. Summary of Affected Entities
As discussed in the Affected Entities
section of the Regulatory Impact
Analysis, the Department expects that
the statutory exemption and
accompanying proposed regulation
would impose paperwork burdens on
automatic portability providers and
plans. For the purposes of this analysis,
the Department assumes that there will
only be one entity providing automatic
portability provider services. The
Department acknowledges that there is
significant uncertainty in how the
automatic portability provider market
will develop in the future. For a larger
discussion on the factors the
Department considered in this estimate,
refer to the Affected Entities section of
the Regulatory Impact Analysis.
In 2023, PSN noted that their member
recordkeepers represent over 185,000
employer-sponsored retirement
plans.152 PSN does not clarify what type
of plans are included in this estimate or
whether all of these plans are eligible
for automatic portability services. The
Department relies on this estimate for
purposes of this analysis with the
acknowledgement of this uncertainty.
The Department requests comment on
how many plans are expected be eligible
for automatic portability services in the
near future, as well as what percentage
of plans might be eligible in the future.
As discussed in the Affected Entities
section of the Regulatory Impact
Analysis, the Department estimates that
there are 954,786 account holders for
whom default IRAs will be established
in the first year, 976,384 in year two and
994,897 in year three. The Department
requests comment on this estimate, as
well as how it would likely change after
the exemption becomes effective. The
table below summarizes the
Department’s estimate for the accounts
eligible for automatic portability
transactions, the number of accounts
that would opt out of automatic
portability transactions, and the number
of executed automatic portability
transactions. For more information on
how these estimates were calculated,
refer to the Affected Entities section of
the Regulatory Impact Analysis.
TABLE 11—AFFECTED PARTICIPANTS/ACCOUNTS
Participants (Total) ...............................................................................................................................................
Accounts Located and Matched for Automatic Portability ...........................................................................
Accounts Opting Out of Automatic Portability ..............................................................................................
Automatic Portability Transactions ...............................................................................................................
3. Acknowledgement of Fiduciary Status
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The proposed regulation requires the
automatic portability provider to
acknowledge in writing that it is a
fiduciary upon being engaged by a plan
fiduciary. The Department anticipates
148 67
FR 17264, 85 FR 31884.
Department estimates 96.1 percent of
retirement investors receive disclosures
electronically. This is the sum of the estimated
share of retirement investors receiving electronic
disclosures under the 2002 electronic disclosure
safe harbor (58.3 percent) and the estimated share
of retirement investors receiving electronic
disclosures under the 2020 electronic disclosure
safe harbor (37.8 percent).
149 The
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Year 1
Year 2
Year 3
954,786
403,397
5,648
397,749
976,384
526,984
8,953
519,606
994,897
639,538
8,953
630,585
that a single standard acknowledgement
would be included in contracts with
plan sponsors. The Department
estimates that it would take a legal
professional one hour to draft this
acknowledgement in the first year,
resulting in an hour burden of one hour
with an equivalent cost of $159.153
Additionally, the Department
estimates that 185,000
acknowledgements of fiduciary
status 154 would be sent to plan
150 United States Postal Service. ‘‘First-Class
Mail.’’ (2023). https://www.usps.com/ship/firstclass-mail.htm.
151 Internal DOL calculation based on 2023 labor
cost data. For a description of the Department’s
methodology for calculating wage rates, see https://
www.dol.gov/sites/dolgov/files/EBSA/laws-andregulations/rules-and-regulations/technicalappendices/labor-cost-inputs-used-in-ebsa-opr-riaand-pra-burden-calculations-june-2019.pdf.
152 Portability Services Network, An Industry Led
Utility, (2023), https://psn1.com/.
153 The hour burden is estimated as: 1 automatic
portability provider × 1 hour = 1 hour. The
equivalent cost is estimated as: 1 automatic
portability provider × 1 hour × $159.34 = $159.34,
rounded to $159.
154 As of 2023, PSN estimated that their members
represented 185,000 employer-sponsored retirement
plans. (Portability Services Network, A Retirement
Industry-Led Utility, (2023), https://psn1.com/
learning-center/about-psn/a-retirement-industryled-utility.)
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fiduciaries in the first year and that it
would take a clerical professional two
minutes to prepare and send the
acknowledgement. This results in an
hour burden of 6,167 hours with an
equivalent cost of $391,275.155 The
Department expects that
acknowledgements sent in subsequent
years would be included in contract
documents and would result in a de
minimis burden.
The Department assumes that the
acknowledgement of fiduciary status
generally would be sent electronically.
Therefore, the Department assumes
there would be no associated material or
postage cost.
4. Summary Plan Description
The proposal would require the
automatic portability provider to
provide the administrator of
participating plans with a model
description of the automatic portability
program for plan sponsors to include in
their summary plan description (SPD),
including fees and expenses, as
applicable. The Department anticipates
that the automatic portability provider
would draft and send the same standard
model description to all plans. The
Department estimates that drafting the
SPD would take a legal professional 10
hours, resulting in an hour burden of 10
hours with an equivalent cost of $1,593
in the first year.156 The Department
estimates that it would take a clerical
professional two minutes to prepare and
send the summary plan description to
each of the 185,000 plans, resulting in
an annual hour burden of 6,167 hours
and an equivalent cost of $391,275.157
The Department assumes that this
document would be sent electronically
and thus would not incur any postage
or material costs.
ddrumheller on DSK120RN23PROD with PROPOSALS2
5. Policies and Procedures
The proposal requires automatic
portability providers to establish,
maintain, and follow written policies
and procedures to ensure that they
obtain or have access to current and
accurate census and contact data on
individual participants and IRA owners
and to specify standards and timeframes
that apply to all automatic portability
155 The hour burden is estimated as: 185,000 plan
fiduciaries × 2/60 hours = 6,167 hours. The
equivalent cost is estimated as: 185,000 plan
fiduciaries × 2/60 hours × $63.45 = $391,275.
156 The hour burden is estimated as: 1 automatic
portability provider × 10 hours = 10 hours. The
equivalent cost is estimated as: 1 automatic
portability provider × 10 hours × $159.34 =
$1,593.40, rounded to $1,593.
157 The hour burden is estimated as: 185,000
plans × 2/60 hours = 6,167 hours. The equivalent
cost is estimated as: 185,000 plans × 2/60 hours ×
$63.45 = $391,275.
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transactions. The proposal also includes
the ability for the automatic portability
provider to establish policies and
procedures in connection with the
limitation on the exercise of discretion.
An automatic portability provider will
be deemed to satisfy the limited
discretion requirement if it establishes,
maintains, and follows policies and
procedures regarding the process for
executing automatic portability
transactions.
The Department estimates that it
would take a legal professional
approximately 10 hours to establish, or
modify as applicable, policies and
procedures satisfying the requirements
in the first year, resulting in an hour
burden of 10 hours in the first year with
an equivalent cost of $1,593.158 In
subsequent years, the Department
estimates that it would take a legal
professional two hours for the automatic
portability provider to modify the
policies and procedures as needed,
resulting in an hour burden of two
hours with an equivalent cost of
$319.159
6. Audit
The proposal requires automatic
portability providers to retain an
independent auditor to conduct an
annual audit to demonstrate compliance
and identify any noncompliance issues.
The auditor shall, at a minimum,
review: the policies and procedures, a
representative sample of the required
disclosures, a representative sample of
automatic portability transactions, and
the requirements of section 4975(d)(25),
4975(f)(12), and these regulations. The
auditor shall prepare a written audit
report signed by the auditor.
The Department estimates that it
would take a clerical professional five
hours to collect and provide records to
the independent auditor, resulting in an
annual hour burden of five hours with
an equivalent cost of $317.160 While the
Department lacks precise information
on how much it would cost an
automatic portability provider to hire an
independent auditor to satisfy the
required conditions, the Department
158 The hour burden is estimated as: 1 automatic
portability provider × 10 hours = 10 hours. The
equivalent cost is estimated as: 1 automatic
portability provider × 10 hours × $159.34 =
$1,593.40, rounded to $1,593.
159 The hour burden is estimated as: 1 automatic
portability provider × 2 hours = 2 hours. The
equivalent cost is estimated as: 1 automatic
portability provider × 2 hours × $159.34 = $318.68,
rounded to $319.
160 The hour burden is estimated as: 1 automatic
portability provider × 5 hours = 5 hours. The
equivalent cost is estimated as: 1 automatic
portability provider × 5 hours × $63.45 = $317.25,
rounded to $317.
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estimates that it would cost $30,000.
This estimate is based on information
previously provided by stakeholders for
similar audits, and the Department
requests comment on this figure.
The Department estimates that it will
take a legal professional three hours to
draft the certification in the first year,
resulting in an hour burden of three
hours and equivalent cost of $478.161
The Department estimates that it would
take a senior executive 30 minutes to
execute the certification, resulting in an
annual hour burden of 30 minutes with
an equivalent cost of $64.162 Finally, the
Department approximates that it would
take a clerical professional 15 minutes
to send the report to the Department
once finalized, resulting in an hour
burden of 15 minutes and an equivalent
cost of $16.163
The proposal requires that the written
audit include certain information,
described in the regulatory text. If the
automatic portability provider does not
have direct access to this information,
the proposal would require the
partnering recordkeepers and
participating plans to provide such
information as a condition of receiving
the automatic portability provider’s
services. This obligation may require an
automatic portability provider to update
requirements with its recordkeepers and
plans. The Department estimates that
updating the standardized contracts
would take a legal professional at the
automatic portability provider one hour,
resulting in an hour burden of one hour
and an equivalent cost of $159.164
Additionally, the Department estimates
that it would take 15 minutes for plan
fiduciaries to execute the updated
contract, resulting in an hour burden of
46,250 hours with an equivalent cost of
$6,240,513.165
161 The hour burden is estimated as: 1 automatic
portability provider × 3 hours = 3 hours. The
equivalent cost is estimated as: 1 automatic
portability provider × 3 hours × $159.34 = $478.02,
rounded to $478.
162 The hour burden is estimated as: 1 automatic
portability provider × 30/60 hours = 30/60 hours.
The equivalent cost is estimated as: 1 automatic
portability provider × 30/60 hours × $128.11 =
$64.06, rounded to $64.
163 The hour burden is estimated as: 1 automatic
portability provider × 15/60 hours = 15/60 hours.
The equivalent cost is estimated as: 1 automatic
portability provider × 15/60 hours × $63.45 =
$15.86, rounded to $16.
164 The hour burden is estimated as: 1 automatic
portability provider × 1 hour = 1 hour. The
equivalent cost is estimated as: 1 automatic
portability provider × 1 hour × $159.34 = $159.34,
rounded to $159.
165 The hour burden is estimated as: 185,000
plans × 15/60 hour = 46,250 hours. The equivalent
cost is estimated as: 185,000 plans × 15/60 hour ×
$134.93 = $6,240,512.50, rounded to $6,240,513.
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7. Corrections
If the auditor determines the
automatic portability provider was not
in compliance with the statute and
related regulations, the proposal
includes an opportunity for selfcorrection.
As such, the proposal would require
the automatic portability provider to
establish policies for the corrections
permitted by the proposal. The
Department assumes that establishing
such policies and procedures would
take a legal professional 20 hours in the
first year, resulting in an hour burden of
20 hours and an equivalent cost of
$3,187.166
In the case of a violation, the
automatic portability provider would be
required to correct the violation and
document the correction in writing
within 30 calendar days of correction.
The Department does not expect that an
automatic portability provider would
have a violation on an annual basis, and
the Department acknowledges that the
correction and related documentation
could vary significantly, depending on
the nature of the violation. For the
purposes of this analysis, the
Department considers the cost on an
average annual basis. The Department
estimates that, on average, it would take
a clerical professional two hours to draft
and send the documentation of the
correction, resulting in an average
annual hour burden of two hours and an
equivalent cost of $127.167
8.1. Notice to the Secretary of Labor
Under the proposed regulation,
within 90 calendar days of the date that
the automatic portability provider
begins operating an automatic
portability transaction program that is
intended to rely on prohibited
transaction relief, the automatic
portability provider must notify the
Secretary. Because PTE 2019–02 was
issued to a single entity, there was no
such requirement in the exemption.
However, the Department believes based
on the small number of expected
8.2. Fee and Compensation Disclosure
Requirement
The proposed regulation requires the
automatic portability provider to
disclose fees and compensation to a
fiduciary of the employer-sponsored
plan and receive an approval in writing
in advance of the transaction. This
includes fees and compensation
received, directly or indirectly, by the
automatic portability provider
(including its affiliates) for services
provided in connection with the
automatic portability transaction. The
Department assumes that the disclosure
would be standard across transactions,
requiring an update no more frequently
than once a year. The Department
requests comment on this assumption.
The Department estimates that
preparing the disclosures of fees and
compensation would take a legal
professional two hours in the first year
to draft the disclosure. This results in a
burden of two hours and an equivalent
cost of $319 in the first year.168 The
Department estimates that it would take
a clerical professional two minutes to
prepare and send the disclosure to the
fiduciary of the estimated 185,000
plans, resulting in a burden of 6,167
hours in the first year and an equivalent
cost of $391,275.169
The Department assumes that the
disclosure and approval would be sent
electronically between the automatic
portability provider and the plan.
Therefore, the Department assumes
there would be no associated material or
postage cost.
166 The hour burden is estimated as: 1 automatic
portability provider × 20 hours = 20 hours. The
equivalent cost is estimated as: 1 automatic
portability provider × 20 hours × $159.34 =
$3.186.80, rounded to $3,187.
167 The hour burden is estimated as: 1 automatic
portability provider × 2 hours = 2 hours. The
equivalent cost is estimated as: 1 automatic
portability provider × 2 hours × $63.46 = $126.90,
rounded to $127.
168 The hour burden is estimated as: 1 automatic
portability provider × 2 hours = 2 hours. The
equivalent cost is estimated as: 1 automatic
portability provider × 2 hours × $159.34 = $318.68,
rounded to $319.
169 The hour burden is estimated as: 185,000
plans × 2/60 hours = 6,167 hours. The equivalent
cost is estimated as: 185,000 plans × 2/60 hours ×
$63.45 = $391,275.
170 The hour burden is estimated as: 1 automatic
portability provider × 2 hours = 2 hours. The
equivalent cost is estimated as: 1 automatic
portability provider × 2 hours × $159.34 = $318.68,
rounded to $319.
171 The detailed annual hour burden is estimated
as:
8. Notices and Disclosures
ddrumheller on DSK120RN23PROD with PROPOSALS2
automatic portability providers entering
the market, that the possible cost burden
associated with submitting the simple
notice via email to the Department to be
roughly $16, which is estimated as 15
minutes of a clerical worker’s time with
an hourly wage rate of $63.45. This
notification needs to be updated to
report a change to the legal or operating
name(s) of the automatic portability
provider that is relying upon the
exemption. The Department expects that
such a change would be rare and thus
does not estimate an associated cost.
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5661
8.3. Initial Enrollment Notice
The proposal requires an automatic
portability provider to send each
individual on whose behalf the
individual retirement plan was
established an initial notice within 15
calendar days of the individual
retirement plan’s enrollment or
participation in an arrangement that
includes the possibility of a future
automatic portability transaction
executed by the automatic portability
provider. The Department estimates that
preparing this disclosure would take a
legal professional two hours, resulting
in an hour burden of two hours and an
equivalent cost of $319.170
As discussed above, the Department
estimates that the disclosures would be
sent to an average of 975,35 individuals
in the first three years, and that it would
take a clerical professional two minutes
to prepare and send the disclosures.
This results in an average hour burden
of 32,512 hours with an average
equivalent cost of roughly $2 million
per year.171 The Department estimates
that an automatic portability provider
would incur $0.66 for postage and $0.25
for the paper and printing costs of five
pages, which the Department estimates
to cost on average $34,615 per year in
the first three years.172
8.4. Pre-Transaction Notice
639,538 in the third year. The
Department estimates that drafting this
notice would take a legal professional
two hours in the first year and that
preparing and sending each disclosure
would take a clerical professional two
minutes.
As discussed at the beginning of this
section, the Department estimates that
3.9 percent of the notices would be sent
by mail. The Department estimates that
an automatic portability provider would
incur a cost of $0.76 to send each
disclosure, including $0.66 for postage
and $0.10 for the paper and printing
costs of two pages. The hour burden,
equivalent cost, postage, and material
costs are summarized in the table below.
Year 1: 954,786 individuals × 2/60 hours = 31,826
hours. The equivalent cost is estimated as: 31,826
hours × $63.45 = $2,019,372.
Year 2: 976,384 individuals × 2/60 hours = 32,546
hours. The equivalent cost is estimated as: 32,546
hours × $63.45 = $2,065,052.
Year 3: 994,897 individuals × 2/60 hours = 33,163
hours. The equivalent cost is estimated as: 33,163
hours × $63.45 = $2,104,207.
172 The detailed cost is estimated as: [(((954,786
year 1) + (976,384 year 2) + (994,897 year 3)) =
2,926,067 × 3.9% = 114,117 × (5 pages × $0.05+
$0.66 postage) = $103,846 total for the three years.
$103,846.47/3 = $34,615 period average.
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TABLE 12—BURDEN AND COST TO DRAFT NOTICE
[Automatic portability provider]
Year 1
Affected Entities .......................................................................................................................
× Annual Hour Burden per Entity (Hours) ...............................................................................
= Total Hours ...........................................................................................................................
× Labor Cost (Legal Professional) ...........................................................................................
= Equivalent Cost ....................................................................................................................
1
2
2
$159.34
$318.68
Year 2
Year 3
..........................
..........................
..........................
..........................
..........................
..........................
..........................
..........................
..........................
..........................
Note: Components may not sum to parts due to rounding.
TABLE 13—BURDEN AND COST TO PREPARE AND SEND NOTICE
[Automatic portability provider]
Year 1
Number of Notices ...................................................................................................................
× Annual Hour Burden per Transaction (Hours) .....................................................................
= Total Hours ...........................................................................................................................
× Labor Cost (Clerical Professional) .......................................................................................
= Equivalent Cost ....................................................................................................................
Year 2
403,397
2/60
13,447
$63.45
$853,184.66
526,984
2/60
17,566
$63.45
$1,114,570.24
Year 3
639,538
2/60
21,318
$63.45
$1,352,623.70
Note: Components may not sum to parts due to rounding.
TABLE 14—MATERIAL AND POSTAGE COST
[Automatic portability provider]
Number of Notices ...................................................................................................................
× Percent of Notices Sent by Mail ...........................................................................................
= Number of Notices Sent by Mail ..........................................................................................
× Postage and Material Cost per Notice .................................................................................
= Material and Postage Cost ...................................................................................................
Year 1
Year 2
Year 3
403,397
3.9%
15,732
$0.76
$11,956.32
526,984
3.9%
20,552
$0.76
$15,619.52
639,538
3.9%
24,942
$0.76
$18,955.92
Note: Components may not sum to parts due to rounding.
8.5. Post-Transaction Notice
The proposal requires an automatic
portability provider, not later than three
business days after an automatic
portability transaction is completed, to
provide notice to the individual on
whose behalf the individual retirement
plan was established. As discussed
above, the Department estimates that
397,749 automatic portability
transactions would occur in first year,
519,606 in the second year, and 630,585
in the third year. The Department
estimates that drafting this notice would
take a legal professional two hours in
the first year and that preparing and
sending each disclosure would take a
clerical professional two minutes.
As discussed at the beginning of this
section, the Department estimates that
3.9 percent of the notices would be sent
by mail. The Department estimates that
an automatic portability provider would
incur a cost of $0.76 to send each
disclosure, including $0.66 for postage
and $0.10 for the paper and printing
costs of two pages. The hour burden,
equivalent cost, postage, and material
costs are summarized in the table below.
TABLE 15—BURDEN TO DRAFT NOTICE
[Automatic portability provider]
Year 1
Affected Entities .......................................................................................................................
× Annual Hour Burden per Entity (Hours) ...............................................................................
= Total Hours ...........................................................................................................................
× Labor Cost (Legal Professional) ...........................................................................................
= Equivalent Cost ....................................................................................................................
1
2
2
$159.34
$318.68
Year 2
Year 3
..........................
..........................
..........................
..........................
..........................
..........................
..........................
..........................
..........................
..........................
Year 2
Year 3
ddrumheller on DSK120RN23PROD with PROPOSALS2
Note: Components may not sum to parts due to rounding.
TABLE 16—BURDEN TO PREPARE AND SEND NOTICE
[Automatic portability provider]
Year 1
Number of Notices ...................................................................................................................
× Annual Hour Burden per Transaction (Hours) .....................................................................
= Total Hours ...........................................................................................................................
× Labor Cost (Clerical Professional) .......................................................................................
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397,749
2/60
13,258
$63.45
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519,606
2/60
17,320
$63.45
630,585
2/60
21,020
$63.45
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TABLE 16—BURDEN TO PREPARE AND SEND NOTICE—Continued
[Automatic portability provider]
Year 1
= Equivalent Cost ....................................................................................................................
Year 2
$841,239.14
Year 3
$1,098,966.69
$1,333,687.28
Note: Components may not sum to parts due to rounding.
TABLE 17—MATERIAL AND POSTAGE COST
[Automatic portability provider]
Number of Notices ...................................................................................................................
× Percent of Notices Sent by Mail ...........................................................................................
= Number of Notices Sent by Mail ..........................................................................................
× Postage and Material Cost per Notice .................................................................................
= Equivalent Cost ....................................................................................................................
Year 1
Year 2
Year 3
397,749
3.9%
15,512
$0.76
$11,789.12
519,606
3.9%
20,265
$0.76
$15,401.40
630,585
3.9%
24,593
$0.76
$18,690.68
Note: Components may not sum to parts due to rounding.
8.6. Culturally and Linguistically
Appropriate Notices
The proposed regulation would
require that notices and disclosures to
participants and IRA owners be
provided in a culturally and
linguistically appropriate manner if the
address of a recipient is in a county
where 10 percent or more of the
population is literate only in the same
non-English language. In these counties,
the automatic portability provider must
include in the English versions of all
required notices and disclosure, a
statement prominently displayed in any
applicable non-English language clearly
indicating how to access the language
services provided by the automatic
portability provider. The Department
estimates that satisfying this
requirement would result in a de
minimis cost.
Additionally, the automatic
portability provider would be required
to provide, upon request, a notice or
disclosure in any applicable nonEnglish language. In the 2016–2020 ACS
data, 230 counties or county equivalents
met or exceeded the 10 percent
threshold (rounded to the nearest
percent).173 In the 2016–2020 ACS, the
Department identified eight languages
that met the 10 percent threshold in at
least one county. The eight languages
were Spanish, Chinese, Navajo, Tagalog,
Samoan, Carolinian, and Chamorro. For
the purposes of this analysis, the
Department estimates that an automatic
portability provider will need to
translate the notices into eight
languages. Document translation costs
vary depending on the length of the
document, the complexity of the
document, and the complexity of the
language.174 One source, estimates that
the average translation cost per page
ranges between $20 and $130.175 The
Department assumes that, on average, it
will cost $100 per page to translate the
notices in this proposal. The translation
costs for the initial enrollment notice,
pre-transaction notice, and the posttransaction notice are summarized in
the table below.
ddrumheller on DSK120RN23PROD with PROPOSALS2
TABLE 18—TRANSLATION COSTS
Cost per
page
Languages
Pages
Cost
Initial Enrollment Notice ...........................................................................................................................
Pre-Transaction Notice ............................................................................................................................
Post Transaction Notice ..........................................................................................................................
8
8
8
5
2
2
$100
100
100
$4,000
1,600
1,600
Total ..................................................................................................................................................
..................
9
................
7,200
A similar analysis conducted by the
Department estimated that the average
requests for translations of written
documents averages 0.098 requests per
1,000 health benefit plan members.176
For the purposes of this analysis, the
Department assumes that recipients of
the notices in this proposal would
request translations at the same rate.
The estimated number of translated
notices requested is summarized in the
table below. The Department requests
comment on how frequently translations
would be requested for such notices.
173 The relevant ACS data set used is the U.S.
Census, 2016–2020 American Community Survey 5Year Estimates, Table B16001, Language Spoken at
Home by Ability to Speak English for the
Population 5 Years and Over, available at https://
data.census.gov/cedsci/table?tid=ACSDT5
Y2020.B16001.
174 American Translators Association, How Much
Does a Translation Cost? (May 2023), https://
www.atanet.org/client-assistance/how-much-doestranslation-cost/.
175 Lettier, Mariel, Translation Rates in 2023—A
Complete Guide, Rush Translate, (2023), https://
rushtranslate.com/blog/translation-rates#:∼:text=
for%201000%20words.-,What%20
is%20the%20average%20rate
%20for%20translation%20
per%20page%3F,certified
%20translation%20and%20charges%20%2424.95.
176 81 FR 92316.
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TABLE 19—TRANSLATED INITIAL ENROLLMENT NOTICES REQUESTED
Total Initial Enrollment Notices ............................................................................................................................
× Percent Requesting Translated Notice ............................................................................................................
= Translated Notices Distributed .........................................................................................................................
Year 1
Year 2
Year 3
954,786
0.0098%
94
976,384
0.0098%
96
994,897
0.0098%
97
Year 1
Year 2
Year 3
403,397
0.0098%
40
526,984
0.0098%
52
639,538
0.0098%
63
Year 1
Year 2
Year 3
397,749
0.0098%
39
519,606
0.0098%
51
630,585
0.0098%
62
Note: Components may not sum to parts due to rounding.
TABLE 20—TRANSLATED PRE-TRANSACTION NOTICES REQUESTED
Total Pre-Transaction Notices .............................................................................................................................
× Percent Requesting Translated Notice ............................................................................................................
= Translated Notices Distributed .........................................................................................................................
Note: Components may not sum to parts due to rounding.
TABLE 21—TRANSLATED POST-TRANSACTION NOTICES REQUESTED
Total Post-Transaction Notices ...........................................................................................................................
× Percent Requesting Translated Notice ............................................................................................................
= Translated Notices Distributed .........................................................................................................................
Note: Components may not sum to parts due to rounding.
The Department assumes that it
would take a clerical professional two
minutes to prepare and send each
disclosure. The Department assumes
that all of the translated notices would
be sent by mail. The Department
requests comment on this assumption.
Additionally, the Department estimates
that an automatic portability provider
would incur a cost of $0.66 for postage
and $0.05 for the material and printing
costs of each page. The hour burden,
equivalent cost, postage, and material
costs are summarized in the table below.
TABLE 22—BURDEN TO PREPARE AND SEND TRANSLATED DISCLOSURES
[Automatic portability provider]
Number of Notices ...............................................................................................................................................
× Annual Hour Burden per Transaction (Hours) .................................................................................................
= Total Hours .......................................................................................................................................................
× Labor Cost (Clerical Professional) ...................................................................................................................
= Equivalent Cost ................................................................................................................................................
Year 1
Year 2
Year 3
173
2/60
5.8
$63.45
$365.90
199
2/60
6.6
$63.45
$420.89
222
2/60
7.4
$63.45
$469.53
Note: Components may not sum to parts due to rounding.
TABLE 23—MATERIAL AND POSTAGE COST FOR THE TRANSLATED INITIAL ENROLLMENT NOTICES
Year 1
Initial Enrollment Notices:
Number of Notices Sent by Mail ..................................................................................................................
× Postage and Material Cost per Notice (5 Pages) .....................................................................................
= Postage and Material Cost ........................................................................................................................
94
$0.91
$85.54
Year 2
96
$0.91
$87.36
Year 3
97
$0.91
$88.27
Note: Components may not sum to parts due to rounding.
ddrumheller on DSK120RN23PROD with PROPOSALS2
TABLE 24—MATERIAL AND POSTAGE COST FOR THE TRANSLATED PRE-TRANSACTION NOTICES
Year 1
Pre-Transaction Notice:
Number of Notices Sent by Mail ..................................................................................................................
× Postage and Material Cost per Notice (2 Pages) .....................................................................................
= Postage and Material Cost ........................................................................................................................
Note: Components may not sum to parts due to rounding.
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40
$0.76
$30.40
Year 2
52
$0.76
$39.52
Year 3
63
$0.76
$47.88
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TABLE 25—MATERIAL AND POSTAGE COST FOR THE TRANSLATED POST-TRANSACTION NOTICES
Year 1
Post-Transaction Notice:
Number of Notices Sent by Mail ..................................................................................................................
× Postage and Material Cost per Notice (2 Pages) .....................................................................................
= Postage and Material Cost ........................................................................................................................
39
$0.76
$29.64
Year 2
51
$0.76
$38.76
Year 3
62
$0.76
$47.12
Note: Components may not sum to parts due to rounding.
9. Website
10. Recordkeeping
The proposal would require the
automatic portability provider to
maintain a website with three categories
of disclosures: (1) a description of all
the fees and compensation received,
directly or indirectly, by the automatic
portability provider for services
provided in connection with the
automatic portability transaction; (2) a
list of recordkeepers for each employersponsored retirement plan with respect
to which the automatic portability
provider carries out automatic
portability transactions; and (3) the
number of plans and participants
covered by each recordkeeper. The
Department assumes that an automatic
portability provider would already have
such a website, readily available access
to the required information, and would
only incur costs associated with drafting
and posting the required disclosures.
The Department estimates that a
senior executive employed by the
automatic portability provider would
spend one hour providing a web
designer the requirements for the
disclosures in the first year, resulting in
an hour burden of one hour with an
equivalent cost of $128.177 Additionally,
the Department estimates that it would
take a web designer five hours to update
and test the website in the first year,
resulting in an hour burden of five
hours and equivalent cost of $778.178
The Department estimates that it would
take a web developer one hour in
subsequent years to make any necessary
revisions or updates to the disclosures,
resulting in an hour burden of one hour
with an equivalent cost of $156.179
An automatic portability provider
would be required to maintain records
sufficient to demonstrate compliance
with the requirements of Code section
4975(f)(12) and this regulation. The
Department expects adequate records
will be automatically generated through
the systems created by the automatic
portability provider and thus would not
create an additional burden.
The proposal would require the
records to be made available to any duly
authorized employee or representative
of the Department of Labor or the
Department of the Treasury within 30
calendar days of the date of a written
request for such records. The
Department estimates that providing
records to the Department would take a
clerical professional two hours on
average to prepare and send requested
records, resulting in a per request
equivalent cost of $127.180 The
Department expects that such requests
would occur rarely. As such, the
Department estimates that one request a
year would result in an average annual
burden of $127.
ddrumheller on DSK120RN23PROD with PROPOSALS2
177 The
hour burden is estimated as: 1 automatic
portability provider × 1 hour = 1 hour. The
equivalent cost is estimated as: 1 automatic
portability provider × 1 hour × $128.11 = $128.11,
rounded to $128.
178 The hour burden is estimated as: 1 automatic
portability provider × 5 hours = 5 hours. The
equivalent cost is estimated as: 1 automatic
portability provider × 5 hours × $155.61 = $778.05,
rounded to $778.
179 The hour burden is estimated as: 1 automatic
portability provider × 1 hour = 1 hour. The
equivalent cost is estimated as: 1 automatic
portability provider × 1 hour × $155.61 = $155.61,
rounded to $156.
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11. Summary
The paperwork burden estimates are
summarized as follows:
Type of Review: New collection.
Agency: Employee Benefits Security
Administration, Department of Labor.
Title: Automatic Portability
Transaction Regulations.
OMB Control Number: 1210–NEW.
Affected Public: Business or other forprofit institution.
Estimated Number of Respondents:
185,001.
Estimated Number of Annual
Responses: 2,384,846.
Frequency of Response: Initially,
Annually, and when engaging in
exempted transaction.
Estimated Total Annual Burden
Hours: 92,887.
Estimated Total Annual Burden Cost:
$97,985.
180 The hour burden is estimated as: 1 automatic
portability provider × 2 hours = 2 hours. The
equivalent cost is estimated as: 1 automatic
portability provider × 2 hours × $63.45 = $126.90,
rounded to $127.
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H. Regulatory Flexibility Act
The Regulatory Flexibility Act
(RFA) 181 imposes certain requirements
on rules subject to the notice and
comment requirements of section 553(b)
of the Administrative Procedure Act or
any other law.182 Under section 603 of
the RFA, agencies must submit an initial
regulatory flexibility analysis (IRFA) of
a proposal that is likely to have a
significant economic impact on a
substantial number of small entities,
such as small businesses, organizations,
and governmental jurisdictions. The
Department’s IRFA is below.
The Affected Entities of the
Regulatory Impact Analysis identifies
automatic portability providers,
recordkeepers, and plans as entities
potentially impacted by the proposal.
While there may be a substantial
number of small recordkeepers and
plans affected by the proposal, the
Department has determined that there
would not be a significant impact on
these entities.183 The analysis below
estimates the effect on small automatic
portability providers.
1. Need for and Objectives of the Rule
Section 120 of the SECURE 2.0 Act of
2022 amended Code section 4975 to add
a statutory exemption for the receipt of
fees and compensation by an automatic
portability provider for services
provided in connection with an
automatic portability transaction. This
proposed rule implements the statutory
prohibited transaction under Code
section 4975 for automatic portability
transactions.
When a plan participant intentionally
or unintentionally leaves money in a
former employer’s defined contribution
181 5
U.S.C. 601 et seq.
U.S.C. 601(2), 603(a); also see 5 U.S.C. 551.
183 For recordkeepers, the proposal would require
automatic portability providers to contractually
require certain information be provided in
connection with its services as an automatic
portability provider. This would likely require the
automatic portability provider to update contracts
with plans. The Department estimates that this
would require plan fiduciaries to execute the
updated contract. The Department estimates that
this would take a plan fiduciary 15 minutes. The
Department does not consider this to be a
significant impact on plans. For plans, the proposal
would not require a substantial action, with respect
to the requirements under PTE 2019–02.
182 5
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plan, depending on plan provisions the
former employer has the option to cash
out balances of $5,000 or less and to
force a transfer of balances between
$1,001 and $5,000 to a Default IRA. This
Default IRA transfer is commonly
referred to as a ‘‘force-out’’ and is only
implemented if the participant does not
elect to have the account balance paid
directly to an eligible retirement plan or
to receive the balance directly. As part
of the SECURE 2.0 Act, the $5,000
threshold is being raised to $7,000.184
Default IRAs, while intended to
preserve retirement assets in
conservatively managed accounts,
typically yield only minimal returns for
investors while often imposing
considerable fees.185 Additionally, these
Default IRAs, established on behalf of
participants, are more susceptible to
being abandoned or forgotten while
potentially exposing those with
multiple accounts to unnecessary losses
from duplicated fees that might
otherwise be avoided were their assets
consolidated into a single account.
Cashouts also directly impact
participants by removing their assets
from tax-favored retirement accounts.186
Automated portability services allow
plan providers to transfer assets into the
plan of a participant’s new employer,
effectively automating roll-ins from
Default IRAs established on behalf of
the separated employee to consolidate
assets into an active, employersponsored defined contribution plan.
2. Affected Small Entities
The Department anticipates an
automatic portability provider would be
classified as NAICS 522320, Financial
Transactions Processing, Reserve, and
Clearinghouse Activities. According to
the size standards set by the Small
Business Administration, entities with
NAICS 522320 are considered small if
they have average annual receipts less
than $47 million.187 According to data
published by the NAICS Association, by
this standard, approximately 99 percent
of entities with NAICS 522320 are
considered small entities.188
As discussed in the Regulatory Impact
Analysis, the Department assumes that
only one entity would rely on the
proposed exemption. This entity, RCH,
in service of PSN, has stated that the
maximum per-transaction fee for its
services is $30.189 Further, as discussed
in the Regulatory Impact Analysis, the
Department estimates that there would
be 60,265 additional transactions in the
first year and an average of 399,341
additional transactions in years two
through ten. If the average transaction
fee ranged between $15 and $30, the
annual additional receipts in the first
year for this service would be between
$0.9 and $1.8 million 190 and between
$6.0 million and $12.0 million in years
two through ten.191
The automatic portability services
operations at RCH represent just one
portion of the business. However,
because the entity is private, the
Department does not have access to its
total annual receipts. While the
Department estimates that the annual
receipts of RCH may exceed the small
entity size thresholds, the Department
cannot confirm. Accordingly, the
Department has conducted an analysis
of the costs imposed by the proposal.
3. Impact of the Rule
As discussed in the Regulatory Impact
Analysis, the Department assumes that
one entity would rely on the proposed
exemption. The Department is
presenting the estimated costs and costs
savings of this entity, RCH/PSN. RCH/
PSN currently operates under an
individual exemption, PTE 2019–02.
The Regulatory Impact Analysis
considers the costs and cost savings this
proposal would impose, with respect to
the requirements under PTE 2019–02.
The Department estimates that the
proposal would result in a cost savings
for an automatic portability provider
operating under the conditions in PTE
2019–02. The table below summarizes
the costs and cost savings under the
proposal. For more information on these
estimates, refer to the Cost section of the
Regulatory Impact Analysis.
TABLE 26—PER ENTITY COSTS AND COST SAVINGS FOR AUTOMATIC PORTABILITY PROVIDERS
Year 1
Years 2–10
(average)
Acknowledgment of Fiduciary Status ......................................................................................................
Policies and Procedures ..........................................................................................................................
Independent Audit ....................................................................................................................................
Corrections to Audit .................................................................................................................................
Website Requirements ............................................................................................................................
Notice to the Secretary of Labor .............................................................................................................
Initial Enrollment Notice a .........................................................................................................................
Pre-Transaction Notice a ..........................................................................................................................
Post Transaction Notice a ........................................................................................................................
$391,434.34
1,593.40
6,034.53
6,188.20
906.16
15.86
b (1,426,704.81)
132,859.13
855,059.22
................................
$318.68
5,397.17
3,001.40
155.61
................................
b (1,302,599.20)
824,218.62
1,580,430.41
Total ..................................................................................................................................................
b (32,613.97)
1,110,922.70
ddrumheller on DSK120RN23PROD with PROPOSALS2
Note: Components may not sum to parts due to rounding.
a Includes costs associated with providing disclosures in a culturally and linguistically appropriate manner.
b This value represents a cost savings, when compared to requirements for RCH/PSN under PTE 2019–02.
184 See
SECURE 2.0 Act, Sec. 304.
Accountability Office (GAO).
‘‘401(k) Plans: Greater Protections Needed for
Forced Transfers and Inactive Accounts.’’ (2014).
186 The Code does not require a mandatory
distribution of $1000 or less to be rolled into an
IRA.
187 U.S. Small Business Administration, Table of
Small Business Size Standards Matched to North
American Industry Classification System Codes,
(March 17, 2023), https://www.sba.gov/sites/
185 Government
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188 This estimate is based on data released by the
NAICS Association. (NAICS Association, Market
Analysis Profile: NAICS Code & Annual Sales,
(2022), https://www.naics.com/custom-marketanalysis-profiles/.)
189 Portability Services Network, Our Fees,
https://psn1.com/learning-center/about-psn/what-
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190 The lower bound estimate is calculated as
60,265 additional transactions × $15 = $903,975.
The upper bound estimate is calculated as 60,265
additional transactions × $30 = $1,807,950.
191 The lower bound estimate is calculated as
399,341 additional transactions × $15 = $5,990,115.
The upper bound estimate is calculated as 399,341
additional transactions × $30 = $11,980,230.
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4. Duplicate, Overlapping, or Relevant
Federal Rules
The proposal is intended to align with
the requirements in the individual
exemption PTE 2019–02. The proposal
also incorporates the statutory
exemption requirements in the SECURE
2.0 Act and supplements them
accordingly. While PTE 2019–02 and
the statutory exemption, as
supplemented by this proposal, differ
slightly, the Department has worked to
ensure that the requirements are
complimentary. Because PTE 2019–02
and the statutory exemption provide
prohibited transaction relief for the
same categories of transactions, RCH/
PSN will only need to rely on either the
statutory or individual exemption.
Therefore, it is important for the
requirements of the statutory and
individual exemptions to be aligned.
Please note that RCH/PSN most likely
will rely on the statutory exemption,
because it has an unlimited term while
the class exemption is limited to a fiveyear term that expires on July 31, 2024.
The Department expects that RCH/PSN
will rely upon the statutory exemption
and this proposal once it becomes
effective rather than PTE 2019–02.
Because PTE 2019–02 is an individual
exemption granted solely to RCH and its
affiliates, any other automatic
portability providers that enter the
market will only be able to rely upon
the statutory exemption and this
proposal, so there will be no duplicative
requirements imposed on them.
ddrumheller on DSK120RN23PROD with PROPOSALS2
5. Description of Alternatives
Considered
This section of the IRFA analysis
addresses alternatives the Department
considered when developing the
proposal. As stated above in this
Regulatory Impact Analysis, the
Department estimates that only one
automatic portability provider would
operate under the proposal. Therefore,
the regulatory alternatives considered
for small entities does not differ from
those considered in the Regulatory
Impact Analysis. The Department
considered the following alternatives:
• Relying Only on Sub-Regulatory
Guidance—Section 120(c) directs the
Secretary of Labor to ‘‘issue such
guidance as may be necessary to carry
out the purposes of the amendments
made by this section, including
regulations or other guidance’’ no later
than 12 months after the enactment of
the statute. The Department considered
whether its responsibilities under
section 120(c) of SECURE 2.0 could be
satisfied by issuing only sub-regulatory
guidance.
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• Issuing More Limited Regulations—
The Department considered issuing
limited regulations concerning only the
portions of Code section 4975(f)(12)
focused on the audit and the
acknowledgement of fiduciary status,
both of which called on the Department
to promulgate regulations to determine
compliance. In so doing, the Department
could have issued sub-regulatory
guidance with respect to compliance
with the rest of the exemption.
• Not Requiring an Initial Enrollment
Notice—The Department considered not
including a requirement for an initial
enrollment notice in the proposed
regulations. The statute only requires
that an automatic portability provider
furnish IRA owners with a pretransaction notice and a post-transaction
notice. Additional notices were left to
the discretion of the Department in
connection with carrying out the
purposes of the statutory exemption.
• Not Requiring the Audit to be an
Independent Audit—The Department
considered proposing an audit that
could be conducted as an internal audit.
A more in-depth discussion of the
regulatory alternatives and the
Department’s decision process is
included in the Regulatory Alternatives
section of the Regulatory Impact
Analysis above.
I. Unfunded Mandates Reform Act
Title II of the Unfunded Mandates
Reform Act of 1995 requires each
Federal agency to prepare a written
statement assessing the effects of any
Federal mandate in a proposed or final
agency rule that may result in an
expenditure of $100 million or more
(adjusted annually for inflation with the
base year 1995) in any one year by state,
local, and tribal governments, in the
aggregate, or by the private sector.192
For purposes of the Unfunded Mandates
Reform Act, as well as Executive Order
12875, this proposal does not include
any Federal mandate that the
Department expects would result in
such expenditures by state, local, or
tribal governments, or the private
sector.193
J. Federalism Statement
Executive Order 13132 outlines
fundamental principles of federalism,
and requires adherence by Federal
agencies to specific criteria in the
process of their formulation and
implementation of policies that have
‘‘substantial direct effects’’ on the states,
the relationship between the national
192 2
U.S.C. 1501 et seq. (1995).
the Intergovernmental Partnership,
58 FR 58093 (Oct. 28, 1993).
government and states, or on the
distribution of power and
responsibilities among the various
levels of government.194 Federal
agencies promulgating regulations that
have federalism implications must
consult with state and local officials and
describe the extent of their consultation
and the nature of the concerns of state
and local officials in the preamble to the
final rule.
In the Department’s view, this
proposal will not have federalism
implications because it would not have
direct effects on the states, on the
relationship between the national
government and the states, nor on the
distribution of power and
responsibilities among various levels of
government. The Department welcomes
input from affected states regarding this
assessment.
Statutory Authority
This regulation is issued pursuant to
the authority in section 505 of ERISA
(Pub. L. 93–406, 88 Stat. 894; 29 U.S.C.
1135), section 102 of Reorganization
Plan No. 4 of 1978, 5 U.S.C. App. 237,
Public Law 117–328, 136 Stat. 4459, and
under Secretary of Labor’s Order No. 1–
2011, 77 FR 1088 (Jan. 9, 2012).
List of Subjects in 29 CFR Part 2550
Employee benefit plans, Individual
retirement accounts, Pensions, Plans.
For the reasons set forth in the
preamble, the Department is proposing
to amend 29 CFR part 2550 as follows:
PART 2550—RULES AND
REGULATIONS FOR FIDUCIARY
RESPONSIBILITY
1. The authority citation for part 2550
is revised to read as follows:
■
Authority: 29 U.S.C. 1135 and Secretary of
Labor’s Order No. 1–2011, 77 FR 1088
(January 9, 2012). Sec. 102, Reorganization
Plan No. 4 of 1978, 5 U.S.C. App. At 727
(2012). Sec. 2550.401c–1 also issued under
29 U.S.C. 1101. Sec. 2550.404a–1 also issued
under sec. 657, Pub. L. 107–16, 115 Stat 38.
Sec. 2550.404a–2 also issued under sec. 657
of Pub. L. 107–16, 115 Stat. 38. Sections
2550.404c–1 and 2550.404c–5 also issued
under 29 U.S.C. 1104. Sec. 2550.408b–1 also
issued under 29 U.S.C. 1108(b)(1). Sec.
2550.408b–19 also issued under sec. 611,
Pub. L. 109–280, 120 Stat. 780, 972. Sec.
2550.412–1 also issued under 29 U.S.C. 1112.
Sec. 2550.4975f–12 also issued under Pub. L.
117–328, 136 Stat. 4459.
2. Add § 2550.4975f–12 to read as
follows:
■
193 Enhancing
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194 Federalism,
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§ 2550.4975f–12 Rules relating to
automatic portability transactions.
(a) In general and scope of exemption.
(1) Internal Revenue Code (Code)
section 4975(d)(25) exempts from the
excise taxes imposed by Code section
4975(a) and (b), by reason of Code
sections 4975(c)(1)(D) and (E), the
receipt of fees and compensation by an
automatic portability provider for
services provided in connection with an
automatic portability transaction. Code
section 4975(d)(25) further exempts
from the excise taxes imposed by Code
section 4975(a) and (b), by reason of
Code section 4975(c)(1)(F), the receipt of
a fee by an automatic portability
provider from an employer-sponsored
retirement plan sponsor in lieu of a fee
imposed on an individual retirement
plan owner. Code section 4975(f)(12)
establishes conditions for automatic
portability transactions to be covered by
the exemption. Effective December 31,
1978, section 102 of the Reorganization
Plan No. 4 of 1978, 5 U.S.C. App. 237,
transferred the authority of the Secretary
of the Treasury to promulgate
regulations of the type published herein
to the Secretary of Labor. This section
implements the statutory exemption and
conditions set forth at Code section
4975(d)(25) and (f)(12).
(2) Automatic portability transaction.
An automatic portability transaction is a
transfer of assets made:
(i) From an individual retirement plan
which is established on behalf of an
individual and to which amounts were
transferred under Code section
401(a)(31)(B)(i),
(ii) To an employer-sponsored
retirement plan described in clause (iii),
(iv), (v), or (vi) of Code section
402(c)(8)(B) (other than a defined
benefit plan) in which such individual
is an active participant, and
(iii) After such individual has been
given advance notice of the transfer and
has not affirmatively opted out of such
transfer.
(3) Automatic portability provider. An
automatic portability provider is a
person, other than an individual, that
executes transfers described in
paragraph (a)(2) of this section.
(4) Code section 4975(d)(25) does not
contain an exemption for other acts
described in Code section 4975(c)(1)(D)
and (E) (relating to transfer to, or use by
or for the benefit of, a disqualified
person of the income or assets of a plan
and to fiduciaries as defined in Code
section 4975(e)(3) dealing with the
income or assets of plans in their own
interest or for their own account) that
are not services provided in connection
with automatic portability transactions.
Services shall not be considered
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provided in connection with an
automatic portability transaction if the
services would have been provided in
the absence of an automatic portability
transaction or anticipation of a future
automatic portability transaction.
Except as described in paragraph (a)(1)
of this section, Code section 4975(d)(25)
does not contain an exemption for acts
described in Code section 4975(c)(1)(F)
(relating to fiduciaries as defined in
Code section 4975(e)(3) receiving
consideration for their own personal
account from any party dealing with a
plan in connection with a transaction
involving the income or assets of the
plan). Such acts are separate
transactions not described in Code
section 4975(d)(25). Code section
4975(d)(25) also does not contain an
exemption from other provisions of the
Code, such as section 401, or other
provisions of law which may impose
requirements or restrictions relating to
the transactions which are exempt
under section 4975(d)(25).
(b) This paragraph (b) sets forth
conditions that must be satisfied in
order for an automatic portability
transaction to be covered by the
statutory exemption in Code section
4975(d)(25).
(1) Acknowledgment of fiduciary
status. The automatic portability
provider shall acknowledge in writing
that it is a fiduciary with respect to the
individual retirement plan in
connection with its processing of
automatic portability transactions:
(i) Upon being engaged by an
employer-sponsored retirement plan;
and
(ii) In the notices to individuals
described in paragraphs (b)(5)(iii)
through (v) of this section.
(2) Fees and compensation. The fees
and compensation received, directly or
indirectly, by the automatic portability
provider (including its affiliates) for
services provided in connection with
the automatic portability transaction
(including any fees or compensation in
connection with, but received before,
the transaction):
(i) Do not exceed reasonable
compensation, as the term is defined in
26 CFR 54.4975–6(e); and
(ii) Are fully disclosed to and
approved in writing in advance of the
transaction by a fiduciary of the
employer-sponsored retirement plan
described in paragraph (a)(2)(ii) of this
section which is independent of the
automatic portability provider. The
information that shall be disclosed
includes the information that is required
to be disclosed under § 2550.408b–2(c)
by a covered service provider as defined
in § 2550.408b–2(c)(1)(iii)(A) (services
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as a fiduciary within the meaning of
ERISA section 3(21)) and § 2550.408b–
2(c)(1)(iii)(B) (recordkeeping services).
(iii) An automatic portability provider
(including its affiliates) may not receive
or pay third-party fees or compensation
to any party in connection with an
automatic portability transaction. This
restriction on third-party compensation
does not apply to a fee paid by the
sponsor of an employer-sponsored
retirement plan that is in lieu of a fee
imposed on an individual retirement
plan owner or a fee that is shared with
another automatic portability provider,
as long as the overall fee associated with
the automatic portability transaction
does not increase as compared to the
fees disclosed to the plan administrator
and individuals in the notices described
in paragraphs (b)(5)(ii) and (iii) of this
section. This restriction does not
prevent an automatic portability
provider (or its affiliates) from receiving
fees for services provided to an
individual retirement plan or employersponsored retirement plan that are in
addition to services provided in
connection with the execution of
automatic portability transactions. The
prohibited transaction relief provided in
Code section 4975(d)(25) does not apply
to fees or compensation paid by an
employer-sponsored retirement plan or
to fees or compensation for such
additional services.
(iv) Automatic portability providersponsored plan. An automatic
portability provider (including its
affiliates) shall not receive any fees or
compensation in connection with an
automatic portability transaction
involving a plan that is sponsored or
maintained by the automatic portability
provider or an affiliate.
(3) Data usage and protection. An
automatic portability provider
(including its affiliates) shall not market
or sell to third parties participantrelated data or individual retirement
plan data that the automatic portability
provider accesses or obtains in
connection with an automatic
portability transaction. An automatic
portability provider shall take all
necessary steps that a reasonable
fiduciary would take to safeguard
participant and individual retirement
plan data to the extent the automatic
portability provider exercises control
over the data. If data is improperly
accessed, the automatic portability
provider shall take appropriate remedial
actions that to safeguard the data based
on the sensitivity of the accessed data
and the nature and severity of the
breach.
(4) Open participation and limitation
on exclusive engagements. (i) The
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automatic portability provider shall
offer to execute automatic portability
transactions on the same terms to any
employer-sponsored retirement plan
described in paragraph (a)(2)(ii) of this
section.
(ii) The automatic portability provider
shall not restrict or limit the ability of
unrelated third parties to develop,
market, and/or maintain a locate-andmatch process or to execute automatic
portability transactions separate from
the automatic portability provider. The
automatic portability provider also shall
not restrict the ability of an employersponsored retirement plan, individual
retirement plan provider (including
custodians, trustees, and issuers), or
recordkeeper to engage other automatic
portability providers to execute
automatic portability transactions.
(5) Notices—(i) Notice to the Secretary
of Labor. Within 90 calendar days of the
date that the automatic portability
provider begins operating an automatic
portability transaction program that is
intended to rely on the prohibited
transaction relief provided by Code
section 4975(d)(25), the automatic
portability provider shall notify the
Secretary of Labor at auto-portability@
dol.gov that it is operating as an
automatic portability provider and
relying on Code section 4975(d)(25),
(f)(12), and these regulations. Each
automatic portability provider that
relies upon the exemption must report
the legal name of each business entity
relying upon the exemption in the email
to the Secretary and any name under
which the automatic portability
provider may be operating. This
notification needs to be reported only
once unless there is a change to the legal
name or operating name(s) of the
automatic portability provider relying
upon the exemption. The automatic
portability provider shall have 90
calendar days to report a change to the
legal or operating name. The automatic
portability provider may notify the
Secretary if it is no longer operating in
reliance upon this exemption.
(ii) Notice to plan administrator. The
automatic portability provider shall
provide each plan administrator a
model description of the automatic
portability program, including fees and
expenses related to the automatic
portability program and automatic
portability transactions. For any
employer-sponsored plan that is subject
to ERISA’s summary plan description
requirement, the automatic portability
provider shall send a notice to each
administrator of such plan that
participates in an arrangement with the
automatic portability provider that the
administrator must fully describe the
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automatic portability program and
disclose fees related to an automatic
portability transaction in its summary
plan description or summary of material
modifications. The model description
must be written in a manner so that it
could be used by the plan administrator
to fulfill summary plan description or
summary of material modifications
obligations, as relevant.
(iii) Initial enrollment notice. The
automatic portability provider shall
furnish each individual on whose behalf
the individual retirement plan was
established an initial notice within 15
calendar days of the individual
retirement plan’s enrollment or
participation in an arrangement that
includes the possibility of a future
automatic portability transaction
executed by the automatic portability
provider. The notice shall include:
(A) A description of the automatic
portability transaction, including that
the automatic portability provider will
send a notice at least 60 calendar days,
but no more than 90 calendar days, in
advance of executing an automatic
portability transaction;
(B) A description of the applicable
account fees that will be charged in
connection with the automatic
portability transaction;
(C) A clear and prominent description
of the individual’s right to affirmatively
elect not to participate in the
transaction, the other available
distribution options, and the procedures
to take advantage of such options;
(D) The contact information for the
automatic portability provider and the
individual retirement plan provider (if
not the automatic portability provider),
including toll-free customer service
numbers; and
(E) The right to designate a
beneficiary and the procedures to do so,
including the appropriate party to
contact if the automatic portability
provider is not the provider of the
individual retirement plan.
(iv) Pre-transaction notice. The
automatic portability provider shall
furnish each individual on whose behalf
the individual retirement plan was
established a pre-transaction notice. The
notice shall be provided at least 60
calendar days, but not more than 90
calendar days, in advance of an
automatic portability transaction. The
notice shall include:
(A) A description of the automatic
portability transaction and a complete
and accurate statement of all fees which
will be charged and all compensation
which will be received by the automatic
portability provider (including its
affiliates) in connection with the
transaction. The description of the
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automatic portability transaction shall
include that the individual retirement
plan assets will not be transferred for at
least 60 calendar days from the date of
the notice, that the individual has been
matched with an account in an
employer-sponsored retirement plan of
a current employer, the name of the
employer, and the name of the plan;
(B) A statement requesting the
individual’s affirmative consent to
transfer the assets from the individual
retirement plan to the account in the
employer-sponsored retirement plan;
(C) A description of the individual’s
right to affirmatively elect not to
participate in the transaction, the other
available distribution options, the
deadline by which the individual must
make an election, and the procedures
for doing so. The description shall
indicate that if the individual does not
affirmatively consent or elect not to
participate by the deadline, the
automatic portability provider will
consider the individual to have given
consent to the automatic portability
transaction;
(D) The contact information for the
automatic portability provider and the
individual retirement plan provider (if
not the automatic portability provider)
including toll-free customer service
numbers that the individual may
contact to make an election, pursue
other available distributions options, or
for other information or assistance with
the automatic portability program; and
(E) The right to designate a
beneficiary and the procedures to do so
for the individual retirement plan if it
is not transferred to an employersponsored retirement plan in which the
individual is an active participant,
including the appropriate party to
contact if the automatic portability
provider is not the provider of the
individual retirement plan.
(v) Post-transaction notice. Not later
than 3 business days after an automatic
portability transaction is completed, the
automatic portability provider shall
provide notice to the individual on
whose behalf the individual retirement
plan was established of:
(A) The actions taken by the
automatic portability provider with
respect to the individual retirement
plan, including that the individual was
matched with an account in an
employer-sponsored retirement plan of
the individual’s current employer;
(B) All relevant information regarding
the location and amount of any
transferred assets which includes, but is
not limited to, the name of the employer
and the name of the plan;
(C) A statement of fees charged
against the individual retirement plan
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by the automatic portability provider or
its affiliates in connection with the
transfer; and
(D) A customer service telephone
number at which the individual can
contact the automatic portability
provider.
(vi) Accessibility of notices. (A) The
notices described in paragraphs
(b)(5)(iii) through (v) of this section
shall be written in a manner calculated
to be understood by the average person,
which for purposes of these regulations,
is the average intended recipient. The
disclosures must be accurate, not
include inaccurate or misleading
statements, and be sufficiently
comprehensive to apprise the individual
of their rights and obligations under the
automatic portability program, must not
be formatted to have the effect of
misleading, misinforming or failing to
inform the recipient, and be written in
a culturally and linguistically
appropriate manner. In fulfilling these
requirements, the automatic portability
provider shall exercise considered
judgment and discretion by taking into
account such factors as the level of
comprehension and education of the
typical intended recipient and the
complexity of the terms of the program.
Consideration of these factors will
usually require the limitation or
elimination of technical jargon and of
long, complex sentences, the use of
clarifying examples and illustrations,
the use of clear cross references, and a
table of contents be included.
(B) Standards for culturally and
linguistically appropriate notices. An
automatic portability provider is
considered to provide relevant notices
and disclosures in a ‘‘culturally and
linguistically appropriate manner’’ if the
automatic portability provider meets all
the requirements of the paragraph
(b)(5)(vi)(C) of this section with respect
to the applicable non-English languages
described in paragraph (b)(5)(vi)(D) of
this section.
(C) Requirements. (1) The automatic
portability provider must provide oral
language services (such as a telephone
customer assistance hotline) that
include the ability to answer questions
in any applicable non-English language
and provide assistance with automatic
portability transactions in any
applicable non-English language;
(2) The automatic portability provider
must provide, upon request, a notice or
disclosure in any applicable nonEnglish language; and
(3) The automatic portability provider
must include in the English versions of
all required notices and disclosure, a
statement prominently displayed in any
applicable non-English language clearly
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indicating how to access the language
services provided by the automatic
portability provider.
(D) Applicable non-English language.
With respect to an address in any
United States county to which a notice
is sent, a non-English language is an
applicable non-English language if ten
percent or more of the population
residing in the county is literate only in
the same non-English language, as
determined in guidance published by
the Secretary of Labor.
(vii) Ensuring participants receive
notices and disclosures. The automatic
portability provider shall adopt and
implement prudent policies and
procedures to ensure that it obtains or
has access to current and accurate
census and contact data on individual
participants and individuals on whose
behalf an individual retirement plan is
established, necessary to effectively
administer the automatic portability
program. An individual cannot
participate in the automatic portability
provider’s automatic portability
transaction program unless the
automatic portability provider has a
reasonable basis for believing the
automatic portability provider has a
valid address for the individual. Notices
and disclosures to participants and
individuals must be made using
methods that satisfy the disclosure
requirements in § 2520.104b–1(b) of this
chapter.
(6) Frequency of searches. The
automatic portability provider shall use
a locate-and-match service to query
cooperating record-keepers, on at least a
monthly basis, whether the individual
for whose benefit the individual
retirement plan is established has an
active account in an employersponsored retirement plan. The
automatic portability provider shall take
prudent steps to verify the accuracy of
the individual’s information (including
such information as the participant’s
social security number, first name, last
name, middle name or initial, date of
birth, phone number, etc.) to ensure the
match is correct. The verification steps
must include ongoing participant
address validation searches via
automated checks of:
(i) National Change of Address
records;
(ii) Two separate commercial locator
databases; and
(iii) Any internal databases
maintained by the automatic portability
provider. If a valid address is not
obtained from the automated checks, the
automatic portability provider must also
perform a manual internet-based search.
These verification steps must be
performed at least twice in the first year
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an account is entered into the automatic
portability provider system and once a
year thereafter.
(7) Monitoring transfers into an
employer-sponsored retirement plan.
The automatic portability provider shall
ensure that an employer-sponsored
retirement plan that accepts transfers
into the plan in connection with an
automatic portability transaction
designates a plan official responsible for
monitoring transfers into the plan due to
automatic portability transactions,
including ensuring the amounts
received on behalf of a participant are
invested properly. Amounts received
are deemed to be invested properly if
made in accordance with the
participant’s current investment
election under the plan or, if no election
is made or permitted, in the plan’s
qualified default investment alternative
under § 2550.404c–5 or in another
investment selected by a fiduciary with
respect to such plan.
(8) Timeliness of automatic portability
transaction execution. If the automatic
portability provider identifies a match,
and the affected individual does not
affirmatively elect not to participate in
the transaction within the timeframe
indicated in the pre-transaction notice,
the automatic portability provider shall,
after liquidating the assets of the
individual retirement plan to cash in
accordance with the timeframes
established in the policies and
procedures adopted pursuant to
paragraph (b)(9) of this section, transfer
the account balance of such plan as
soon as practicable to the participant’s
account in the employer-sponsored
retirement plan.
(9) Limitation on exercise of
discretion and on policies and
procedures. The automatic portability
provider shall neither have nor exercise
discretion to affect the timing or amount
of the transfer, other than to deduct the
appropriate fees as described in
paragraph (b)(2) of this section. An
automatic portability provider will be
deemed to satisfy this paragraph (b)(9)
if it establishes, maintains, and follows
written policies and procedures that set
specific standards and timeframes that
apply to all automatic portability
transactions. The policies and
procedures shall, at a minimum,
address:
(i) The process to ensure that an
employer-sponsored retirement plan
that accepts transfers into the plan in
connection with an automatic
portability transaction designates a
representative that will be responsible
for monitoring transfers into the plan
due to automatic portability transactions
and investment of amounts received;
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(ii) The process and timing for
liquidating the assets of the individual
retirement plan to cash and closing the
individual retirement plan;
(iii) The process for verifying and
validating that the correct fees are
withdrawn from the individual
retirement plan;
(iv) The process and timing for
transmitting assets to employersponsored retirement plans;
(v) The process for verifying the assets
were received by the employersponsored retirement plan; and
(vi) The process for sending all
required notices to plan participants or
individuals on whose behalf an
individual retirement plan is
established, in accordance with
paragraph (h) of this section.
(c) Annual audit and corrections. (1)
An automatic portability provider shall
retain an independent auditor to
conduct an annual audit to assist the
automatic portability provider in
demonstrating compliance with the
automatic portability provider’s policies
and procedures, the requirements of
Code section 4975(d)(25), (f)(12), and
these regulations and identifying any
instances of noncompliance. The
auditor shall, at a minimum, review: the
policies and procedures, a
representative sample of the required
disclosures, a representative sample of
automatic portability transactions, and
the requirements of Code section
4975(d)(25), 4975(f)(12), and these
regulations. The auditor shall have
appropriate technical training and
proficiency with respect to ERISA Title
I, the Code, and the automatic
portability transactions described in
these regulations to conduct the audit.
(2) Independence of auditor. An
auditor is independent if the automatic
portability provider does not have an
ownership interest in or control the
auditor and the auditor derives no more
than two percent of its annual revenue
from services provided directly or
indirectly to the automatic portability
provider or any of its affiliates.
(3) Access to information. The
automatic portability provider shall
grant the auditor access to its automatic
portability operations and records
(including, as necessary, the operations
and records of its affiliates) sufficient to
allow the auditor to make the
determinations and findings required by
these regulations.
(4) Audit report findings and
determinations. The auditor shall
prepare a written audit report signed by
the auditor. The written audit report
shall include the following findings and
determinations:
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(i) The total number of completed
automatic portability transactions
during the audit period;
(ii) Whether the notices in the
reviewed sample met the timing and
content requirements of Code section
4975(f)(12) and these regulations and
were delivered in a manner reasonably
designed to ensure affected individuals
would receive the notices;
(iii) Whether any required notices
were returned as undeliverable and
what steps were taken by the automatic
portability provider to address
undeliverable notices;
(iv) Whether the notices in the
reviewed sample were written in a
manner reasonably calculated to be
understood by the average intended
recipient, including whether the notices
include inaccurate or misleading
statements;
(v) Whether the appropriate accounts
in the employer-sponsored retirement
plan in the reviewed sample received all
the assets due as a result of the
automatic portability transaction;
(vi) A summary of the fees individuals
were charged by the automatic
portability provider (and any affiliates)
for services provided in connection with
automatic portability transactions,
including whether those fees increased
since the last report;
(vii) Whether the fees and
compensation received by the automatic
portability provider (including its
affiliates) in connection with the
automatic portability transactions are
consistent with the fees authorized by
appropriate plan fiduciaries and did not
exceed reasonable compensation, as
described in paragraph (b)(2)(i) of this
section;
(viii) Whether all requirements of
Code section 4975(f)(12) and these
regulations were satisfied with respect
to:
(A) The policies and procedures; and
(B) The transactions and disclosures
that were reviewed;
(ix) A summary of compliance issues
reported to or discovered by the auditor,
the auditor’s recommendations, and the
extent to which the automatic
portability provider has addressed or is
addressing the issues pursuant to the
correction procedures in paragraph
(c)(9) of this section;
(x) Any other recommendations from
the auditor to improve the policies and
procedures and overall execution of
automatic portability transactions to
ensure compliance with the
requirements of Code section 4975(f)(12)
and these regulations; and
(xi) A description of the auditor’s
methodology and procedures in
performing the audit.
PO 00000
Frm 00049
Fmt 4701
Sfmt 4702
5671
(5) Additional information to be
included in the audit report. The
written audit report shall also include:
(i) The number of mandatory
distributions into individual retirement
plans described in paragraph (a)(2)(i) of
this section for which the automatic
portability provider is conducting
searches as required by paragraph (b)(6)
of this section; and
(ii) The number of individual
retirement plans described in paragraph
(a)(2)(i) of this section:
(A) Which have been transferred to
designated beneficiaries;
(B) For which the automatic
portability provider is searching for next
of kin due to the death of an account
holder without a designated beneficiary;
and
(C) That were reduced to a zero
balance while in the automatic
portability provider’s custody.
(6) Records not in possession of the
automatic portability provider. If the
automatic portability provider does not
have access to the records or
information to be included in the audit
report, the automatic portability
provider, as a condition of its services,
shall require that the appropriate
information is provided to the automatic
portability provider.
(7) Timing of the audit report and
submission to the Secretary of Labor.
The written audit report shall be
completed within 180 calendar days
following the annual period to which
the audit relates. The automatic
portability provider shall submit the
written audit report to the Secretary of
Labor at auto-portabilityaudit@dol.gov
within 30 calendar days of completion.
(8) Certification of audit review and
addressing compliance issues. The
automatic portability provider shall
include a certification filed with the
written audit report, under penalty of
perjury, that the automatic portability
provider reviewed the audit report. The
automatic portability provider shall also
certify that it has addressed, corrected,
or remedied any noncompliance or
inadequacy in its compliance or has an
appropriate written plan to address any
such issues identified in the audit
report.
(9)(i) Correction procedures. The
automatic portability provider shall
establish procedures for the correction
of failures to comply with Code section
4975(f)(12) and these regulations. The
procedures shall, at a minimum, require
the automatic portability provider to
notify the auditor during the applicable
audit cycle of any correction(s) the
automatic portability provider made on
its own. The automatic portability
provider may engage in corrections on
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Federal Register / Vol. 89, No. 19 / Monday, January 29, 2024 / Proposed Rules
its own, without the auditor’s input and
without losing relief under Code section
4975(d)(25), if:
(A) Either the violation did not result
in losses to the individual retirement
plan or the automatic portability
provider made the individual retirement
plan whole for any resulting losses;
(B) The automatic portability provider
corrects the violation and documents
the correction in writing within 30
calendar days of correction;
(C) The correction occurs no later
than 90 calendar days after the
automatic portability provider learned
of the violation or reasonably should
have learned of the violation; and
(D) All instances of noncompliance
and accompanying corrections are
reported in writing to the auditor.
(ii) Auditor recommendations. If the
auditor determines the automatic
portability provider was not in
compliance with any provision of Code
section 4975(f)(12) or these regulations
during the audit period, the auditor
shall identify the instances of
noncompliance in the audit report along
with a description of corrective actions
taken by the automatic portability
provider and any recommended
additional corrections. An automatic
portability provider will not be treated
as having failed to comply with any
provision of Code section 4975(f)(12) or
these regulations, provided it corrects
any instance of noncompliance
identified by the auditor as soon as
reasonably practicable.
(10) Additional corrective actions.
The Secretary of Labor may require the
automatic portability provider to submit
to supplemental audits and corrective
actions, including a temporary
prohibition from relying on the
exemption if the automatic portability
provider or an affiliate is found to be:
(i)(A) Engaging in a systematic pattern
or practice of violating any provision of
Code section 4975(f)(12) or this
regulation;
(B) Intentionally violating any
provision of Code section 4975(f)(12) or
this regulation; or
(C) Providing materially misleading
information to the Secretary of Labor,
Secretary of the Treasury, or the auditor
in connection with automatic portability
transactions; or
(ii) The subject of a foreign or
domestic criminal conviction:
(A) Involving or arising out of the
conduct of the automatic portability
program or any automatic portability
transaction; or
VerDate Sep<11>2014
20:42 Jan 26, 2024
Jkt 262001
(B) For any felony involving larceny,
theft, robbery, extortion, forgery,
counterfeiting, fraudulent concealment,
embezzlement, fraudulent conversion,
misappropriation of funds or securities,
or conspiracy to commit any such
crimes or a crime in which any of the
foregoing crimes is an element.
(d) Website. (1) The automatic
portability provider shall maintain a
website which displays:
(i) A description of all the fees and
compensation received, directly or
indirectly, by the automatic portability
provider for services provided in
connection with the automatic
portability transaction;
(ii) A list of recordkeepers for each
employer-sponsored retirement plan
with respect to which the automatic
portability provider carries out
automatic portability transactions; and
(iii) The number of plans and
participants covered by each
recordkeeper.
(2) The website is not required to be
limited to the information described in
paragraphs (d)(1)(i) through (iii) of this
section, and may include other
information, for example, about the
automatic portability provider, the
automatic portability program, or other
services provided to employersponsored retirement plans or
individual retirement plans, but the
automatic portability provider must
ensure that the information described in
paragraphs (d)(1)(i) and (ii) of this
section is displayed in a way that
clearly sets forth the automatic
portability transaction fees and
compensation separately from other fees
and compensation.
(e) Limitation on exculpatory
provisions. The automatic portability
provider shall not include exculpatory
provisions in its contracts or
communications with individuals
described in paragraph (a)(2)(i) of this
section disclaiming or limiting the
automatic portability provider’s liability
in the event the automatic portability
provider causes an improper transfer of
assets in connection with an automatic
portability transaction. This limitation
does not prohibit disclaimers for:
(1) Liability caused by an error, a
misrepresentation, or misconduct of a
party independent of the automatic
portability provider and its affiliates, or
(2) Damages arising from acts outside
the control of the automatic portability
provider.
(f) Record retention requirements.
(1)(i) An automatic portability provider
PO 00000
Frm 00050
Fmt 4701
Sfmt 9990
shall, for not less than 6 years after the
automatic portability transaction has
occurred, maintain records sufficient to
demonstrate compliance with the
requirements of Code section 4975(f)(12)
and this regulation.
(ii) No prohibited transaction will be
considered to have occurred solely on
the basis of the unavailability of such
records if they are lost or destroyed due
to circumstances beyond the control of
the automatic portability provider
before the end of the six-year period. An
automatic portability provider’s failure
to maintain the records necessary to
determine whether the conditions of
Code section 4975(f)(12) and this
regulation have been met will result in
the loss of the relief provided by Code
section 4975(d)(25) and this regulation
only for the transaction or transactions
for which such records are missing or
have not been maintained.
(2) The records maintained to
demonstrate compliance with the
requirements of Code section 4975(f)(12)
and this regulation shall be made
available to any duly authorized
employee or representative of the
Department of Labor or the Department
of the Treasury within 30 calendar days
of the date of a written request for such
records by the Department of Labor or
the Department of the Treasury.
(g) Definitions. (1) A person or entity
is an affiliate if, directly or indirectly
(through one or more intermediaries) it
controls, is controlled by, or is under
common control with such person or
entity; or is an officer, director, or
employee of, or partner in, such person
or entity. Unless otherwise specified, an
affiliate refers to an affiliate of the
automatic portability provider.
(2) The term control means the power
to exercise a controlling influence over
the management or policies of an entity
or person other than an individual.
(3) The term individual retirement
plan means:
(A) An individual retirement account
described in Code section 408(a); and
(B) An individual retirement annuity
described in Code section 408(b).
Signed at Washington, DC, this 16th day of
January 2024.
Lisa M. Gomez,
Assistant Secretary, Employee Benefits
Security Administration, U.S. Department of
Labor.
[FR Doc. 2024–01208 Filed 1–26–24; 8:45 am]
BILLING CODE 4510–29–P
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[Federal Register Volume 89, Number 19 (Monday, January 29, 2024)]
[Proposed Rules]
[Pages 5624-5672]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-01208]
[[Page 5623]]
Vol. 89
Monday,
No. 19
January 29, 2024
Part II
Department of Labor
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Employee Benefits Security Administration
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29 CFR Part 2550
Automatic Portability Transaction Regulations; Proposed Rule
Federal Register / Vol. 89 , No. 19 / Monday, January 29, 2024 /
Proposed Rules
[[Page 5624]]
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DEPARTMENT OF LABOR
Employee Benefits Security Administration
29 CFR Part 2550
RIN 1210-AC21
Automatic Portability Transaction Regulations
AGENCY: Employee Benefits Security Administration (EBSA), Labor.
ACTION: Notice of proposed rulemaking.
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SUMMARY: This document contains a proposed rule that would implement
the statutory prohibited transaction exemption under section 4975 of
the Internal Revenue Code (Code) for certain automatic portability
transactions. Section 120 of the SECURE 2.0 Act of 2022 amended Code
section 4975 to add a statutory exemption for the receipt of fees and
compensation by an automatic portability provider for services provided
in connection with an automatic portability transaction. Specifically,
Code section 4975(d)(25) provides prohibited transaction relief if the
conditions set forth in Code section 4975(f)(12) are met. The
Department of Labor is proposing this regulation because, with certain
exceptions not relevant here, section 102 of Reorganization Plan No. 4
of 1978 transfers the authority of the Secretary of the Treasury to
issue certain regulations, rulings, opinions, and exemptions under Code
section 4975 to the Secretary of Labor. Consistent with this transfer
of authority, Congress authorized and directed the Department of Labor
to issue regulations under Code section 4975 to implement provisions of
section 120 of the SECURE 2.0 Act.
DATES: Comments on these proposed rules are due on March 29, 2024.
ADDRESSES: EBSA encourages interested persons to submit their comments
on these proposed rules online. You may submit comments, identified by
RIN 1210-AC21, by either of the following methods:
Federal eRulemaking Portal: www.regulations.gov. Follow the
instructions for submitting comments.
Mail: Office of Regulations and Interpretations, Employee Benefits
Security Administration, Room N-5655, U.S. Department of Labor, 200
Constitution Avenue NW, Washington, DC 20210, Attn: Automatic
Portability Regulations RIN 1210-AC21.
Instructions: All submissions must include the agency name and
Regulatory Identifier Number RIN 1210-AC21 for this rulemaking. If you
submit comments online, do not submit paper copies. All comments
received will be posted without change on www.regulations.gov and
www.dol.gov/agencies/ebsa and will be made available for public
inspection at the Public Disclosure Room, N-1513, Employee Benefits
Security Administration, U.S. Department of Labor, 200 Constitution
Avenue NW, Washington, DC 20210.
Warning: Do not include any personally identifiable or confidential
business information in your comment that you do not want publicly
disclosed. Comments are public records that are posted online as
received and can be retrieved by most internet search engines.
Docket: Go to the Federal eRulemaking Portal at https://www.regulations.gov for access to the rulemaking docket, including any
background documents and the plain-language summary of the proposed
rule of not more than 100 words in length required by the Providing
Accountability Through Transparency Act of 2023.
FOR FURTHER INFORMATION CONTACT: Scott Ness, Office of Regulations and
Interpretations, Employee Benefits Security Administration, (202) 693-
8500 or Joseph Brennan, Office of Exemption Determinations, Employee
Benefits Security Administration, (202) 693-8456. These are not toll-
free numbers.
SUPPLEMENTARY INFORMATION:
A. Background Regarding Automatic Portability Transactions
Section 120 of the SECURE 2.0 Act of 2022 (SECURE 2.0 Act) \1\
amended Internal Revenue Code (Code) section 4975 to add a statutory
prohibited transaction exemption for the receipt of fees and
compensation by an ``automatic portability provider'' for services
provided in connection with an ``automatic portability transaction.''
Specifically, Code section 4975(d)(25) provides prohibited transaction
relief if the conditions set forth in Code section 4975(f)(12) are met.
In the retirement plan context, portability refers to the process of
transferring workers' retirement savings from one tax-advantaged plan
or account to another when their covered service with an employer
terminates (e.g., from a traditional 401(k) plan account to a
traditional individual retirement plan--such as an individual
retirement account or annuity described in Code section 408(a) or (b)
(IRA)--or from a Roth 401(k) plan account to a Roth IRA. As described
in more detail below, the term ``automatic portability transaction''
means a transaction in which mandatory distributions pursuant to Code
section 401(a)(31)(B)(i) from an employer-sponsored retirement plan to
an IRA established on behalf of an individual are subsequently
transferred to an eligible employer-sponsored plan in which such
individual is an active participant, after such individual has been
given advance notice of the transfer and has not affirmatively opted
out of such transfer. According to the most recent Department of Labor
(Department) annual report (Form 5500) data, there are an estimated
635,000 defined contribution plans, covering an estimated 86.6 million
participants with account balances totaling $9.3 trillion in assets.\2\
With the proliferation of these accounts, there is a particular need
for this type of automatic portability solution to help ensure
participants remain connected to their retirement savings when they
change jobs.\3\
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\1\ Public Law 117-328, Dec. 29, 2022, Division T.
\2\ 2021 Form 5500 Data, U.S. Department of Labor.
\3\ Although the Department believes this body of plans is the
one primarily relevant for purposes of the application of the
statutory exemption, the Department notes that additional defined
contribution plans that do not file a Form 5500 or Form 5500-SF and
certain defined benefit plans are eligible to make mandatory
distributions. See the regulatory impact analysis sections in this
document for a discussion of the plans and participants impacted by
this proposed regulation.
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1. Mandatory Distributions of Small Account Balances
Under the Code, qualified retirement plans are permitted to include
provisions requiring an immediate distribution to a separating
participant without the participant's consent if the present value of
the participant's vested accrued benefit does not exceed $5,000 \4\
(for distributions made after December 31, 2023, the $5,000 threshold
is increased to $7,000).\5\ These transactions are generally referred
to as ``mandatory distributions.''
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\4\ Code sections 411(a)(11) and 417(e). See Code section
411(a)(11)(D) for circumstances where the amount of a distribution
may be greater than $5,000 if a participant made a previous roll-in
to a plan from an IRA. In such circumstances, the roll-in funds are
not considered in determining the $5,000 vested accrued balance, so
a larger amount of assets could be subject to a mandatory
distribution under the terms of the plan.
\5\ See SECURE 2.0 Act Sec. 304, updating dollar limit for
mandatory distributions.
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Code section 401(a)(31)(B) provides that a trust will not
constitute a qualified trust unless the plan of which the trust is a
part provides that: (1) if a mandatory distribution of more than $1,000
is to be made; and (2) the participant does not elect to have such
distribution paid directly to an eligible
[[Page 5625]]
retirement plan or to receive the distribution directly, then (3) the
plan administrator must transfer such distribution to an IRA of a
designated trustee or issuer.\6\ These distributions are referred to as
``automatic rollovers of mandatory distributions.'' Code section
401(a)(31)(B)(i) requires the plan administrator to notify the
participant in writing, either separately or as part of the notice
required under Code section 402(f), that the participant may transfer
the distribution to another IRA.\7\ Code section 402(f)(1)(A) requires
plan administrators to provide a participant with a written notice
within a reasonable period of time before making an automatic rollover
of a mandatory distribution explaining, among other things, the
following: (1) the Code provisions under which the participant may
elect to have the distribution transferred directly to an eligible
retirement plan and that if an election is not made, such automatic
rollover of a mandatory distribution is subject to the provisions of
Code section 401(a)(31)(B); (2) the provision requiring income tax
withholding if the distribution is not directly transferred to an
eligible retirement plan; and (3) the provisions under which the
distribution will not be taxed if the participant transfers the
distribution amount (including amounts withheld under Code section
3405) to an eligible retirement plan within 60 days of receipt.\8\
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\6\ Code section 401(a)(31)(B)(i) requires the transfer be made
to an ``individual retirement plan,'' defined by Code section
7701(a)(37) as an individual retirement account described in Code
section 408(a) and an individual retirement annuity described in
Code section 408(b). See IRS Notice 2005-5, 2005-1 C.B. 337,
regarding the applicability of Code section 401(a)(31)(B) to
retirement plans under Code sections 401(a), 401(k), 403(a), 403(b),
and 457(b) (https://www.irs.gov/irb/2005-03_IRB).
\7\ ;Code section 401(a)(31)(B)(i).
\8\ See 29 CFR 2550.404a-2; Code section 401(a)(31)(B)(i); and
Code section 402(f).
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The Secretary of Labor (the Secretary) issued regulations in 2004
providing safe harbors for such automatic rollovers of mandatory
distributions from a plan subject to Title I of the Employee Retirement
Income Security Act (ERISA) which provide that (1) a plan
administrator's designation of an IRA to receive the automatic rollover
and (2) the initial investment choice for the rolled-over funds will be
deemed to satisfy the fiduciary responsibility provisions of ERISA
section 404(a) if the safe harbor requirements are met.\9\
Specifically, plan administrators complying with the Department's
fiduciary safe harbor regulations must invest the former participant's
assets in an investment product designed to preserve principal and
provide a reasonable rate of return.\10\ An IRA established pursuant to
Code section 401(a)(31)(B) and/or in compliance with the Department's
regulation is commonly referred to respectively as a ``Default IRA'' or
``Safe Harbor IRA.''
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\9\ See 69 FR 58017 (Sep. 28, 2004).
\10\ 29 CFR 2550.404a-2(c)(3)(i).
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2. Automatic Portability Transactions
An automatic portability transaction as defined in Code section
4975(f)(12)(A)(i) builds on the portability concept and is part of a
larger framework for facilitating the movement of assets from one tax-
favored retirement plan to another. The overall terms and details of an
automatic portability framework would generally be memorialized in
contracts with recordkeepers, plan sponsors, and the automatic
portability provider. A comprehensive automatic portability framework
includes three key components. First, there is a ``transfer-out'' plan
that initiates a mandatory distribution. Second, there is an IRA
established in accordance with Code Section 401(a)(31)(B) (a Default
IRA) to receive (via a rollover) and hold the distributed funds.\11\
Third, there is a ``transfer-in'' plan that receives the roll-in
distribution from the Default IRA when an IRA owner is matched with an
account in an eligible employer-sponsored plan at a new employer.
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\11\ This may be, but is not necessarily, a Safe Harbor IRA
established in accordance with the Department's regulations at 29
CFR 2550.404a-2 because all Safe Harbor IRAs are generally Default
IRAs, but not all Default IRAs are Safe Harbor IRAs.
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To roll in funds from an IRA to the transfer-in plan, the transfer-
in plan must permit such roll-ins. Additionally, an automatic
portability provider must have access to records for the Default IRA
and transfer-in plan sufficient to make a match. The general concept of
``locate, match, and transfer'' involves making queries of cooperating
recordkeepers' systems to determine if a Default IRA owner has become a
participant in an employer-sponsored retirement plan through re-
employment (i.e., the transfer-in plan).\12\ If the individual is
matched with an account in the transfer-in plan, the automatic
portability transaction is designed for the automatic portability
provider to roll the individual's IRA assets into the individual's
account in the transfer-in plan. Automatic portability transactions may
be particularly important and helpful to workers who have lost contact
with their retirement plans when they change jobs, cannot be located
because the plan does not have updated address information or other
contact information for separated employees, or refuse to respond to
plan communications about their retirement account. When an automatic
portability provider transfers funds from the transfer-out plan to a
Default IRA without a participant's active involvement, the risk of
funds becoming lost or difficult to locate increases. Therefore,
automatic portability transactions are intended to benefit participants
and IRA owners that are unresponsive or considered missing.\13\
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\12\ The concept of ``locate, match, and transfer'' is discussed
in more detail below.
\13\ The Department notes that Code section 4975(f)(12) defines
an automatic portability transaction with respect to an individual
that has not affirmatively consented to the transfer. An individual
who affirmatively consents may still have IRA assets rolled into a
new plan through the same mechanisms, although it would not
technically fall within the statutory definition.
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3. Current DOL Individual Prohibited Transaction Exemption for
Automatic Portability Transactions
When an automatic portability provider transfers assets from an IRA
to a new employer's plan without the IRA owner's affirmative consent,
the automatic portability provider is exercising fiduciary discretion
for purposes of the prohibited transaction provisions of the Code.\14\
The assessment of a fee against the IRA, in turn, implicates the
prohibited transaction provisions in Code section 4975(c)(1). The
Department first issued guidance regarding an automatic portability
transaction before the enactment of the SECURE 2.0 Act. Retirement
Clearinghouse (RCH) approached the Department in 2018 for sub-
regulatory guidance and prohibited transaction exemptive relief
regarding its multi-part automatic portability framework (the RCH
Program). In response, the Department issued Advisory Opinion 2018-01A
(AO 2018-01A) \15\ and an administrative prohibited transaction
exemption (PTE 2019-02) \16\ in connection with the RCH Program. AO
2018-01A concerned the status of certain parties involved in the RCH
Program as ``fiduciaries'' within the meaning of ERISA section 3(21)(A)
and Code section 4975(e)(3).\17\ In AO 2018-01A, the Department stated
that plan sponsors exercise discretion in their fiduciary capacity and
would be
[[Page 5626]]
subject to the general fiduciary standards of ERISA when deciding
whether to participate in the RCH Program. The advisory opinion further
explained that, without the individual's affirmative consent, RCH acted
as a fiduciary within the meaning of Code section 4975(e)(3) in
deciding whether to transfer the assets from an individual's Default
IRA to the individual's new employer plan.\18\ Furthermore, the
Department indicated that an individual's failure to respond to RCH's
communications about a default transfer of the assets in the
individual's account to the new employer's plan is not tantamount to
affirmative consent by the individual to the default transfer and does
not relieve RCH from fiduciary status and related responsibilities.\19\
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\14\ See the discussion of AO 2018-01A, below.
\15\ Available at: https://www.dol.gov/sites/dolgov/files/EBSA/about-ebsa/our-activities/resource-center/advisory-opinions/2018-01a.pdf.
\16\ See 83 FR 55741 (Nov. 7, 2018) (proposed exemption) and 84
FR 37337 (July 31, 2019) (granted exemption).
\17\ AO 2018-01A (Nov. 18, 2018).
\18\ Id. at 5.
\19\ Id. at 5-6.
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The Department additionally stated in AO 2018-01A that, unlike the
Department's automatic safe harbor regulations,\20\ which pertain to
the automatic rollover of an individual's retirement plan mandatory
distribution into an IRA, no similar statutory or regulatory provision
provides relief from fiduciary responsibility for the ``default''
transfer of assets from the Default IRA to a new employer's plan.\21\
Therefore, it was necessary for RCH to receive a prohibited transaction
exemption from the Department in order for RCH to receive a fee or
other compensation when it exercised fiduciary authority to make the
default transfer of assets from the Default IRA to a new employer's
plan.\22\ At RCH's request, the Department issued PTE 2019-02, an
administrative exemption that provides such prohibited transaction
relief for RCH.\23\ Due to the novelty of the RCH Program, the
Department limited the relief provided in PTE 2019-02 to a five-year
term, which expires on July 31, 2024. To receive prohibited transaction
relief beyond the five-year term, RCH would need to submit an
additional individual administrative exemption request to the
Department.
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\20\ 29 CFR 2550.404a-2 and 2550.404a-3.
\21\ Id. at 6. The Department notes that Code section
4975(f)(12) applies only to transfers made under Code section
401(a)(31)(B)(i), so the fiduciary relief provided in 29 CFR 404a-3
is not applicable to transactions covered by 4975(d)(25).
\22\ AO 2018-01A addressed the fiduciary status of an automatic
portability provider but did not address whether a prohibited
transaction would occur.
\23\ 84 FR 37337.
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B. Overview of the SECURE 2.0 Act Statutory Exemption for Automatic
Portability Transactions
Section 120 of the SECURE 2.0 Act added a statutory exemption in
Code section 4975 that allows an automatic portability provider to
receive a fee in connection with executing an automatic portability
transaction that largely mirrors the relief the Department granted RCH
in PTE 2019-02. The availability of the statutory exemption to all
automatic portability providers that meet its requirements generally
eliminates the need for RCH, and other automatic portability providers,
to request an administrative PTE for relief similar to the relief the
Department granted in PTE 2019-02. Specifically, the statutory
exemption in Code section 4975(d)(25) provides a conditional prohibited
transaction exemption from the restrictions in Code sections
4975(c)(1)(D) and (E) for an automatic portability provider to receive
fees and compensation for services provided ``in connection with an
automatic portability transaction'' if the conditions set forth in Code
section 4975(f)(12) are met.\24\
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\24\ Emphasis added.
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Code section 4975(f)(12)(A)(i) generally defines an automatic
portability transaction as a transfer of assets from a Default IRA \25\
to a transfer-in plan after the IRA owner has been given advance notice
of the transfer and has not affirmatively opted out. The ``transfer-
in'' plan covered by the definition is any employer-sponsored
retirement plan (other than a defined benefit plan) that is: a
qualified trust, an annuity plan described in Code section 403(a), an
eligible deferred compensation plan described in Code section 457(b)
which is maintained by an eligible employer described in Code section
457(e)(1)(A), or an annuity contract described in Code section
403(b).\26\
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\25\ The statutory definition specifically references ``an
individual retirement plan which is established on behalf of an
individual and to which amounts were transferred under section
401(a)(31)(B)(i).''
\26\ These are plans described in clause (iii), (iv), (v), or
(vi) of Code section 402(c)(8)(B).
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Notably, the SECURE 2.0 Act amendment to the Code does not
specifically include any references to a transfer-out plan (i.e., the
plan engaging in the mandatory distribution and automatic rollover). As
discussed above, the existence of a transfer-out plan is a necessary
precursor to an automatic portability transaction, but the transfer-out
transaction is already governed by mandatory distribution and automatic
rollover provisions in the Code that are discussed above, and the
Department already has provided conditional fiduciary and prohibited
transaction relief for such transactions under its automatic rollover
safe harbor regulations.\27\ Similarly, the general fiduciary
principles regarding an individual's default investments in the
transfer-in plan and the Department's regulations on qualified default
investment alternatives will govern the transfer-in plan sponsor's
responsibilities once the assets are transferred from the individual
Default IRA into the transfer-in plan.\28\
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\27\ 29 CFR 2550.404a-2.
\28\ 29 CFR 2550.404c-5.
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As noted, Code section 4975(d)(25) provides prohibited transaction
relief if the conditions set forth in Code section 4975(f)(12) are met.
Specifically, Code section 4975(f)(12) and this proposed regulation
require:
the automatic portability provider to acknowledge its
fiduciary status with respect to the IRA;
that the automatic portability provider's fees do not
exceed reasonable compensation;
restrictions to be placed on an automatic portability
provider's use of plan participant and IRA owner data;
participation in the program to be available on the same
terms for all eligible transfer-in plans;
the automatic portability provider to conduct at least
monthly searches for transfer-in plan accounts;
the automatic portability provider to timely execute
automatic portability transactions;
the automatic portability provider's discretion to affect
the timing or amount of the transfer pursuant to an automatic
portability transaction to be limited; and
the automatic portability provider to retain records
demonstrating it is complying with the exemption conditions, conducting
an annual audit, and maintaining a website with a list of participating
recordkeepers and the automatic portability provider's fees.
Section 120 of the SECURE 2.0 Act also provides that, not later
than 12 months after the date of its enactment, the Secretary shall
issue such guidance as may be necessary to carry out the purposes of
the amendments made by section 120, including regulations or other
guidance which:
1. Require an automatic portability provider to provide a notice to
individuals on whose behalf the default IRA is established in advance
of the pre-transaction notice;
2. Require an automatic portability provider to disclose to a
responsible plan fiduciary information about the
[[Page 5627]]
provider's fees, compensation, and services as required of covered
service providers pursuant to DOL regulations under ERISA section 408
(i.e., 29 CFR 2550.408b-2(c));
3. Require plans involved in the automatic portability transaction
to fully disclose fees related to an automatic portability transaction
in its summary plan description or summary of material modifications;
4. Require plans involved in the automatic portability transaction
to invest amounts received on behalf of a participant pursuant to an
automatic portability transaction in the participant's current
investment election under the plan or, if no election is made or
permitted, in the plan's qualified default investment alternative under
the Department's Qualified Default Investment Alternative (QDIA)
regulations (i.e., 29 CFR 2550.404c-5) or another investment selected
by a fiduciary with respect to such plan;
5. Prohibit or restrict the receipt or payment of third-party
compensation (other than a direct fee paid by a plan sponsor which is
in lieu of a fee imposed on an IRA owner) by an automatic portability
provider in connection with an automatic portability transaction;
6. Prohibit exculpatory provisions in an automatic portability
provider's contracts or communications with individuals disclaiming or
limiting liability in the event that an automatic portability
transaction results in an improper transfer;
7. Require an automatic portability provider to take actions
necessary to reasonably ensure that participant and beneficiary data is
current and accurate;
8. Limit the automatic portability provider's use of data related
to automatic portability transactions for any purpose other than the
execution of such transactions or locating missing participants, except
as permitted by the Secretary;
9. Provide for corrections procedures in the event an auditor
determines the automatic portability provider was not in compliance
with the statute and related regulations, including deadlines,
supplemental audits, and corrective actions which may include a
temporary prohibition from relying on the statutory exemption;
10. Ensure that participants and beneficiaries receive all the
required notices and disclosures; and
11. Make clear that the statutory exemption applies solely to the
automatic portability transactions described in the statutory
exemption, and, to the extent the Secretary deems necessary or
advisable, specify how the application of the exemption relates to or
coordinates with other statutory provisions, regulations, and
administrative guidance.\29\
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\29\ See Public Law 117-328, Dec. 29, 2022, Division T, Sec.
120(c).
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Some interested stakeholders have communicated to the Department
that they have already developed products and established procedures
for an automatic portability service and that they do not believe any
further guidance from the Department is necessary to effectuate the
purpose of section 120 of the SECURE 2.0 Act. However, the Department
believes that regulations, as compared to some other form of guidance,
are needed to implement section 120(c) of the SECURE 2.0 Act in a
manner that addresses and reinforces the consumer protections in the
above list of statutory conditions and requirements. Furthermore, the
Department believes that these proposed regulations will provide a
broader cross-section of interested and affected entities with the
opportunity to formally comment on the proposal, whether implementing
regulations are necessary, and whether elements of the proposed
requirements should be modified or eliminated to best support Congress'
intent in passing the new statutory exemption.
C. Prospective Effect of Implementing Regulations and Interim
Interpretive Policy
The Department is proposing that any final rule adopted based on
this proposal would be effective 60 days after publication in the
Federal Register and that the requirements of the final rule would have
prospective applicability. The Department specifically solicits
comments on whether there should be some delayed applicability date to
allow for automatic portability providers and plan fiduciaries to make
any changes to automatic portability programs or related contracts or
arrangements that may be needed or desired in light of the final rule.
This approach is intended to make it clear the statutory exemption is
available in accordance with the effective date of the SECURE 2.0 Act
while acknowledging that there may be a need to transition contracts or
arrangements to meet specific requirements of the final rule.
As noted above, section 120 of the SECURE 2.0 Act directed the
Secretary to issue such guidance as may be necessary to carry out the
purposes of the amendments made by section 120 no later than 12 months
after the date of the enactment of the Act. Compliance with the
conditions and requirements in Code sections 4975(d)(25) and
4975(f)(12) is an independent statutory obligation for parties seeking
their prohibited transaction relief that is not dependent upon the
issuance of regulations or guidance by the Department. For the period
from publication of this proposed regulation until after the Department
issues a final regulation or other applicable administrative guidance,
automatic portability providers and plan fiduciaries are expected to
comply with the requirements of Code sections 4975(f)(12) and
4975(d)(25) using a good faith, reasonable interpretation of the law
taking into account the list of consumer protection conditions and
requirements in section 120(c) of the SECURE 2.0 Act.\30\ During that
period, to the extent an automatic portability provider or plan
fiduciary believes there is some uncertainty regarding whether the
automatic portability program or the parties' conduct in connection
with the program complies with the statutory provisions, the Department
expects that the provider or fiduciary will strictly adhere to the
requirements in Code section 4975(f)(12) and act in a manner that
furthers the financial interests of the affected plan, plan
participant, or IRA owner taking into account the consumer protection
conditions and requirements listed in section 120(c) of the SECURE 2.0
Act.
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\30\ The Department expects to issue a final rule before the
first annual audit would be required pursuant to the requirement in
Code section 4975(f)(12)(B)(xi)(II) under which an automatic
portability provider must ``conduct an annual audit, in accordance
with regulations promulgated by the Secretary of Labor, of automatic
portability transactions occurring during the calendar year to
demonstrate compliance with this paragraph and any regulations
thereunder and identify any instances of noncompliance therewith,
and shall submit such audit annually to the Secretary of Labor, in
such form and manner as specified by such Secretary.'' However,
because a final rule may be published part way through the first
audit period, the Department specifically solicits comments on
whether the final rule should provide an alternative pursuant to
which the submission of the annual audit for the first year could be
delayed and submitted together with the audit for the second year.
See, for comparison, 29 CFR 2520.104-50--Short plan years, deferral
of accountant's examination and report. The Department also requests
comment on whether certain aspects of this proposal that would be
subject to audit review should have a specific delayed effective
date because the aspect of the proposal may take additional time for
an automatic portability provider to fully implement.
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D. Overview of the Proposed Regulation
Certain provisions of ERISA Title I, such as the provisions on
prohibited transactions, have parallel provisions enacted in Title II
of ERISA and codified in the Code. When ERISA was passed,
[[Page 5628]]
regulatory authority over Title I resided with the Secretary of Labor
while regulatory authority over Title II resided with the Secretary of
the Treasury. To rationalize the administration and interpretation of
these parallel provisions, Reorganization Plan No. 4 of 1978, 5 U.S.C.
App., divided the interpretive and rulemaking authority between the
Secretaries of Labor and of the Treasury, so that, in general, the
agency with regulatory and interpretive responsibility for a given
provision of ERISA Title I would also have regulatory and interpretive
responsibility for the parallel provision in the Code. Among the
sections transferred to the Department were certain of the prohibited
transaction provisions (including exemptions) in Code section 4975.
Title I's prohibited transaction rules, 29 U.S.C. 1106-1108, apply to
Title I-covered plans, and the Code's corresponding prohibited
transaction rules, 26 U.S.C. 4975, apply both to Title I-covered
pension plans that are tax-qualified pension plans, as well as other
specified tax-advantaged arrangements, including IRAs.
Although the new automatic portability transaction prohibited
transaction exemption appears only in Code section 4975 and directly
pertains to transactions involving IRAs, the Secretary of Labor still
retains regulatory authority over certain prohibited transaction
provisions under Code section 4975, as provided in Reorganization Plan
No. 4 of 1978. Consistent with that authority, section 120 of the
SECURE 2.0 Act directs the Secretary of Labor to issue regulations and
guidance related to the new statutory exemption for automatic
portability transactions.
Therefore, the proposed regulation would add a new Sec.
2550.4975f-12 to the Department's fiduciary regulations at 29 CFR part
2550. The proposed regulation tracks the requirements under Code
section 4975(f)(12) that must be satisfied in order for the automatic
portability transaction to be covered by the statutory prohibited
transaction exemption in Code section 4975(d)(25). Paragraph (a)
describes the general scope of the statutory exemption and regulation.
Paragraph (b) sets forth the conditions an automatic portability
provider must satisfy for a transaction to qualify as an ``automatic
portability transaction'' and for the exemption to apply. Paragraph (c)
sets forth proposed annual audit and correction procedure requirements.
Paragraph (d) sets forth website requirements that must be met for
automatic portability providers to satisfy the statutory exemption and
proposed regulation. Paragraph (e) describes prohibitions on the
automatic portability provider's use of exculpatory provisions in
contracts or communications disclaiming or limiting their liability in
the event an improper transfer of assets in connection with an
automatic portability transaction occurs. Paragraph (f) sets forth the
record retention requirement automatic portability providers must meet
to satisfy the statutory exemption and proposed regulation. Paragraph
(g) defines certain terms used in the proposed regulation.
1. Scope of Prohibited Transaction Relief
The relief provided by Code section 4975(d)(25) and the proposed
exemption is limited to Code sections 4975(c)(1)(D) and (E) for the
receipt of fees and compensation by an automatic portability provider
for services provided in connection with an automatic portability
transaction and Code section 4975(c)(1)(F) for the receipt of fees by
an automatic portability provider from a plan sponsor in lieu of fees
imposed on an IRA owner. Neither the statutory exemption in Code
section 4975(d)(25) nor the proposed regulation contains an exemption
for other acts described in Code section 4975(c)(1)(D) and (E)
(relating to the transfer to, or use by or for the benefit of, a
disqualified person of the income or assets of a plan and to
fiduciaries dealing with the income or assets of plans in their own
interest or for their own account) that are not in connection with the
automatic portability transaction. Additionally, neither the statutory
exemption in Code section 4975(d)(25) nor the proposed regulation
contains an exemption for acts described in Code section 4975(c)(1)(F)
(relating to fiduciaries receiving consideration for their own personal
account from any party dealing with a plan in connection with a
transaction involving the income or assets of the plan) except for the
limited relief for a fee paid by a plan sponsor, noted above. Such acts
described in Code sections 4975(c)(1)(D), (E), and (F) are separate
transactions not described in Code section 4975(d)(25). Further,
neither the statutory exemption in Code section 4975(d)(25) nor this
proposed regulation contains an exemption from other provisions of the
Code, such as section 401, or other provisions of law which may impose
requirements or restrictions relating to the transactions that are
exempt under Code section 4975(d)(25). As defined in Code section
4975(f)(12)(A)(ii) and in this proposed regulation, an automatic
portability provider is a person, other than an individual, who
executes the automatic portability transaction on the same terms to all
transfer-in plans and Default IRAs that use the provider.
The Department interprets the ``in connection with'' language from
Code section 4975(d)(25) to include only those services and related
fees and compensation that would not otherwise occur or be incurred if
not for the automatic portability transaction or anticipation of a
future automatic portability transaction. The Department requests
comments on whether additional specificity regarding the types of
services that are covered by Code section 4975(d)(25) should be
included, for example, by a definition added to the regulations that
identifies the types of services. Further, if a commenter believes more
specificity would be helpful, the Department requests that the
commenter include a proposed definition, list, or other identification
of the services that should be covered.
2. Acknowledgment of Fiduciary Status
Code section 4975(f)(12)(B)(i) and this proposed regulation
requires an automatic portability provider to acknowledge that it is a
fiduciary with respect to the IRA in an automatic portability
transaction.\31\ Pursuant to the statutory text authorizing the
Secretary to specify the time and format of such an acknowledgment,
paragraph (b)(1) of this proposed regulation requires the automatic
portability provider to acknowledge in writing that it is a fiduciary
as defined in Code section 4975(e)(3) upon being engaged by a plan
fiduciary, as well as in the required notices and disclosures,
described below, to plan participants and IRA owners. This fiduciary
acknowledgement is designed to ensure that the fiduciary nature of the
relationship is clear to the automatic portability provider and
responsible plan fiduciaries as well as to affected participants and
IRA owners.\32\ The automatic portability provider's acknowledgment of
its fiduciary status may include a description of the scope of the
fiduciary status of the automatic portability provider and may explain
that, consistent with Code section 4975(e)(3), the automatic
portability provider is not a fiduciary under the Code's definition
with respect to any
[[Page 5629]]
assets or administration of the plan or IRA with respect to which the
automatic portability provider does not (1) have any discretionary
authority, discretionary control, or discretionary responsibility (2)
exercise any authority or control, and (3) render investment advice for
a fee or other compensation, nor have any authority or responsibility
to render such investment advice. The Department notes that it is
possible that the automatic portability provider may have fiduciary
status under other laws, e.g., the Federal securities laws. The
acknowledgment required by the exemption does not reach such status but
the Department notes that the acknowledgment required by the exemption
should not be presented in a way that misinforms or misleads
individuals regarding potential fiduciary status under such other laws.
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\31\ As described in Code section 4975(f)(12)(A)(i)(I).
\32\ This is generally when an individual fails to respond to
notices and the automatic portability provider directs the transfer
of assets and assesses fees. See AO 2018-01 for a more detailed
description of fiduciary status in automatic portability
arrangements.
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3. Fees
(a) Reasonable Compensation
Subject to two exceptions described below, Code section
4975(f)(12)(B)(ii)(I) and this proposed regulation permit an automatic
portability provider to receive fees and compensation for services
provided in connection with the automatic portability transaction,
provided that the fees and compensation do not exceed reasonable
compensation. The proposed regulations incorporate the existing
standard regarding reasonable compensation for the provision of
services found at 26 CFR 54.4975-6(e).
(b) Fee and Compensation Disclosure Requirement
This proposed regulation mirrors the statutory text by requiring
the automatic portability provider to disclose to a responsible plan
fiduciary of the transfer-in plan the information that a service
provider to the plan would be required to disclose under 29 CFR
2550.408b-2(c). For purposes of this requirement, the disclosures would
relate to the automatic portability provider's services as an automatic
portability provider and not other services that may be provided. For
purposes of this disclosure requirement, the automatic portability
provider will be considered to be a ``covered service provider'' under
2550.408b-2(c)(1)(iii)(A) and (B) providing services as a fiduciary and
as a recordkeeper. Since the automatic portability provider would
generally be precluded from receiving third-party compensation under
other provisions of the proposal, the Department does not believe the
provisions of 2550.408b-2(c) related to a covered service provider
under 2550.408b-2(c)(1)(iii)(C)--``other services for indirect
compensation''--would be relevant. The Department seeks comments on
whether there are particular compliance issues under 2550.408b-2(c) for
automatic portability providers that the Department should specifically
address in a final rule.
(c) Prohibition of Fees for Automatic Portability Transactions
Involving a Plan of the Automatic Portability Provider or Its
Affiliates
The statute prohibits an automatic portability provider from
receiving any fees or compensation in connection with an automatic
portability transaction involving a plan which is sponsored or
maintained by the automatic portability provider. In other words, the
automatic portability provider may execute such transactions, but it
may not receive fees for doing so. In the Department's view, the
statutory reference to the automatic portability provider in this
circumstance should be read to include any affiliates of the automatic
portability provider. Accordingly, paragraph (b)(2)(iv) of the proposed
regulation mirrors the statutory provision by prohibiting an automatic
portability provider from receiving any fees or compensation in
connection with an automatic portability transaction involving a plan
that is sponsored or maintained by the automatic portability provider
but includes plans maintained by any of the automatic portability
provider's affiliates.
(d) Prohibition on Receipt of Third-Party Compensation in Connection
With Automatic Portability Transactions
Section 120(c)(5) of the SECURE 2.0 Act provides the Secretary with
the regulatory authority to prohibit or restrict the receipt or payment
of third-party compensation (other than a direct fee paid by a plan
sponsor that is in lieu of a fee imposed on an IRA owner) by an
automatic portability provider in connection with an automatic
portability transaction. The proposed regulation includes text that
mirrors the statutory text allowing a direct fee to be paid by a plan
sponsor if it is in lieu of a fee imposed on an IRA owner. The proposed
regulation includes one exception to the general restriction on third-
party compensation. Specifically, under the proposal, an automatic
portability provider would be able to share a portion of its fee or
compensation with another automatic portability provider as long as the
overall fee paid, directly or indirectly, by the plan or IRA does not
increase as compared to the fees disclosed in the description provided
to the plan administrator and in the initial enrollment notice provided
to the IRA owner.
The third-party compensation restriction in the proposed regulation
is limited to fees and compensation in connection with the automatic
portability transaction and would not prevent an automatic portability
provider from receiving fees for services provided to an IRA or
employer-sponsored retirement plan that are in addition to services
provided in connection with the automatic portability transaction.
However, the prohibited transaction relief provided in Code section
4975(d)(25) applies only to fees and compensation received in
connection with the automatic portability transaction. The automatic
portability provider would need to rely upon other statutory or
administrative exemptions if it receives fees for providing additional
services that involve prohibited transactions.
4. Data Usage and Protection
Code section 4975(f)(12)(B)(iii) prohibits an automatic portability
provider from using data it obtains in connection with automatic
portability transactions for any purpose other than to execute the
automatic portability transactions or locate missing participants as
part of its automatic portability service, except as permitted by the
Secretary. The automatic portability provider is specifically
prohibited by the statute from marketing or selling data relating to
the IRA or to the plan participants. Paragraph (b)(3) of the proposed
regulation parallels the statutory language by not permitting the use
of data for any purpose other than the execution of automatic
portability transactions or locating missing participants. For purposes
of the restriction on marketing or selling IRA data, the Department
interprets this to include specific data regarding the IRA owner. The
Department is not proposing any exceptions to this restriction.
However, the Department welcomes comments on whether the regulations
should permit use of data for other purposes, and, if it should, what
those other purposes would be, whether allowing use of data for those
purposes would provide a benefit to IRA owners and plan participants,
and what regulatory protections should be applied to that use of the
data.
In support of the obligation to limit use of data, the proposed
regulation provides that the automatic portability provider must take
steps that a prudent fiduciary would take to safeguard plan participant
and IRA data in its
[[Page 5630]]
possession or under its control.\33\ The proposal further would
require, if data were improperly accessed, that the automatic
portability provider take appropriate remedial actions to safeguard the
data based on the sensitivity of the accessed data and the nature and
severity of the breach. The Department seeks comment on whether the
regulation should include specific data security requirements, such as
a requirement to carry insurance to cover data breaches.
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\33\ See generally Cybersecurity Program Best Practices at
https://www.dol.gov/sites/dolgov/files/ebsa/key-topics/retirement-benefits/cybersecurity/best-practices.pdf; Online Security Tips at
https://www.dol.gov/sites/dolgov/files/ebsa/key-topics/retirement-benefits/cybersecurity/online-security-tips.pdf; and Tips for Hiring
a Service Provider with Strong Cybersecurity Practices at https://www.dol.gov/sites/dolgov/files/ebsa/key-topics/retirement-benefits/cybersecurity/tips-for-hiring-a-service-provider-with-strong-security-practices.pdf.
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5. Open Participation
Paragraph (b)(4) of this proposed regulation parallels Code section
4975(f)(12)(B)(iv) by requiring as a condition of the availability of
the exemption that the automatic portability provider offer automatic
portability transactions on the same terms to any transfer-in plan.
This proposed requirement does not mean that fees can never change.
Rather, at any given time, the fees paid for automatic portability
transactions should be the same for any transfer-in plan that engages
the automatic portability provider.
Based on the general regulatory authority granted to the Secretary
in section 120(c) of the SECURE 2.0 Act, the Department is also
proposing that open participation would require that the automatic
portability provider not restrict or limit the ability of an employer-
sponsored retirement plan, IRA provider (including trustees under Code
section 408(a), custodians under Code section 408(h), or issuers under
Code section 408(b)), or recordkeeper to engage other automatic
portability providers to execute automatic portability transactions. In
proposing this requirement, the Department recognizes that numerous
service providers that have existing systems for automatic rollovers of
mandatory distributions may want to supplement their services with
automatic portability transaction features. Plan fiduciaries or service
providers may determine that there are cost-effective ways to integrate
services of more than one automatic portability provider to increase
the likelihood of successfully locating participant funds for transfer
into the transfer-in plan.
6. Notices
(a) Notice to the Department
The Department has an obligation under the statute to monitor and
enforce the audit reporting requirements for automatic portability
providers relying on the exemption, including deadlines for submitting
the audit report to the Department. Accordingly, under the proposed
regulation, within 90 calendar days of the date that the automatic
portability provider begins operating an automatic portability
transaction program that is intended to rely on prohibited transaction
relief provided by section 4975(d)(25), the automatic portability
provider must notify the Secretary at [email protected] that it
is operating as an automatic portability provider in accordance with
Code section 4975(d)(25). The automatic portability provider must
report the legal name of each business entity relying upon the
exemption and any name (e.g., trade or Doing Business As (DBA) name)
under which the business entity may be operating. This notification
needs to be updated to report a change to the legal or operating
name(s) of the automatic portability provider that is relying upon the
exemption. The automatic portability provider will have 90 calendar
days to report a change to the legal or operating name. The automatic
portability provider may also notify the Department if it is no longer
operating in reliance upon the exemption. The notification requirement
will allow the Department to monitor and enforce the audit report
requirements.
(b) Model Description of Automatic Portability Program for Use in
Summary Plan Descriptions by Transfer-Out and Transfer-In Plans
In the Department's view, to comply with the summary plan
description (SPD) content requirements in 29 CFR 2510.102-2 that the
SPD ``shall be sufficiently comprehensive to apprise the plan's
participants and beneficiaries of their rights and obligations under
the plan,'' participating transfer-out plans and transfer-in plans
subject to ERISA's SPD requirements must include a description of the
automatic portability program in the plan's SPD. Further, section
120(c)(3) of the SECURE 2.0 Act provides the Secretary with authority
to require a transfer-in plan to fully disclose fees related to an
automatic portability transaction in its SPD or summary of material
modifications (SMM) to the extent an SMM is used to fulfill this SPD
disclosure requirement.
The Department's existing regulatory safe harbors for automatic
rollovers by the transfer-out plan already require plan administrators
for ERISA Title I plans to provide participants with an SPD or SMM that
describes the plan's automatic rollover provisions. The SPD or SMM also
must include: (1) an explanation that the mandatory distribution will
be invested in an investment product designed to preserve principal and
provide a reasonable rate of return and liquidity; (2) a statement
indicating how fees and expenses attendant to the IRA will be allocated
(i.e., the extent to which expenses will be borne by the IRA owner
alone or shared with the distributing plan or plan sponsor); (3) the
name, address and phone number of a plan contact (to the extent not
otherwise provided in the SPD or SMM) for further information
concerning the plan's automatic rollover provisions; and (4) the IRA
provider and the fees and expenses attendant to the IRA.
The Department proposes a requirement that the automatic
portability provider provide the administrator of participating plans
with a description of the automatic portability program, including fees
and expenses, that the administrator could use in fulfilling its SPD
obligations, as relevant. The Department requests comments on whether
the final rule should set forth specific content requirements for an
automatic portability provider model notice.
(c) Notices to IRA Owner
This proposed regulation specifies two notices an automatic
portability provider is required to send to IRA owners before an
automatic portability transaction is executed and one notice after the
automatic portability transaction is executed, as described below.
i. Initial Enrollment Notice
Section 120(c)(1) of the SECURE 2.0 Act authorizes the Secretary to
require the automatic portability provider to provide a notice to IRA
owners in advance of the pre-transaction notice specified in Code
section 4975(f)(12)(B)(v). Consistent with this authority, this
proposed regulation includes a requirement that an automatic
portability provider provide an ``initial enrollment notice'' to the
IRA owner no later than 15 calendar days after the IRA is enrolled in
an arrangement that includes an automatic portability transaction
component. The Department assumes that the date of enrollment will
generally be the date that an IRA is established in connection with a
mandatory distribution. However, for IRAs that were established
[[Page 5631]]
prior to the existence of the new statutory exemption, or established
and then later added into an automatic portability arrangement, the
enrollment date may be a later date (e.g., when the IRA provider begins
acting as an automatic portability provider or engages an automatic
portability provider to begin including the IRA in a locate-and-match
service).
The Department requests comments regarding the 15-calendar-day
timeframe for sending the initial enrollment notice, particularly if
the automatic portability provider is not the provider of the IRA. In
this regard, the Department requests comments about the process by
which IRAs that are not established with or provided by the automatic
portability provider would engage an automatic portability provider and
how the automatic portability provider would ensure that such a notice
would be provided.
The Department proposes that the initial enrollment notice would
include a variety of information regarding the nature of the automatic
portability transaction and additional aspects of the IRA arrangement
that are required to be included in the pre-transaction notice,
discussed below. The Department anticipates that this notice
requirement could be satisfied by including the information specified
in proposed paragraph (b)(5)(iv) in the notice required under Code
section 401(a)(31)(B) upon the establishment of a Default IRA.
ii. Pre-Transaction Notice
Paragraph (b)(5)(iv) of the proposed regulation incorporates the
statutory provisions of Code section 4975(f)(12)(B)(v) requiring the
automatic portability provider to provide a pre-transaction notice to
the IRA owner at least 60 days before an automatic portability
transaction occurs with information describing the automatic
portability transaction, fees to be received in connection with the
transaction, the right to elect not to participate in an automatic
portability transaction, distribution options, deadlines for making
elections, a telephone number for the automatic portability provider,
and the right to and procedures for designating a beneficiary.
The proposed regulation provides additional clarification regarding
the timing of the pre-transaction notice by requiring that the notice
be sent no earlier than 90 days in advance of the automatic portability
transaction. This is intended to ensure that the notice is sent
sufficiently close to the actual execution of the automatic portability
transaction so that the assets of the IRA do not remain there for an
unreasonable period waiting to be rolled-in to the transfer-in plan.
The Department seeks comments on the proposed pre-transaction
notice and whether additional information should be required. The
Department is particularly interested in comments regarding whether
specific information should be provided to the IRA owner explaining the
significance of transferring assets into an employer-sponsored plan as
opposed to retaining those assets in an IRA, as well as any plain
language examples to help the IRA owner better understand the various
aspects of an automatic portability arrangement. Relatedly, the
Department requests comment on whether model disclosures or model
language for the pre-transaction notice would be helpful and encourages
commenters who support a model disclosure or model language, model
charts, or other formats submit suggestions for the model language,
chart or format they believe would help ensure readability and
accessibility for the target audience. The Department also requests
comment on whether a final rule should specify a minimum amount of time
that the IRA owner has to make an election to opt out of the automatic
portability transaction, e.g., no sooner than 10 days before the
anticipated execution of the automatic portability transaction
identified in the pre-transaction notice.
iii. Post-Transaction Notice
This post-transaction notice, which would occur after a transfer-in
plan receives an individual's IRA funds, is the last notice that the
automatic portability provider would be required to provide to the IRA
owner or plan participant. Paragraph (b)(5)(v) of this proposed
regulation incorporates the statutory requirements in
4975(f)(12)(B)(vi). The statute requires that no later than three
business days after the completion of an automatic portability
transaction, the automatic portability provider shall provide notice to
the IRA owner of the actions taken by the automatic portability
provider with respect to the IRA. The statute also requires the notice
to include all relevant information regarding the location and amount
of any transferred assets, a statement of fees charged against the IRA
or transfer-in plan account in connection with the transfer, and a
contact phone number for the automatic portability provider.
The proposed regulation provides some minor clarifying language
intended to explain the Department's view regarding the information
needed to satisfy the statutory language. For instance, the proposed
regulation adds that (1) a description of the actions taken by the
automatic portability provider specifically includes that the
individual was matched with an account in a new employer plan, (2)
relevant information regarding the amount of transferred assets
includes the name of the employer and name of the plan where the assets
were transferred, and (3) the telephone number required by the
statutory text is a customer service telephone number.
The Department requests comment on whether model disclosures or
model language for the post-transaction notice would be helpful and
encourages commenters to submit language or formats they believe would
help ensure readability and accessibility for the target audience.
(d) Consolidation of Automatic Portability Provider Notices With Other
Disclosures
The Department understands that an automatic portability provider
may also be the designated provider of Default IRAs for a transfer-out
plan and may be providing notices required by the Code and/or the
Department's Safe Harbor Regulation. To the extent that the automatic
portability provider has been engaged to provide notices to
participants in connection with mandatory distributions on behalf of
employer-sponsored plans, the notices and disclosures to individuals
required by the statutory exemption and this proposed regulation would
not have to be provided separately. However, the automatic portability
provider should take care to ensure that the information required by
the notice provisions to individuals in this proposed regulation is
clearly displayed to reduce possible confusion with other provided
information.
(e) Accessibility of Disclosures to Participants and IRA Owners
Paragraph (b)(5)(vi) of this proposed regulation parallels the
statutory text of Code section 4975(f)(12)(B)(vii) by requiring all
required notices to participants and IRA owners to be written in a
manner calculated to be understood by the average person and not
include inaccurate or misleading statements. The proposed regulation
includes provisions intended to clarify and explain this requirement.
In the Department's view, the idea of an ``average person'' in the
context of understanding the notices under the exemption should be read
as the average person receiving the notices rather than an abstract
concept of an average person at large. Accordingly, the proposed
[[Page 5632]]
regulation speaks in terms of the average intended recipient of the
notices. The proposal also specifies that the disclosures must be
accurate, not misleading,\34\ and sufficiently comprehensive to apprise
the individual of their rights and obligations under the automatic
portability program, must not be formatted to have the effect of
misleading, misinforming, or failing to inform the recipient, and be
written in a culturally and linguistically appropriate manner (see
discussion below). In fulfilling these requirements, the proposed
regulation requires the automatic portability provider to exercise
considered judgment and discretion by taking into account such factors
as the level of comprehension and education of the typical intended
recipient and the complexity of the terms of the program. Consideration
of these factors will usually require the limitation or elimination of
technical jargon and of long, complex sentences, the use of clarifying
examples and illustrations, the use of clear cross references, and a
table of contents. These proposed requirements are modeled on the
Department's regulation governing the style and format of SPDs that
plan administrators are required to provide plan participants and
beneficiaries.\35\
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\34\ The Department would consider it misleading, for example,
for the automatic portability provider to include in notices to
individuals any exculpatory clauses or indemnification provisions
that are not permitted under this proposed regulation or by
applicable law.
\35\ 29 CFR 2520.102-2.
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(f) Culturally and Linguistically Appropriate Standards for Required
Notices and Disclosures to Participants and IRA Owners
The proposed regulation would require that notices and disclosures
to participants and IRA owners be provided in a culturally and
linguistically appropriate manner in certain situations. The proposal
essentially adopts the ACA standard for group health benefit
notices.\36\ Specifically, if the address of a recipient of a required
notice or disclosure is in a county where 10 percent or more of the
population is literate only in the same non-English language, the
notice or disclosure must include a prominent statement in the relevant
non-English language about the availability of language services. The
automatic portability provider would also be required to provide a
verbal customer assistance process in the non-English language and
provide written notices in the non-English language upon request.
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\36\ See, e.g., 29 CFR 2590.715-2715 and 2590.715-2719(e).
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(g) Ensuring Participants and IRA Owners Receive Notices
Section 120(c)(10) of the SECURE 2.0 Act authorizes the Secretary
to issue regulations to ensure that the participants and IRA owners,
``in fact, receive all required notices and disclosures.'' Furthermore,
Section 120(c)(7) of the SECURE 2.0 Act grants the Secretary regulatory
authority to require the automatic portability provider ``to take
actions necessary to reasonably ensure that participant and beneficiary
data is current and accurate.'' To this end, paragraph (b)(5)(vii) of
the proposed regulation would require the automatic portability
provider to adopt and implement prudent policies and procedures to
ensure that it obtains individual participant and IRA owner data
necessary to effectively administer the automatic portability program
and that the participant and IRA owner data in its possession or
control is current and accurate. The proposed regulation also specifies
that notices and disclosures to participants and IRA owners must be
made using methods that satisfy the disclosure requirements in 29 CFR
2520.104b-1(b). The regulation at 29 CFR 2520.104b-1(b) provides a
general standard that covered materials shall be furnished using
``measures reasonably calculated to ensure actual receipt of the
material by plan participants, beneficiaries and other specified
individuals.'' The Department requests comments on how an automatic
portability provider would handle undeliverable mail and whether
specific additional regulatory protections should be established for
individuals with respect to whom the automatic portability provider has
received returned mail. The Department also invites comments on whether
the regulation should specifically address electronic disclosure of
notices and disclosures under the exemption, including how to deal with
undeliverable electronic notices.
7. Frequency of Searches
The proposed regulation parallels the Code section
4975(f)(12)(B)(viii) requirement that the automatic portability
provider query on at least a monthly basis whether any individual with
an IRA has an account in a transfer-in plan. The Department believes
that verification of the information used in connection with performing
searches is important to carrying out the purposes of the statutory
exemption. Accordingly, under the proposal, the automatic portability
provider must perform ongoing participant address validation searches
via automated checks of (1) National Change of Address records, (2) two
separate commercial locator databases, and (3) any internal databases
maintained by the automatic portability provider. If a valid address is
not obtained from the automated checks, the automatic portability
provider must also perform a manual internet-based search. The proposal
would require these verification steps to be performed at least twice
in the first year an account is entered into the automatic portability
provider system and once a year thereafter. The Department invites
comments on whether additional or different verification steps should
be required and on whether a final regulation should specifically list
other information to be used in the searches that may aid in validating
a match, for example, beneficiary information. In the Department's
view, the statutory exemption's description of the search requirement
envisions the automatic portability provider taking reasonable steps to
verify the accuracy of the information used for conducting the required
searches.
The Department requests comment on whether the final regulations
should permit the query to be performed by a partnering recordkeeper in
addition to the automatic portability provider and how the automatic
portability provider would share information with recordkeepers for
purposes of running the query. If the Department permits this under the
final regulations, the Department anticipates that the ultimate
obligation to ensure the required searches are performed would remain
with the automatic portability provider. The Department also requests
comment on whether there should be specific parameters or obligations
for partnering recordkeepers if they are permitted to run the queries.
Finally, if any commenter believes partnering recordkeepers should be
permitted to run queries, the Department requests any additional
information that would support the need and rationale for permitting
this under a final regulation.
8. Monitoring Transfers
The Department believes proper monitoring of automatic portability
transactions by the transfer-in plan is also critical to ensuring the
successful execution of the transactions, and, accordingly, the
proposal includes a monitoring requirement. The Department believes
general prudence obligations would require such monitoring but is
including this
[[Page 5633]]
requirement in the proposed regulation pursuant to the general
regulatory authority provided to the Department in section 120(c) of
the SECURE 2.0 Act and the authority transferred to the Secretary under
section 102 of Reorganization Plan No. 4 of 1978. Paragraph (b)(7) of
the proposed regulation requires that the automatic portability
provider ensure that each transfer-in plan for whom the automatic
portability provider performs automatic portability transactions
designates a plan official responsible for monitoring transfers into
the plan and confirming that amounts received on behalf of a
participant are invested properly. Under the proposal, amounts received
would be deemed to be invested properly if made according to the
participant's current investment election under the plan or, if no
election is made or permitted, in the plan's qualified default
investment alternative under 29 CFR 2550.404c-5 or in another
investment selected by a fiduciary with respect to such plan.
9. Timeliness of Execution
Code section 4975(f)(12)(B)(ix) requires timely execution of
transfers by requiring the automatic portability provider to transfer
the liquidated account balance of the IRA as soon as practicable.
Paragraph (b)(8) of the proposed regulation incorporates the statutory
text and includes provisions intended to clarify the statutory
requirement. First, the proposal clarifies the timeliness of execution
is measured from the date after the final deadline passes for the
affected individual to affirmatively elect not to participate in the
transaction, as specified in the pre-transaction notice. The proposed
regulation also provides that the automatic portability provider must
follow timeframes formally established in policies and procedures,
discussed in more detail below. The proposal does not include a
specific timeframe for what would be considered ``as soon as
practicable'' but requests comments on whether the final rule should
include such a specific timeframe or other clarification of the
standard.
10. Limitation on Exercise of Discretion and Policies and Procedures
Code section 4975(f)(12)(B)(x) provides that the automatic
portability provider will neither have nor exercise discretion to
affect the timing or amount of the transfer pursuant to an automatic
portability transaction other than to deduct the appropriate fees.
Paragraph (b)(9) of the proposed regulation incorporates the statutory
limitation on discretion and expands upon the statutory text by
specifying that an automatic portability provider will be deemed to
satisfy the limited discretion requirement if it establishes,
maintains, and follows policies and procedures regarding the process
for executing automatic portability transactions. The policies and
procedures must set specific standards and timeframes that are equally
applied to all automatic portability transactions. The Department is
proposing the policies and procedures to operationalize the limited
discretion standard in accordance with the general regulatory authority
granted to the Secretary under section 120(c) of the SECURE 2.0 Act and
the authority transferred to the Secretary under section 102 of
Reorganization Plan No. 4 of 1978. The policies and procedures are
intended to ensure that the automatic portability provider is acting in
accordance with its obligations under the exemption and these
regulations and consistently with the intent of the statutory
exemption. The Department also believes the policies and procedures
will ensure that there is appropriate operational documentation by the
automatic portability provider to support the audit, described below.
The policies and procedures must, at a minimum, specifically and
prudently address: (1) the process to ensure that transfer-in plans
designate a plan official that will be responsible for monitoring
transfers into the plan due to automatic portability transactions; (2)
the process and timing for liquidating the assets of the Default IRA to
cash and closing the IRA; (3) the process for verifying and validating
that the correct fees are withdrawn from the Default IRA; (4) the
process and timing for transmitting assets to the transfer-in plan; (5)
verifying the assets were received by the transfer-in plan; and (6)
sending all notices to plan participants or individuals on whose behalf
a Default IRA is established as required in this proposed regulation.
11. Audit and Corrections
(a) Audit and Audit Report
Code section 4975(f)(12)(B)(xi) includes a requirement for an
annual audit to be conducted in accordance with regulations promulgated
by the Secretary. The statute requires that an audit be conducted that
demonstrates compliance with Code section 4975(f)(12) and any
regulations thereunder and that identifies any instances of
noncompliance with the statute or such regulations. The statute
requires the automatic portability provider to submit a copy of the
auditor's report to the Secretary in such form and manner as specified
by the Secretary.
(b) Auditor and Auditor's Report
After consideration, the Department is proposing that the audit be
an independently conducted audit to best ensure that the automatic
portability provider is executing automatic portability transactions in
a manner that is consistent with ERISA and that promotes the retirement
security of workers. An auditor will be considered independent if: (1)
the auditor is a person or an entity that the automatic portability
provider does not own or control, and (2) the auditor does not derive
more than two percent of its annual revenue from services provided
directly or indirectly to the automatic portability provider or any of
its affiliates. In addition, the auditor must have the appropriate
technical training and proficiency necessary to carry out the audit.
The Department invites comments regarding the two percent threshold.
The Department believes the two percent threshold supports a
presumption of independence but requests comment with supporting
rationale if affected entities believe a higher threshold should be
permitted. Additionally, the Department requests comment on what
additional protections commenters would propose to support one or more
higher thresholds.
Paragraph (c) of this proposed regulation would also require the
independent auditor to review the automatic portability provider's
policies and procedures as well as representative samples of the
required disclosures and related automatic portability transactions
sufficient for the auditor to make the required audit determinations
and findings. The findings must be memorialized in a written audit
report, which would include the following: (1) the number of completed
automatic portability transactions during the audit period; (2) whether
the required notices met the timing and content requirements of these
regulations; (3) whether the required notices were written and
delivered in a manner reasonably designed to ensure that affected
individuals would both receive and understand the notices; (4) whether
any required notices were returned as undeliverable and what steps were
taken by the automatic portability provider to address undeliverable
notices; (5) whether the appropriate transfer-in plan accounts received
all the assets due as a result of the automatic portability
transactions; (6) a summary of all fees charged by the automatic
portability provider (and any
[[Page 5634]]
affiliates) for services in connection with automatic portability
transactions, including whether those fees increased since the last
report; (7) whether the fees and compensation received by the automatic
portability provider (including its affiliates) are consistent with the
fees authorized by the appropriate fiduciaries and did not exceed
reasonable compensation; (8) whether all requirements of section
4975(f)(12) and these proposed regulations were satisfied with respect
to: (a) the policies and procedures and (b) the transactions and
disclosures that were reviewed; (9) a summary of compliance issues
reported to or discovered by the auditor, the auditor's
recommendations, and the extent to which the automatic portability
provider has addressed or is addressing the issues pursuant to the
correction procedures; (10) any other recommendations from the auditor
to improve the policies and procedures and overall execution of
automatic portability transactions; and (11) a description of the
auditor's audit methodology. In order to assist the auditor in the
review, the automatic portability provider is required to grant the
auditor access to its automatic portability operations and records
(including, as necessary, the operations and records of its affiliates)
sufficient to allow the auditor to make the determinations and findings
noted above.
Section 120(d) of the SECURE 2.0 Act requires the Secretary to
provide periodic reports to Congress that include a variety of
information related to automatic portability transactions and
portability arrangements more generally. The Department envisions that
most of the information required for this report to Congress will come
from information included in the audit reports filed by automatic
portability providers. Therefore, the Department is proposing that the
written audit report would also include: (1) the number of automatic
rollovers of mandatory distributions from qualified plans into Default
IRAs that are included in the automatic portability program; \37\ (2)
the number of completed automatic portability transactions; and (3) the
number of Default IRAs separately in each of the following categories:
(a) which have been transferred to designated beneficiaries, (b) for
which the automatic portability provider is searching for next of kin
due to a deceased IRA owner without a designated beneficiary, and (c)
that were reduced to a zero balance while in the automatic portability
provider's custody.
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\37\ Sec. 120(d)(1)(A)(i) uses the term ``automatic cash outs''
but the Department believes, based on the context, that it is
referring to automatic rollovers of mandatory distributions as that
term is used throughout this preamble.
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If the automatic portability provider does not have direct access
to any information required to be included in the audit report, the
automatic portability provider would be required, as a condition of its
services, to obtain appropriate information from partnering
recordkeepers and participating plans in their possession or control,
on request from the automatic portability provider, so it can be
provided to the independent auditor and incorporated into the audit
report.\38\ The Department seeks comments on the availability of any
information not otherwise directly accessible by the automatic
portability provider and if there are any barriers to obtaining this
information from participating recordkeepers or employer-sponsored
plans. The Department also seeks comment on whether there are other
readily available sources for such information that would be accessible
to the Department.
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\38\ The automatic portability provider may not have direct
access to all the information identified in section 120(d) of the
SECURE 2.0 Act if, for instance, the automatic portability provider
is not the provider or custodian of all IRAs for which it will
execute automatic portability transactions.
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i. Timing of Audit Report & Certification
This proposed regulation would require the independent auditor to
complete the audit within 180 calendar days following the annual period
to which the audit relates. The automatic portability provider must
then submit a copy of the written audit report to the Department at
[email protected] within 30 calendar days of completion.
The automatic portability provider's submission to the Department must
also include a certification, under penalty of perjury, that the
automatic portability provider reviewed the audit report and that, to
the best of its knowledge at the time, it has addressed, corrected, or
remedied any noncompliance or inadequacy, or has an appropriate written
plan to address any such issues identified in the audit report.
(c) Corrections
Section 120(c)(9) specifically grants the Secretary authority to
provide for correction procedures in the event the auditor determines
the automatic portability provider was not in compliance with the
statute and related regulations. To effectuate the intent of this
provision, the Department is proposing three components for
corrections.
First, the Department is providing an opportunity for an automatic
portability provider to make certain self-corrections. Under paragraph
(c)(9)(i), the Department would not consider a non-exempt prohibited
transaction to have occurred due to a violation of the requirements of
Code section 4975(f)(12) and these regulations with respect to a
transaction, provided that either the violation does not result in
investment losses to the Default IRA or the automatic portability
provider made the IRA whole for any resulting losses. In order to self-
correct in those situations, the automatic portability provider would
be required to correct the violation and document the correction in
writing within 30 calendar days of correction. The correction would
only be permitted if it occurs no later than 90 calendar days after the
automatic portability provider learned of the violation or reasonably
should have learned of the violation. Finally, all instances of
noncompliance and accompanying corrections would be required to be
reported in writing to the auditor and the auditor would have to agree
that the transaction did not result in investment losses or that the
IRA was made whole. The Department solicits comments on whether
specific criteria should be included in the final rule on measuring
investment losses and make whole requirements.
The second component for corrections involves additional
recommendations from the auditor. If the auditor determines that the
automatic portability provider was not in compliance with any provision
of Code section 4975(f)(12) or these regulations during the audit
period, the auditor must identify the instances of noncompliance in the
audit report along with its recommended corrections. An automatic
portability provider would not be treated as having failed to comply
with any provision of Code section 4975(f)(12) or these regulations,
provided it corrects any instance of noncompliance identified by the
auditor as soon as reasonably practicable according to the auditor's
recommendations.
The Department believes that the first two components for
corrections will provide an automatic portability provider with
additional incentive to take the audit process seriously, timely
identify and correct violations of Code section 4975(f)(12) and these
proposed regulations, and use the audit process to correct deficiencies
in the automatic portability provider's operations to avoid potential
future violations,
[[Page 5635]]
penalties, losses to IRA owners/plan participants, and lawsuits.
The third and final component for corrections would involve the
Secretary requiring an automatic portability provider to submit to
supplemental audits and corrective actions if significant compliance
issues are uncovered. The Department is proposing the following
scenarios involving the automatic portability provider or an affiliate
under which the Secretary may impose additional corrective actions: (1)
engaging in a systematic pattern or practice of violating any provision
of section 4975(f)(12) or an implementing regulation; (2) intentionally
violating any provision of section 4975(f)(12) or an implementing
regulation; (3) providing materially misleading information to the
Secretary, Secretary of the Treasury, or the auditor in connection with
automatic portability transactions; (4) a foreign or domestic criminal
conviction involving or arising out of the conduct of the automatic
portability program or any automatic portability transaction; or (5) a
foreign (or foreign equivalent) \39\ or domestic criminal conviction
for any felony involving the following crimes: larceny, theft, robbery,
extortion, forgery, counterfeiting, fraudulent concealment,
embezzlement, fraudulent conversion, misappropriation of funds or
securities, or conspiracy to commit any such crimes or a crime in which
any of the foregoing crimes is an element.
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\39\ The Department does not expect that foreign crimes will
arise frequently in connection with automatic portability providers,
but if they do, impacted entities may contact the Department for
guidance. Additionally, the Department requests comment regarding
whether any additional process should be provided for foreign crimes
before the Department imposes supplemental audits or corrective
actions, particularly those foreign crimes that raise issues
regarding their equivalence to a domestic crime.
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12. Automatic Portability Provider website
The proposed regulation in paragraph (d) parallels the statutory
language in Code section 4975(f)(12)(B)(xii) requiring the automatic
portability provider to: (1) maintain a website which contains a list
of recordkeepers with respect to which the automatic portability
provider carries out automatic portability transactions and (2) list
all fees paid to the automatic portability provider. Under the proposed
regulation the list would have to include the fees and the identity of
the party or account that is paying the particular fee. The proposal
also requires that the website include the number of plans and
participants covered by each recordkeeper. The Department solicits
comments on whether other documents or materials should be required to
be posted on the website, for example, a copy of the independent
auditor's audit report redacted as needed to protect confidential
business information, if any, in the audit report.
Because the Department anticipates that automatic portability
providers may include a range of other services and information,
customer support features, and functionalities in addition to automatic
portability transactions, the proposal would also require the website
to display automatic portability transaction-related information in a
way that differentiates that information from other information or
elements of the website (e.g., separately identifying the automatic
portability transaction fees and services from fees and services in
connection with establishing and custody of a Default IRA).
The Department intends that these website disclosures and
additional parameters will make it easier for plan sponsors to
independently assess the overall cost of an automatic portability
arrangement in connection with signing up for an automatic portability
transaction service covered by the statutory exemption and this
regulation.
13. Limitations on Exculpatory Provisions
Section 120(c)(6) of the SECURE 2.0 Act specifically provides the
Secretary with the authority to place limitations on exculpatory
provisions due to an improper transfer of Default IRA assets.
Therefore, the Department is proposing that the automatic portability
provider may not include exculpatory provisions in its contracts
disclaiming or limiting the automatic portability provider's liability
in the event that the automatic portability transaction results in an
improper roll-in to the transfer-in plan. However, this requirement
would not prohibit disclaimers for liability caused by an error,
misrepresentation, or misconduct of a party independent of the
automatic portability provider and its affiliates, or damages arising
from acts outside the control of the automatic portability provider.
Section 120(c)(6) of the SECURE 2.0 Act does not specifically address
other exculpatory provisions. The Department requests comments on
whether the prohibition on exculpatory provisions should be broader and
include violations of the prohibited transaction provisions in Code
section 4975 generally and ERISA in connection with any conduct of the
automatic portability provider or an affiliate that is subject to Title
I.
14. Record Retention
This proposed regulation incorporates the statutory language in
Code section 4975(f)(12)(B)(xi)(I) regarding record retention by
requiring that an automatic portability provider maintain, for not less
than six years, records sufficient to demonstrate compliance with the
requirements of the statute and this proposed regulation and make them
available to authorized employees of the Department and the Department
of the Treasury within 30 calendar days of a written request. This
proposal also includes clarifying language regarding the record
retention requirement and its impact on the prohibited transaction
relief provided by Code section 4975(d)(25), which clarifying language
the Department has frequently included in administrative prohibited
transaction exemptions. First, the proposal provides that no prohibited
transaction will be considered to have occurred if, solely because of
circumstances beyond the control of the automatic portability provider,
the records are lost or destroyed before the six-year period ends
(e.g., due to a natural disaster). Second, an automatic portability
provider's failure to maintain the records necessary to determine
whether the conditions of Code section 4975(d)(25) and this regulation
have been met will result in the loss of the relief provided under this
exemption only for the transaction or transactions for which such
records are missing or have not been maintained. Such failure does not
affect the relief for other transactions if the automatic portability
provider maintains records for such other transactions in compliance
with the record retention requirements.
15. Definitions
The Department included three definitions in proposed paragraph
(g). The proposed definition of ``affiliate'' is consistent with the
Department's definition of affiliate in many other regulations.\40\
Likewise, the definition of ``control'' is intended to be consistent
with the Department's use of that term in other regulations.\41\ The
definition of ``individual retirement plan'' refers to an individual
retirement account or annuity described in Code section
[[Page 5636]]
408(a) or 408(b). The Department requests comment on whether any other
definitions may be necessary to provide additional clarity to the
proposed regulation.\42\
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\40\ A person or entity is an ``affiliate'' if, directly or
indirectly (through one or more intermediaries) it controls, is
controlled by, or is under common control with such person or
entity; or is an officer, director, or employee of, or partner in,
such person or entity. Unless otherwise specified, an ``affiliate''
refers to an affiliate of the automatic portability provider.
\41\ The term ``control'' means the power to exercise a
controlling influence over the management or policies of an entity
or person other than an individual.
\42\ As one example, should the Department define ``active
participant'' or is this term generally understood?
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E. Request for Public Comments
The Department invites comments from interested persons on all
facets of the proposed rule. Commenters are free to express their views
not only on the specific provisions of the proposal as set forth in
this document, but on any issues germane to the subject matter of the
proposal. Comments should be submitted in accordance with the
instructions at the beginning of this document.
Without limiting the generality of the above request for comments,
the Department requests comments on whether the rule should include
provisions that specially address issues related to IRA beneficiaries.
The statutory provisions envision an automatic portability transaction
as a transfer of assets ``made from an individual retirement plan which
is established on behalf of an individual and to which amounts were
transferred under section 401(a)(31)(B)(i)'' to an eligible employer-
sponsored retirement plan in which ``such individual is an active
participant.'' The statutory provisions do not expressly reference
moving funds for a beneficiary from a default IRA to an employer-
sponsored plan in which the beneficiary participates. The statutory
provisions similarly require notices to ``the individual on whose
behalf the individual retirement plan . . . is established.''
Nonetheless, the Department notes the recordkeeping provisions in the
statute expressly reference the automatic portability provider taking
steps to ensure it has accurate beneficiary information and the
statutory provisions on the required Report to Congress call for
separate identification of IRAs transferred to designated beneficiaries
and IRAs for which a next of kin is being identified after the death of
the IRA owner without a designated beneficiary. Accordingly, the
Department is interested in comments on whether the final regulation
should address specific beneficiary issues, and, if the commenter
believes it should, the Department asks that the commenter identify the
issue or issues and include recommendations on how the issue or issues
should be addressed in the regulation.
The Department also specifically requests comments on exemptive
relief for Default IRAs involving rollovers of mandatory distributions
with a value of $1,000 or less. The proposal does not expressly include
such mandatory distributions in light of the SECURE 2.0 Act amendment
of Code section 4975 defining the term ``automatic portability
transaction'' to mean a transaction in which mandatory distributions
pursuant to Code section 401(a)(31)(B)(i) from an employer-sponsored
retirement plan to an IRA established on behalf of an individual are
subsequently transferred to an eligible employer-sponsored plan in
which such individual is an active participant, after such individual
has been given advance notice of the transfer and has not affirmatively
opted out of such transfer. As noted elsewhere in this document, Code
section 401(a)(31)(B)(i) refers to distributions of nonforfeitable
accrued benefits the present value of which is in excess of $1,000 but
less than or equal to $7,000. The Department confronted a similar issue
in implementing section 657(c)(2)(A) of the Economic Growth and Tax
Relief Reconciliation Act of 2001 (EGTRRA), which directed the
Department to issue regulations providing safe harbors under which (1)
a plan administrator's designation of an institution to receive the
automatic rollover, and (2) the initial investment choice for the
rolled-over funds would be deemed to satisfy the fiduciary
responsibility provisions of section 404(a) of ERISA. Section 657 of
EGTRRA also referenced Code section 401(a)(31)(B) automatic rollovers.
However, in its final rule in 2004, the Department, in response to
public comments, included mandatory distribution amounts of $1,000 or
less noting that, although not described in Code section 401(a)(31)(B),
tax-qualified retirement plans are permitted to distribute to a
separating participant without the participant's consent provided the
present value of the participant's vested accrued benefit did not
exceed the maximum value at that time of $5,000.\43\ The Department
said that, after taking into account the purpose and provisions of the
safe harbor regulation, it was persuaded that application of the safe
harbor to rollovers of mandatory distributions of $1,000 or less was
appropriate because the availability of the safe harbor for such
distributions might increase the likelihood that such amounts will be
rolled over to individual retirement plans and thereby may promote the
preservation of retirement assets without compromising the interests of
the participants on whose behalf such rollovers are made.\44\ In
addition, some plans may find it advisable to provide for automatic
rollovers of all sizes of small accounts to avoid the issues that arise
when distribution checks remain uncashed.\45\ Thus, in light of the
fact that the regulatory exemption in Code section 4975 established by
the SECURE 2.0 Act specifically references 401(a)(31)(B), the
Department is interested in public comments on whether it should use
its general exemption authority under ERISA section 408(a) to provide
parallel exemptive relief for mandatory distributions of $1,000 or less
for reasons similar to those noted above in connection with the
Department's automatic rollover safe harbor in 29 CFR 2550.404a-2.
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\43\ See 29 CFR 2550.404a-2(d); Final Rule on Fiduciary
Responsibility Under the Employee Retirement Income Security Act of
1974 Automatic Rollover Safe Harbor, 69 FR 58018 (Sept. 28, 2004).
\44\ Id. at 58019.
\45\ See ``The Benefits of Mandatory Distributions,'' A White
Paper by Fred Reish and Bruce Ashton (2013)(available at https://fredreish.com/wp-content/uploads/2013/03/The-Benefits-of-Mandatory-Distributions-A-White-Paper-February-2013_NEW.pdf).
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F. Regulatory Impact Analysis
The Department has examined the effects of this proposed rule as
required by Executive Order 12866,\46\ Executive Order 13563,\47\ the
Congressional Review Act,\48\ the Paperwork Reduction Act of 1995,\49\
the Regulatory Flexibility Act,\50\ section 202 of the Unfunded
Mandates Reform Act of 1995,\51\ and Executive Order 13132.\52\
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\46\ Regulatory Planning and Review, 58 FR 51735 (Oct. 4, 1993).
\47\ Improving Regulation and Regulatory Review, 76 FR 3821
(Jan. 21, 2011).
\48\ 5 U.S.C. 804(2) (1996).
\49\ 44 U.S.C. 3506(c)(2)(A) (1995).
\50\ 5 U.S.C. 601 et seq. (1980).
\51\ 2 U.S.C. 1501 et seq. (1995).
\52\ Federalism, 64 FR 43255 (Aug. 10, 1999).
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1. Executive Order 12866 (Regulatory Planning and Review), Executive
Order 14094 (Modernizing Regulatory Review), and 13563 (Improving
Regulation and Regulatory Review)
Under E.O. 12866 (as amended by Executive Order 14094), the Office
of Management and Budget (OMB)'s Office of Information and Regulatory
Affairs determines whether a regulatory action is significant and,
therefore, subject to the requirements of the E.O. and review by OMB.
58 FR 51735. As amended by Executive Order 14094, section 3(f) of
Executive Order 12866 defines a ``significant regulatory action'' as a
regulatory action that is likely to result
[[Page 5637]]
in a rule that may: (1) have an annual effect on the economy of $200
million or more; or adversely affect in a material way the economy, a
sector of the economy, productivity, competition, jobs, the
environment, public health or safety, or state, local, territorial, or
tribal governments or communities; (2) create a serious inconsistency
or otherwise interfere with an action taken or planned by another
agency; (3) materially alter the budgetary impact of entitlements,
grants, user fees or loan programs or the rights and obligations of
recipients thereof; or (4) raise legal or policy issues for which
centralized review would meaningfully further the President's
priorities or the principles set forth in the Executive order. OMB has
determined that this revision is a significant regulatory action under
section 3(f)(1) of E.O. 12866.
Executive Order 13563 directs agencies to propose or adopt a
regulation only upon a reasoned determination that its benefits justify
its costs; the regulation is tailored to impose the least burden on
society, consistent with achieving the regulatory objectives; and in
choosing among alternative regulatory approaches, the agency has
selected those approaches that maximize net benefits. E.O. 13563
recognizes that some benefits are difficult to quantify and provides
that, where appropriate and permitted by law, agencies may consider and
discuss qualitative values that are difficult or impossible to
quantify, including equity, human dignity, fairness, and distributive
impacts.
2. Need for Regulation
When American workers change jobs, they often encounter frictions
that result in reduced retirement savings in aggregate. This regulation
will alleviate some of those frictions, resulting in more retirement
savings, which will improve Americans' preparation for retirement. This
is particularly beneficial given the wider context that many workers
have insufficient retirement savings. Only 57 percent of households
headed by 55-64 year olds held any retirement savings accounts in 2022,
and the median amount in those accounts was $185,000.\53\ The Federal
Reserve reports that only one-third of Americans view their retirement
savings plan as sufficient to meet their needs in retirement.\54\ This
is consistent with projections by VanDerhei (2019) showing that about
41 percent of households ages 35 to 64 will run short of money in
retirement.\55\ Similarly, Brown et al. (2018) find that nearly 77
percent of Americans are behind in saving for retirement given their
age and income.\56\
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\53\ 2022 Survey of Consumer Finance. ``Retirement Account by
Age of Reference Person,'' The Fed--Table: Survey of Consumer
Finances, 1989--2022 (federalreserve.gov).
\54\ Federal Reserve. ``Survey of Household Economics and
Decisionmaking.'' 2022.
\55\ Jack VanDerhei, ``Retirement Savings Shortfalls: Evidence
from EBRI's 2019 Retirement Security Projection Model.'' Employee
Benefit Research Institute (March 7, 2019).
\56\ Jennifer Brown, Joelle Saad-Lessler, and Diane Oakley.
``Retirement in America: Out of Reach for Working Americans?''
National Institute on Retirement Security. 2018.
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Previous generations of American workers who had a retirement plan
usually had a defined benefit (DB) pension plan that promised fixed
payments to them upon retirement. An employee's retirement benefit
under a DB plan often is based on a percentage of their final year's
compensation multiplied by their total years of employment with the
sponsoring employer.\57\ Workers who changed jobs and moved to another
plan, however, received less benefits from DB plans, as these plans
often had a five-year cliff vesting policy, so a worker who stayed at a
job for fewer than five years received no retirement benefits from that
job. Even when a worker accrued benefits under a former employer's DB
plan, the effects of inflation often meant that their final year's
salary earned from their former employer tended to be lower than their
final year's salary earned from a subsequent employer before
retirement. Since the employee's final year's salary is a key factor in
the benefit formula, they would receive lower lifelong pension benefits
as a result of switching jobs even if they worked the same number of
years at the same salaries.
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\57\ U.S. Bureau of Labor Statistics, Employee Benefits,
``Retirement plan provisions for private industry workers in the
United States,'' Table 2, reference year 2022, (April, 2023).
Available at: https://www.bls.gov/ebs/publications/retirement-plan-provisions-for-private-industry-workers-2022.htm.
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In recent decades defined contribution (DC) plans have supplanted
DB plans as the most prevalent type of pension plan provided to
workers.\58\ DC plans, such as 401(k) plans, base their benefit on
employer and employee contributions to an individual's account and the
investment earnings on their account balance. Currently, 49 percent of
private industry workers (59 percent of full-time private industry
workers) are participating in a DC plan.\59\ For workers that change
jobs frequently, DC plans have certain portability advantages over
traditional DB plans. Public policies such as this new automatic
portability statutory exemption and this proposed regulation can
further benefit participants by facilitating portability among DC plans
and IRAs.
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\58\ Employee Benefits Security Administration, Private Pension
Plan Bulletin Historical Tables and Graphs 1975-2021, (September
2023), Table E4, (September 2023), https://www.dol.gov/sites/dolgov/files/ebsa/researchers/statistics/retirement-bulletins/private-pension-plan-bulletin-historical-tables-and-graphs.pdf.
\59\ U.S. Bureau of Labor Statistics, National Compensation
Survey, Series: NBU29000000000000026313 & NBU29000000000002526313,
(March, 2023), Available at: https://data.bls.gov/cgi-bin/srgate.
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In the current retirement system where employer-sponsored DC plans
are the primary vehicle available for employees to save for retirement,
an employee separating from service with an employer may be suddenly
confronted with an important financial decision regarding how to handle
retirement assets they have accrued in their employer's DC plan. Making
it simpler for employees to consolidate their retirement accounts and
maintain their tax-favored status can improve retirement security for
American workers.
Currently, employees who change jobs generally have the following
four options for handling their retirement assets:
1. Leave the assets in their former employer's plan. The separating
employee can do this if the value of their accrued benefit under the
plan meets any threshold imposed by the plan, which can be at most
$7,000 beginning in 2024. (A participant might choose this option
because they find the former plan's services, investments, and fees to
be attractive or because of simple inattention.)
2. Roll over their savings into a retirement plan sponsored by
their new employer.
3. Roll over their assets into an IRA.
4. Cash out the balance.
The first three of these options, where the assets are in a plan or
an IRA, retain their tax-preferred status. A cashout, on the other
hand, results in the loss of tax-preferred status for those assets. It
is no longer earning investment returns that are tax-deferred. The
funds are distributed directly to the employee and are subject to
regular income taxes. Additionally, a 10 percent penalty tax applies if
the employee is under age 55 throughout the year in which they
terminate service with the employer and if the employee does not
qualify for an exception.
When a plan participant separates from service with an employer
with an account balance in the former employer's DC plan, the former
employer has the option to immediately
[[Page 5638]]
cash out account balances of $5,000 or less without the participant's
consent (if the plan has a provision allowing the immediate
distribution).\60\ These distributions are a form of cashout and are
often referred to as ``mandatory distributions.'' If, however, the
participant's account balance is between $1,001 and $5,000, and the
participant does not elect to have the account balance paid to an
eligible retirement plan or receive the distribution directly in cash,
then the plan administrator of the former employer's plan must transfer
such account balance to a so-called ``Default IRA'' if this is required
by the plan's provisions. These distributions are commonly referred to
as ``force-outs'' or ``automatic rollovers of mandatory
distributions.'' \61\ As part of the SECURE 2.0 Act, Congress raised
the $5,000 threshold to $7,000 (effective for distributions occurring
after December 31, 2023).\62\
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\60\ Code sections 411(a)(11) and 417(e).
\61\ Code section 401(a)(31)(B)(i).
\62\ See SECURE 2.0 Act, Sec. 304.
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Default IRAs, while intended to preserve retirement assets in
conservatively managed accounts, typically yield only minimal returns
for investors while often imposing considerable fees.\63\ A 2014 study
by the Government Accountability Office (GAO) found that, ``fees
outpaced returns in most of the [forced-out] IRAs analyzed'' and that
account balances ``tended to decrease over time.'' \64\ GAO also found
the average return to be less than two percent for money market funds,
which are typical investments for Default IRAs. In contrast, many
accounts rolled into a worker's new employer's plan likely will be
invested in the plan's default investment, usually target date funds,
which typically outpace the return on money market funds. Observing
data on small balance rollover IRAs in general suggests that most
Default IRA owners will stay invested in money market funds for a
substantial length of time; recent data suggest roughly 40 percent of
these accounts remain in principal-preserving investments for at least
10 years.\65\
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\63\ Government Accountability Office (GAO). ``401(k) Plans:
Greater Protections Needed for Forced Transfers and Inactive
Accounts.'' (2014).
\64\ Id.
\65\ Lucas Goodman, Anita Mukherjee, and Shanthi Ramnath (2023):
``Set it and forget it? Financing retirement in an age of
defaults'', Journal of Financial Economics, vol 148, p.47-68.
Investment Company Institute. ``The IRA Investor Profile:
Traditional IRA Investors' Activity, 2007-2016.'' (September 2018),
Appendix: Figure A.2, Page 68.
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With job turnover, a single individual may end up with multiple
Default IRAs, further complicating the management of their retirement
account assets, and in many cases, exposing participants to duplicative
fees that might otherwise have been avoided if their assets were
consolidated into a single account. Also, these Default IRAs are
established by employers on behalf of non-responsive participants;
therefore, they are more susceptible to being abandoned or forgotten by
participants.
Cashouts affect participants by removing their assets from tax-
favored retirement accounts. A 2023 study by Wang, Zhai, and Lynch
found that over 40 percent of separating employees report cashing out
at least some of their retirement account balance, consistent with
reporting from numerous recordkeepers suggesting a cashout rate of
approximately 40 percent among separating participants with account
balances below $5,000.\66\ VanDerhei (2019) analyzes individuals age 35
to 64, projects forward their main sources of retirement resources,
estimates how much they will fall short, aggregates that across all
individuals, and calculates a present value, estimating an aggregate
retirement savings shortfall in excess of $3 trillion. In light of this
shortfall, reducing cashouts and retaining assets in the retirement
system is an important retirement policy objective, particularly for
those workers with small balance accounts who may be struggling to
accumulate significant retirement assets.\67\
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\66\ Yanwen Wang, Muxin Zhai, and John G. Lynch, Jr. ``Cashing
Out Retirement Savings at Job Separation.'' (2023). Vanguard. ``How
America Saves.'' 2023. Alight. ``Universe Benchmarks Report: How
Workers Are Saving and Investing in Defined Contribution Plans.''
(2023). Alight. ``Distributions from Defined Contribution Plans:
What Do Workers Do with their Retirement Savings After They Leave
Their Employers? A Deep Dive into Post-Termination Behavior, 2008-
2017.'' (2019). Lucus Goodman, Jacob Mortenson, Kathleen Mackie, and
Heidi R. Schramm, ``Leakage from Retirement Savings Accounts in the
United States,'' (2021) National Tax Journal, 74(3), 689-719.
\67\ VanDerhei, ``Retirement Savings Shortfalls,'' 2019.
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Taking a cashout or taking no action at all may seem like the
simplest and most expedient courses of action for a small-balance
account participant upon job separation but can result in sub-optimal
outcomes. A 2013 GAO study found that the rollover process was complex,
inefficient, and burdensome for participants.\68\ These findings were
reinforced by a 2019 GAO report, which suggested that frictions in the
rollover process likely contributed to participants cashing out their
accounts prematurely.\69\ Both studies advised that improving the
processes for account consolidation after job separation is imperative
to reducing the leakage of assets from the retirement system.
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\68\ Government Accountability Office. ``401(k) Plans: Labor and
IRS Could Improve the Rollover Process for Participants.'' Report to
Congressional Requesters. (2013).
\69\ Government Accountability Office. ``Retirement Savings:
Additional Data Analysis Could Provide Insight into Early
Withdrawals.'' Report to the Chairman, Special Committee on Aging,
U.S. Senate. (2019).
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Plan account portability is thus integral to the retention and
accumulation of retirement assets for workers. Measures to improve
account portability would serve to reduce participant losses due to
cashouts (and the associated taxes and penalties for early
withdrawals), lost accounts, duplicative fees arising from multiple
accounts, and boost average investment return.
The SECURE 2.0 Act includes a new statutory prohibited transaction
exemption that seeks to improve retirement plan portability by
permitting an automatic portability provider to perform automatic
portability transactions for participants with Default IRA accounts
established as a result of a mandatory distribution from a former
employer's plan if the individual does not respond to their former
plan's administrator's notices.\70\ If an automatic portability
provider meets the conditions of the statutory exemption, it can
transfer assets from a worker's Default IRA to their active account in
their new employer's DC plan. The proposed rule would implement the new
statutory exemption.
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\70\ Internal Revenue Code section 4975(d)(25).
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3. Baseline and Post Statute and Regulation Scenarios
Prior to the passage of SECURE 2.0 Act, RCH operated in the
automatic portability marketplace using PTE 2019-02 which is the
``baseline'' scenario for this analysis. As discussed previously, the
PTE was issued for a five-year term. The need to renew the PTE, and the
uncertainty associated with its continual renewal, creates uncertainty
for the marketplace. The baseline includes the assumptions of future
renewals of PTE 2019-02 for RCH and the mandatory distribution
threshold to be at the pre-statute level of $5,000. SECURE 2.0 Act
raised the mandatory distribution threshold for a plan administrator to
transfer assets into a Default IRA from $5,000 to $7,000 and creates a
statutory exemption that eliminated the uncertainty in the marketplace
about the continued existence of PTE 2019-02, which should encourage
the marketplace to expand its reach in the Defined Contribution
universe.\71\ The analysis looks at the
[[Page 5639]]
combined impacts of the SECURE 2.0 Act and the proposed regulations and
does not distinguish between the two.
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\71\ Brian Croce, ``SECURE 2.0 Enshrines Auto Portability Into
Law,'' Pensions and Investments, (January 27, 2023) at https://
www.pionline.com/retirement-plans/secure-20-enshrines-auto-
portability-
law#:~:text=The%20SECURE%202.0%20provision%20stipulates,sell%20data%2
0relating%20to%20the.
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The baseline assumes that the recordkeepers currently performing
automatic portability transactions continue to be the only
recordkeepers providing automatic portability transactions in the
future, therefore the percent of plans and accounts covered by
automatic portability remains unchanged at 65 percent. However, the
percent of plans and accounts covered by automatic portability is
expected to increase in the post-rule and regulation scenario,
increasing from 65 percent to 90 percent by year 10.\72\ This is
actually a simplification, the average of a number that likely would
have grown slightly in the absence of the Secure 2.0 Act. Before
passage of the Act, in October 2022, there were only three
recordkeepers who had joined the automatic portability consortium. of
2022, the Secure 2.0 Act was signed in late December 2022, and very
soon shortly thereafter other large recordkeepers joined. While much of
this growth in consortium members is likely related to the prospect and
enactment of legislation, there might have been some growth even
without the legislation. The inclusion of automatic portability in the
Secure 2.0 Act increases awareness of the program and that publicity
may promote growth.
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\72\ In other words, for an affected participant who changes
jobs in year 10, there is a 90 percent chance that their former plan
has a recordkeeper that belongs to PSN and also a 90 percent chance
that their new plan has a recordkeeper that belongs to PSN. This
means that 81 percent of the workers who switch from one DC plan to
another in year 10, have a small balance account, and do not take
any affirmative action, would experience an automatic portability
transaction.
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This assumption is based on 2016 testimony by RCH and EBRI before
the ERISA Advisory Council wherein they stated that the ability to
locate and match accounts to conduct automatic portability transfers is
``highly dependent on market adoption.'' \73\ As the network grows,
there is a greater likelihood of being able to match a separating
participant with their new employer's plan. As a result, the benefits
of belonging to the network increase, encouraging more recordkeepers to
join. It is anticipated that as a result of the legislation and the
reduced uncertainty, more recordkeepers will join the consortium, and
this dramatic growth is reflected in the post-rule estimates. Section 9
``Uncertainty'' provides an alternative estimate reflecting growth in
the number of recordkeepers joining the network in the baseline
scenario. The Department requests comment on the portion of the
expansion in recordkeepers joining the network that would be
attributable to the proposal.
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\73\ Retirement Clearinghouse, LLC, Employee Benefit Research
Institute, and contributor Boston Research Technologies. ``Auto
Portability Research & Simulation: Automating Plan-to-Plan Transfers
for Small Accounts.'' Consolidated Testimony in front of the ERISA
Advisory Council, June 8, 2016.
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4. Affected Entities
4.1. Automatic Portability Providers
Retirement Clearinghouse (RCH), originally founded as
RolloverSystems in 2001, was the first company to approach the
Department for sub-regulatory guidance and prohibited transaction
relief to offer an automatic portability program to plans. RCH asserted
that its services would facilitate automatic rollovers into Default
IRAs from accounts in plans of individuals' former employers that are
eligible for mandatory distributions under Code section 401(a)(31)(B),
automatic rollovers into Default IRAs of account balances from
terminated DC plans, and automatic roll-in of funds held in Default
IRAs to an individual account plan maintained by the IRA owner's new
employer when the Default IRA owner changes jobs and has an account in
their new employer's DC plan. In 2019, the Department issued PTE 2019-
02, an individual prohibited transaction exemption permitting RCH to
receive certain fees in connection with the transfer of an individual's
Default IRA to the individual's account in a new employer-sponsored
plan, without the individual's affirmative consent.\74\
---------------------------------------------------------------------------
\74\ See 83 FR 55741 (Nov. 7, 2018) (proposed exemption) and 84
FR 37337 (July 31, 2019) (granted exemption).
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Since then, RCH's footprint in the automatic portability space has
grown with its formation of the Portability Services Network (PSN).
This network currently consists of founding owning members RCH and six
recordkeepers: Alight, Empower, Fidelity, Principal, TIAA, and
Vanguard, and it can incorporate an unlimited number of additional
member recordkeepers. While PSN operates as a separate entity from RCH
that is controlled by RCH's founding owning members, PSN solely relies
on the technological infrastructure and operations established by
RCH.\75\ PSN's website currently states that it does not charge a fee
to recordkeepers or plan sponsors for its automatic portability
services; instead, it charges participants a one-time fee when their
account balances are transferred into a new employer's plan. Currently,
the maximum transfer fee is $30, and the fee could be lower for smaller
accounts.\76\
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\75\ Portability Services Network, Our Structure, (2023),
https://psn1.com/learning-center/about-psn/structure-of-psn.
\76\ Portability Services Network, Our Fees, (2023), https://
psn1.com/learning-center/about-psn/what-are-psns-
fees#:~:text=Key%20aspects%20of%20PSN's%20fee,be%20processed%20at%20n
o%20charge.
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The automatic portability provider market is new and complex.
Therefore, there is significant uncertainty regarding how many entities
will offer automatic portability services in the future and how the
automatic portability marketplace will evolve. Barriers to entry exist
in the business model, because entities must have sufficient access to
plan and IRA participant data and information systems technology that
would allow it to match a worker's default IRA with their plan account
and transfer the employee's Default IRA to their new employer's plan.
The larger the amount of data available to the automatic portability
provider, the more successful it will be in matching participants'
Default IRAs with their active accounts in a new employer's plan.
Based on the best available data, the Department estimates that PSN
currently covers more than 60 percent of account holders in large DC
plans \77\ and that its market share is likely to increase further due
to the new statutory prohibited transaction exemption. Due to the
aforementioned barriers to entry for potential automatic portability
providers, the Department is unaware of any entities other than PSN
that are currently planning to become an automatic portability provider
in reliance on Code section 4975(d)(25).\78\ Therefore, for purposes of
this analysis, the Department assumes that PSN will be the only entity
providing automatic portability provider services pursuant to the
statutory exemption. The Department assumes this will be the case even
though RCH was granted PTE 2019-02, because the individual exemption
has a limited five-year term that expires on July 31, 2024, while the
[[Page 5640]]
statutory exemption does not, and RCH would have to request additional
relief from the Department to continue relying on PTE 2019-02 after its
five-year term expires. If, counter to the Department's assumption, it
turns out that there is more than one automatic portability provider,
the Department anticipates that the number of automatic portability
providers would be very small because of the barriers to entry. They
might specialize by geography or by types of plan; for example, one
automatic portability provider might specialize in plans for government
employees. It seems likely that their networks would overlap so both
automatic portability providers could be successful in making many
matches. The Department welcomes comments regarding how many automatic
portability providers there would be, as well as data and other
information that will allow the Department to further assess how the
automatic portability marketplace will develop.
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\77\ Plans classified as large constitute nearly 90 percent of
account holders in plans required to file the Form 5500 and must
submit the Schedule C of the Form 5500, which covers service
providers, such as recordkeepers. Plans considered small do not
report this information. Calculation based on tabulations of the
2021 EBSA Private Pension Plan Bulletin Research File.
\78\ The Department is aware of one additional entity that had
expressed interest in becoming an automatic portability provider;
however, the Department understands this entity is no longer moving
ahead with plans to become an automatic portability provider.
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4.2. Recordkeepers
As discussed above, the Department assumes that PSN will be the
only automatic portability provider in the market. PSN is structured
with seven ``owner members,'' who have board control. It allows for
open recordkeeper membership without board control. In September of
2023, PSN stated that the owner members, which include Alight, Empower,
Fidelity, Principal, RCH, TIAA, and Vanguard, were the only members at
that time.\79\ There is significant uncertainty regarding how many
recordkeepers will join PSN. The Department believes that automatic
portability transactions will be a desirable feature for plan sponsors
and participants, which may drive growth in recordkeeper participation.
Recordkeepers do not incur a direct cost to join PSN. The Department
requests comment on how many recordkeepers would choose to join PSN.
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\79\ Portability Services Network, PSN Participating Owner
Members and Members, (2023), https://psn1.com/auto-portability/regulatory-information/participating-recordkeepers.
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While this analysis assumes that PSN will be the only automatic
portability provider, the Department acknowledges that another
automatic portability provider may enter the market. Entry of
additional automatic portability providers may impact the number of
affected recordkeepers and the manner in which those recordkeepers are
affected by this proposed regulation.
According to the Department's analysis of 2021 Form 5500 data,
there were 1,951 recordkeepers providing services to private sector DC
retirement plans.\80\ As described in more detail in subsection 3.1
above, the six recordkeepers that are founding owner members of PSN
administer accounts for over 60 percent of account holders in large DC
plans that file Form 5500. The Department estimates that by the end of
the ten-year estimation period for this analysis, roughly 90 percent of
the DC account holders in plans filing Form 5500 would be associated
with participating recordkeepers. As an illustration, this level of
recordkeeper participation could be achieved if the next 12 largest
recordkeepers, in terms of account holders serviced, fully participated
in the program. Because the market is currently dominated by large
recordkeepers, the Department anticipates that additional entry into
the market will be initially dominated by other large recordkeepers.
However, because of the low cost to participate in the PSN, it is
possible that most recordkeepers will eventually participate in it. The
Department solicits comments on its assumptions and estimates regarding
recordkeeper participation.
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\80\ The analysis only included plans with nonzero plan assets
and nonzero participants. Calculations based on the 2021 Form 5500.
---------------------------------------------------------------------------
4.3. Plans, Plan Participants, and the Number of Automatic Portability
Transactions
This section derives an estimate of the number of automatic
portability transactions. It does so by (1) identifying plans,
participants, and assets covered by PSN-participating recordkeepers,
(2) estimating the number of accounts below the mandatory distribution
threshold, and (3) estimating employment separations and post-
separation behavior. It estimates these figures under the baseline
scenario and under implementation of the statute and regulation.
4.3.1. Plans, Participants and Assets
The proposed regulation has the potential to affect participants
with account balances in any employer-sponsored retirement plan that
is: (1) a qualified trust; (2) an annuity plan described in Code
section 403(a); (3) an eligible deferred compensation plan described in
Code section 457(b) which is maintained by an eligible employer
described in Code section 457(e)(1)(A); or (4) an annuity contract
described in Code section 403(b).\81\ Approximately 635,000 DC plans
reported participants with account balances on their 2021 Form 5500.
These plans cover 86.6 million participants with total account balances
of $9.3 trillion.
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\81\ While this rulemaking technically may apply to separated,
vested DB participants as well, the Department believes that it is
rare that they would be affected by the rule and therefore does not
include them in its estimates. For further discussion, please see
section 9. Uncertainty. The number of participants is left static
throughout the ten-year time period of analysis. While this could
impact the overall estimate of the benefits and costs, it does not
impact the relative difference between benefits and costs.
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To understand the number of plans, participants and assets that
could be impacted one would need to know if the plan's recordkeeper is
part of the PSN network and if their account balance is below the
mandatory distribution threshold ($5,000 baseline or $7,000 post
statute and regulation) when they separate from employment. To identify
plans with PSN-participating recordkeepers the Department queried Form
5500 Schedule C data, which has information on a plan's service
providers. The data has limitations. in particular, only large plans
are required to submit the Schedule C, which means the majority of
plans do not have to file the Schedule C. However, the group of
retirement plans required to submit the Schedule C covers nearly 90
percent of participants with account balances and 90 percent of assets,
which are the main variables of interest.
The query of Schedule C data showed that the six recordkeepers that
are founding owner members of PSN provided services to over 34,600
large plans (40 percent of large plans) with 47 million account holders
(61 percent of account holders in large plans). These plans held $5.5
trillion in assets (66 percent of large plan assets) in 2021.\82\
---------------------------------------------------------------------------
\82\ Tabulations presented are based on the 2021 EBSA Private
Pension Plan Bulletin Research File.
---------------------------------------------------------------------------
Some plans with participants that may be impacted by the proposed
rule are not required to file the Form 5500, for example state and
local governmental plans. Account holders who participate in state and
local governmental plans that are not covered by ERISA may also be
affected by the proposed rule if their plan sponsor contracts with an
automatic portability provider to provide automatic portability
services. According to BLS employment data, there are almost 20 million
currently employed state and local government workers in the United
States.\83\ The March 2021 National Compensation Survey: Employee
Benefits in the United States indicates that 18 percent of state and
local
[[Page 5641]]
government workers participate in a defined contribution plan.\84\
Without more granular data, it is difficult for the Department to
determine a reasonably specific proportion of these workers that could
be affected by the proposed rule. However, the Department estimates
that up to 3.5 million state and local government workers participate
in a DC plan that may also incorporate a mandatory distribution
provision for small account balances.\85\
---------------------------------------------------------------------------
\83\ BLS Series Report(s) from the Current Employment Statistics
program: CES9092000001 & CES9093000001, Dec 2022 data element, data
accessed 10/2/2023 from: https://data.bls.gov/cgi-bin/srgate.
5,087,000 state employees and 14,370,000 local government employees.
\84\ BLS, ``National Compensation Survey: Employee Benefits in
the United States'', (September 2021), Employee Benefits in the
United States, March 2021 (bls.gov).
\85\ Calculated as: 18% x (5,087,000 state employees +
14,370,000 local government employees) = 3,502,260.
---------------------------------------------------------------------------
4.3.2. Accounts With Balances Less Than the Mandatory Distribution
Amount
The proposed regulation directly affects participants with account
balances less than $7,000 in a plan at the time of separation from
employment, previously only $5,000.\86\ To estimate the number of
affected participants, the Department considered the separation rate
for participants within this group and the proportion of DC plan
accounts with balances under $7,000.
---------------------------------------------------------------------------
\86\ There are some accounts that could have balances above the
$7,000 threshold that are still subject to a mandatory distribution.
See Code section 411(a)(11)(D) for circumstances where the amount of
a distribution may be greater than $5,000 if a participant made a
previous roll-in to a plan from an individual retirement plan. In
such circumstances, the roll-in funds are not considered in
determining the $5,000 vested accrued balance, so a larger amount of
assets could be subject to a mandatory distribution under the terms
of the plan.
---------------------------------------------------------------------------
While the Department lacks data specifically on DC accounts with
less than $7,000, there are related data that are useful in the
construction of an estimate. The Employee Benefit Research Institute
(EBRI) reported that in 2020, 40 percent of 401(k) plan accounts with
balances had less than $10,000 in their accounts and 28 percent had
less than $5,000 in their account.\87\ The Department used this data to
estimate that approximately 33 percent of DC plan accounts will have
balances below the new mandatory distribution threshold of $7,000.
Additionally, the Department estimates that 28 percent of DC plan
accounts would have balances below the current mandatory distribution
threshold of $5,000 that represent the baseline. The Department
requests comment on these assumptions and this estimate.
---------------------------------------------------------------------------
\87\ Sarah Holden, Steven Bass, and Craig Copeland. ``401(k)
Plan Asset Allocation, Account Balances and Loan Activity in 2020,''
EBRI Issue Brief #576. November 29, 2022. Retirement Clearinghouse,
LLC, Employee Benefit Research Institute, and contributor Boston
Research Technologies. ``Auto Portability Research & Simulation:
Automating Plan-to-Plan Transfers for Small Accounts.'' Consolidated
Testimony in front of the ERISA Advisory Council, June 8, 2016.
---------------------------------------------------------------------------
4.3.3. Affected Accounts
Table 1 shows the estimates of the number of accounts, how the
affected accounts are identified, and how the affected accounts are
impacted in the baseline scenario and post-rule scenario for the first
year in the estimation period. This section explains the assumptions
and calculations used to obtain the estimates in the table. A similar
table could be constructed for each year, with the difference for each
year being the percent of accounts covered by the automatic portability
network. A key takeaway from the table is the increase in accounts in
plans with the automatic portability feature from the baseline to the
post-rule scenario. The increase in these accounts is the source of
much of the benefits of the rule. Bolded numbers at the bottom of a
table are numbers that flow into a subsequent table.
Table 1--Affected Accounts
------------------------------------------------------------------------
Baseline Post-rule
------------------------------------------------------------------------
Defined Contribution Plan Account 86,573,634 86,573,634
Holders................................
x Job Separation Rate Associated with 20% 20%
Modest Account Balances................
-------------------------------
= Annual Account Churn.................. 17,314,727 17,314,727
x Proportion with Balance of $7,000 or 33% 33%
less...................................
-------------------------------
= Affected Accounts..................... 5,713,860 5,713,860
x Proportion of Separating Account 85% 100%
Holders Subject to Mandatory
Distribution...........................
-------------------------------
= Accounts Subject to Mandatory 4,848,124 5,713,860
Distribution \1\.......................
Accounts Not Subject to Mandatory 865,736 0
Distribution \1\.......................
------------------------------------------------------------------------
\1\ These values flow into Table 3.
A 2023 report by Vanguard suggests that accounts with balances
below $10,000, which is the most similar balance category that aligns
with the mandatory distribution limit and therefore used as a proxy for
this group, are primarily held by participants with household incomes
of less than $50,000.\88\ The Federal Reserve Economic Well-Being of
U.S. Households Survey of Household Economics and Decisionmaking (SHED)
survey provides data on voluntary and involuntary employment
separations by income range. Based on SHED data from 2018-2022, the
Department assumes a separation rate of 20 percent for workers with
annual household incomes of less than $50,000.\89\ The Department uses
this factor as the separation rate for small balance plans in its
estimations.
---------------------------------------------------------------------------
\88\ Vanguard. ``How America Saves.'' 2023.
\89\ Federal Reserve. ``Economic Well-Being of U.S. Households
in 2022.'' (2023). https://www.federalreserve.gov/publications/files/2022-report-economic-well-being-us-households-202305.pdf.
---------------------------------------------------------------------------
The Department is interested in the post-separation behavior of
both the employer/plan sponsor and account owner. A survey conducted by
the Callan Institute in 2022 found that 65 percent of DC plan sponsors
sought to retain assets of both retirees and terminated participants,
with 85 percent seeking to retain assets of retirees and 65 percent
seeking to retain assets of other terminated participants.\90\ This
study also suggests that plan sponsors seek to retain separating
employees' plan assets due to cost efficiencies, although half of the
responding plan sponsors did not have a strategy in place for asset
retention. The Department seeks comment from entities such as plan
sponsors and recordkeepers with information on plan policies and
[[Page 5642]]
participant behavior after job separation related to small balance
accounts.
---------------------------------------------------------------------------
\90\ Callan Institute. ``2023 Defined Contribution Trends.''
https://www.callan.com/research/2023-defined-contribution-trends-survey/.
---------------------------------------------------------------------------
Two recordkeepers servicing 8 million accounts, Alight and
Vanguard, published separate experience studies regarding post-
separation actions in 2023.\91\ These reports have informed the
Department's understanding of the disposition of small balance
accounts. As presented in table 2, the two studies report similar rates
of cashouts. However, the proportion of accounts rolling over and
remaining with the prior employer's plan varied significantly. These
differences may be attributable to differing economic conditions,
differing levels of financial literacy, or by plan design elements
unique to the recordkeeper.
---------------------------------------------------------------------------
\91\ Vanguard. ``How America Saves.'' 2023; Alight. ``Universe
Benchmarks Report.'' 2023.
Table 2--Post-Separation Behavior for Small Balance Accounts
[$1,000-$4,999]
--------------------------------------------------------------------------------------------------------------------------------------------------------
Remain in plan
Year published Recordkeeper Accounts Cashout (%) (%) Rollover (%)
--------------------------------------------------------------------------------------------------------------------------------------------------------
2023........................................... Vanguard............................... 5,000,000 34 51 15
2023........................................... Alight................................. 3,000,000 39 28 33
---------------------------------------------------------------------------------------------------------
Behavior Assumptions without Automatic Portability Feature *............................................ 36 42 22
Behavior Assumptions with Automatic Portability Feature (Based on RCH Pilot)............................ 27 42 31
--------------------------------------------------------------------------------------------------------------------------------------------------------
* Weighted average of values from Vanguard and Alight reports. Automatic portability is estimated to decrease cashouts by 25% across eligible accounts,
which increases rollovers by approximately 40%.
The Department developed its estimates related to post-separation
actions using both studies to create weighted averages based on the
number of accounts in each study. Therefore, the Department estimates
that 36 percent of separations will result in a cashout in the absence
of the enhanced automatic portability plan feature provided in this
proposal and statutory exemption. The Department acknowledges that the
experience of these two service providers may not be representative of
the experience for all plan recordkeepers and requests comments or
additional data concerning this assumption.
This proposal would affect plan participants differently depending
on the size of their account balance. As discussed above, under current
law, a separating employee with a DC plan account balance of $7,000 or
less can be ``cashed out'' of the plan by their employer without their
consent. A separating employee with DC plan savings between $1,001 and
$7,000 can only be ``forced out'' of their plan into a Default IRA
through an automatic rollover if they do not provide directions to the
employer after receiving a notice from the plan's administrator.\92\
---------------------------------------------------------------------------
\92\ See Code section 401(a)(31)(B) as amended by the SECURE 2.0
Act. Previously, this ``force out'' applied to a separating employee
with DC plan savings between $1,001 and $5,000.
---------------------------------------------------------------------------
Alternatively, this proposal would allow for ``automatic
portability transactions.'' These are transactions in which assets held
in a Default IRA established on behalf of an individual from a
mandatory distribution from an employer-sponsored retirement savings
plan are subsequently transferred to an eligible employer-sponsored
plan in which such individual is an active participant, after such
individual has been given advance notice of the transfer and has not
affirmatively opted out of such transfer. As shown above in table 2,
the Department estimates that the statutory exemption would reduce the
propensity to cash out for separating participants with small accounts
by 25 percent. The basis for this estimate is a pilot study of
automatic portability conducted by RCH which reduced cashout rates for
small balance account holders by approximately 50 percent.\93\ The
specific way the pilot study was implemented, however, suggests that
this finding is larger than we would observe under the statutory
exemption. The pilot study had a selected sample of participants who
had been matched to a current, active account. Participants received a
letter encouraging them to call and speak with someone who would
provide advice or guidance about their options and offer to help them
implement a rollover.
---------------------------------------------------------------------------
\93\ Boston Research Technologies. ``Eliminating Friction and
Leaks in America's Defined Contribution System.'' 2013.
---------------------------------------------------------------------------
Table 3 shows how the affected accounts are sorted in the
Department's estimation process for year one. For both the baseline and
the post-rule scenario, the first step is to group the accounts based
on whether or not the account belongs to a plan with the automatic
portability feature and accounts subject to a mandatory distribution
requirement. There are 865,736 accounts that are not subject to
mandatory distribution in the baseline because their balances are
between $5,001 and $7,000. These accounts are subject to mandatory
distribution in the post-rule scenario. The assumptions from table 2
are then applied to these groups to estimate the share of small
accounts post-separation being cashed out, remaining in the plan, and
those rolled over.\94\
---------------------------------------------------------------------------
\94\ These estimates are calculated as follows: 36% baseline
cashout rate x 25% decline from automatic portability = 9 percentage
points. The estimated post-rule cashout rate is the baseline cashout
rate, 36%, minus 9%, which equals 22%. The estimated post-rule
rollover rate is the baseline rollover rate of 22%, plus the 9%
increase from automatic portability, which equals 31%.
[[Page 5643]]
Table 3--Year One Disposition of Accounts
--------------------------------------------------------------------------------------------------------------------------------------------------------
Baseline \1\ Post-rule
----------------------------------------------------------------------------------------------
Accounts not
Disposition of accounts Accounts subject subject to Accounts subject
to mandatory mandatory Total to mandatory Total
distribution distribution \1\ distribution
--------------------------------------------------------------------------------------------------------------------------------------------------------
Accounts with Balances Below $7,000...................... 4,848,124 865,736 5,713,860 5,713,860 5,713,860
Cashout:
Number of Accounts................................... 1,461,709 311,665 1,773,374 1,722,728 1,722,728
Remain in Plan:
Number of Accounts................................... 2,036,212 363,609 2,399,821 2,399,821 2,399,821
Rollover:
Number of Accounts................................... 1,350,202 190,462 1,540,664 1,591,310 1,591,310
x Estimated Percent of Rollovers Going into Default IRAs. 60% 0% ................. 60% 60%
----------------------------------------------------------------------------------------------
Total Default IRAs....................................... 810,122 0 810,122 954,786 954,786
x Year One Account Coverage by AP Network \2\............ 65% 65% 65% 65% 65%
----------------------------------------------------------------------------------------------
Automatic Portability Feature............................ 526,579 0 526,579 620,611 620,611
No Automatic Portability Feature \3\..................... 283,543 0 283,543 334,175 334,175
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ In the baseline, accounts with assets between $5,001 and $7,000 are not subject to mandatory distribution. In the post-rule scenario, all accounts
with assets below $7,000 are subject to mandatory distribution.
\2\ Coverage by the AP network is expected to expand in the post rule scenario while the baseline is assumed to remain constant. The post rule scenario
is modeled using the following coverage assumptions: A = 65%, 72%, 78%, 82%, 84%, 86%, 88%, 89%, 90%, 90%{time} ; where element i = years 1
through 10.
\3\ 35 percent of accounts are not assumed to be covered by the AP network in year one. The percent of accounts not covered by the AP network in
subsequent years may be calculated as 1-Ai.
Finally, the Department estimates the number of default IRA
accounts expected to be generated from the roll over activity in year
one. Research finds that approximately 60 percent of all small account
balance IRA rollovers (default IRAs) are the result of automatic
rollovers of mandatory distributions.\95\ The estimates of accounts
rolling over for the first year described in table 3 are applied to the
60 percent factor to generate the estimated number of affected accounts
expected to roll over into a default IRA. This is the group where the
automatic portability transactions will occur. These calculations
continue into table 4, where the number of Default IRAs is shown over
each of the first ten years, followed by the number of Default IRAs
with automatic portability features, as well as the number that
ultimately result in an automatic portability transaction each year.
---------------------------------------------------------------------------
\95\ Approximately 60% is an estimate of the share of IRAs below
the current mandatory distribution threshold of $5,000, established
from a rollover, that remain fully invested in money market funds
after one year of opening. See Figure 6.8. Investment Company
Institute. ``The IRA Investor Profile: Traditional IRA Investors'
Activity, 2007-2016.'' (2018). Goodman, Mukherjee, and Ramnath,
``Set It and Forget It,'' 2023.
[[Page 5644]]
Table 4--Ten Year Counts of Default IRA and Automatic Portability (AP) Transactions
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Estimation period Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Total
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Baseline (RCH/PSN Operates, $5,000 Distribution Limit)..........................................................................................................................................
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Coverage/Match Factor............................ 65% 65% 65% 65% 65% 65% 65% 65% 65% 65%
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Default IRAs..................................... 810,122 810,122 810,122 810,122 810,122 810,122 810,122 810,122 810,122 810,122 8,101,220
Accounts with AP................................. 526,579 526,579 526,579 526,579 526,579 526,579 526,579 526,579 526,579 526,579 5,265,790
AP Transfers..................................... 337,484 337,484 337,484 337,484 337,484 337,484 337,484 337,484 337,484 337,484 3,374,840
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Post-Rule (RCH/PSN Grows, $7,000 Distribution Limit)............................................................................................................................................
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Coverage/Match Factor............................ 65% 72% 78% 82% 84% 86% 88% 89% 90% 90%
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Default IRAs..................................... 954,786 976,384 994,897 1,007,239 1,013,410 1,019,581 1,025,752 1,028,837 1,031,923 1,031,923 10,084,732
Accounts with AP................................. 620,611 702,996 776,020 825,936 851,264 876,840 902,662 915,665 928,731 928,731 8,329,456
AP Transfers..................................... 397,749 519,606 630,585 699,159 724,418 766,494 809,360 817,864 839,779 824,156 7,029,170
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Differences between the Baseline and Post-Rule:
Default IRAs................................. 144,664 166,262 184,775 197,117 203,288 209,459 215,630 218,715 221,801 221,801 1,983,512
Accounts with AP............................. 94,032 176,417 249,441 299,357 324,685 350,261 376,083 389,086 402,152 402,152 3,063,666
AP Transfers................................. 60,265 182,122 293,101 361,675 386,934 429,010 471,876 480,380 502,295 486,672 3,654,330
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
* The Department estimates that approximately 1.4% of all accounts that are matched for an automatic portability transaction will not be transferred due to account holder opt-out. The coverage/
match rates can not be applied directly to the estimates in the table to obtain other estimates in the table. The drop in Automatic Portability transfers from year 9 to year 10 is a function
of the coverage/match rates being the same in both years in the estimation model.
[[Page 5645]]
5. Benefits
This section describes the benefits of the proposed regulation in
comparison to the baseline before the statutory exemption for automatic
portability transactions was enacted by SECURE 2.0 Act. As previously
stated, RCH/PSN already relies on relief the Department provided in PTE
2019-02, an administrative individual exemption, to provide automatic
portability provider services. In general, the benefits of the proposed
regulation are derived from the removal of the uncertainty associated
with the need to rely on an individual exemption. Moreover, RCH/PSN
will benefit from this proposed regulation because they would not have
to request additional relief from the Department when the five-year
term of PTE 2019-02 expires.
The establishment of a statutory exemption encourages the growth of
the market for automatic portability providers. As previously stated,
the Department assumes that RCH currently represents roughly 65 percent
of the accounts in the system and that they have a success rate of 65
percent in matching accounts in that system. This results in roughly
337,000 automatic portability transfers estimated to occur each year in
the baseline. This is compared to the expansion that results from the
rule where the Department estimates the number of automatic portability
transfers to grow to approximately 825,000 at the end of the estimation
window. This estimate represents automatic portability coverage for
approximately 90 percent of the accounts in the DC system. This is
anticipated to result in $2.8 billion of undiscounted benefits arising
through:
An increase in potentially affected accounts due to the
increase in the mandatory distribution threshold from $5,000 to $7,000;
Projected account balance appreciation and higher returns;
Reduction of duplicative fees; and
Consolidation of abandoned accounts.
Retaining assets in retirement accounts and avoiding cashouts is an
objective of the statute and proposed rules. Table 5a shows the value
of assets retained in the retirement accounts through a reduction of
the amount of assets cashed out. The impact of the rule is the
difference in the value of accounts that cashout post-rule relative to
the baseline. This amount is not classified as a benefit. Table 5b
shows each component of the quantified benefit stream measured as
improvements between the baseline scenario and the post proposed rule
scenario. The increase overtime in affected accounts is incorporated
into the values displayed.
[[Page 5646]]
Table 5A--Value of Affected Accounts
[$ in millions]
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Year 1 2 3 4 5 6 7 8 9 10 Total
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Retirement Assets Retained via Cashout Avoidance:
Rule......................................... $5,334 $5,202 $5,086 $5,007 $4,967 $4,926 $4,886 $4,865 $4,844 $4,844 $49,962
-Baseline.................................... 5,461 5,461 5,461 5,461 5,461 5,461 5,461 5,461 5,461 5,461 54,609
----------------------------------------------------------------------------------------------------------------------------------------------
= Assets Retained........................ 127 259 375 454 494 534 575 596 617 617 4,647
Present Value of Assets Retained by Discount
Rate:
3 Percent.................................... 123 244 343 403 426 448 468 470 473 459 3,856
7 Percent.................................... 118 226 306 346 352 356 358 347 335 313 3,059
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Table 5B--Value of Affected Accounts
[$ in millions]
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Year 1 2 3 4 5 6 7 8 9 10 Total
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Value of Reallocation of Assets:
Rule......................................... $29,218 $27,792 $26,380 $24,954 $23,554 $22,267 $21,058 $19,905 $18,839 $17,842 $231,808
-Baseline.................................... 29,249 27,570 26,013 24,569 23,229 21,987 20,835 19,767 18,776 17,857 229,851
----------------------------------------------------------------------------------------------------------------------------------------------
= Benefits............................... -31 222 367 385 325 280 223 139 63 -15 1,957
Value of Duplicated Account Fees:
Rule......................................... 17 39 65 94 125 157 191 225 261 295 1,469
-Baseline.................................... 14 28 43 57 71 85 99 113 128 142 780
----------------------------------------------------------------------------------------------------------------------------------------------
= Benefits............................... 3 10 22 38 54 72 92 112 133 153 689
Value of Abandoned Accounts Consolidated:
Rule......................................... 12 16 19 21 22 23 24 25 25 25 211
-Baseline.................................... 10 10 10 10 10 10 10 10 10 10 101
----------------------------------------------------------------------------------------------------------------------------------------------
= Benefits............................... 2 5 9 11 12 13 14 14 15 15 110
Annual Total:
Rule......................................... 29,247 27,846 26,464 25,069 23,701 22,447 21,273 20,155 19,125 18,162 233,488
-Baseline.................................... 29,273 27,609 26,066 24,636 23,310 22,082 20,944 19,890 18,913 18,009 230,732
----------------------------------------------------------------------------------------------------------------------------------------------
= Benefits............................... -26 237 398 433 390 365 329 265 211 153 2,756
Present Value of Benefits by Discount Rate:
3 Percent.................................... -26 224 364 385 337 306 267 209 162 114 2,342
7 Percent.................................... -25 207 325 331 278 243 205 154 115 78 1,911
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
[[Page 5647]]
Lastly, it should enhance the ability of American workers to
achieve their retirement savings goals by consolidating retirement
funds into fewer accounts and investing assets consistent with their
retirement needs. These benefits are described in more detail in the
following subsections.
5.1. Benefits for Plan Participants
The Department expects that DC plan participants with small account
balances that are subject to the Code's mandatory distribution rules
would benefit from increased access to automatic portability
transactions in several ways. First, their retirement account balances
would be consolidated in their new employer's plan, which would reduce
participants' exposure to duplicative fees. Second, the incidence of
missing participants and abandoned accounts would decrease as a result
of the automatic portability providers matching a Default IRA with an
individual's account in their new employer's plan. Third, moving assets
from a Default IRA to a DC plan would likely provide greater investment
returns, on average, as the assets are reallocated from being invested
in money market funds to target date funds and other, more diversified
investments.
5.1.1. Account Consolidation
One potential outcome of a highly mobile labor force (one in which
employees change jobs frequently) is the proliferation of retirement
accounts. Data from the Federal Reserve indicates that approximately 20
percent of employees with a DC plan account and household incomes below
$50,000 changed jobs in the past year.\96\ As participants change jobs,
mandatory distributions into a Default IRAs can result in individuals
owning several retirement accounts.\97\ Once potential outcome of
multiple accounts is individuals paying management or recordkeeping
fees for several accounts. GAO reported a median annual record-keeping
flat fee of $42 per account. Although modest, this fee can contribute
to an erosion of accumulated retirement assets, especially if applied
to multiple, small-balance accounts.\98\ Thus, each account
consolidation provides a benefit to participants equal to the value of
any associated fees or expenses arising from maintaining an additional
retirement account that would be eliminated through consolidation net
of the transfer fee discussed in section 6.4 of the Costs section
below. Accordingly, the Department estimates that over the 10-year
estimation window, account consolidations will total approximately 3.7
million additional accounts when compared to the baseline, yielding
approximately $689 million in undiscounted benefits for participants
accruing from the reduction of duplicative fees for multiple accounts
over the 10-year estimation period.\99\
---------------------------------------------------------------------------
\96\ Federal Reserve. ``Economic Well-Being of U.S. Households
in 2022.'' (2023). https://www.federalreserve.gov/publications/files/2022-report-economic-well-being-us-households-202305.pdf.
\97\ Employee Benefit Research Institute. ``EBRI IRA Database:
IRA Balances, Contributions, Rollovers, Withdrawals, and Asset
Allocation, 2017 Update.'' (2020).
\98\ Government Accountability Office. ``401(k) Plans: Greater
Protections Needed for Forced Transfers and Inactive Accounts.''
(2014).
\99\ The estimate is calculated as follows: 3,654,330 account
consolidations x $42 = $153,481,860 in benefits. $153,481,860 x
average of 4.5 years receiving benefit per account = $689,003,322 in
total benefits. At a discount rate of 3 percent, this results in
$552,051,586 in total benefits. At a discount rate of 7 percent,
this results in $417,450,008 in total benefits.
---------------------------------------------------------------------------
5.1.2. Missing Participants and Abandoned Accounts
Another consequence of the proliferation of small-balance accounts
is the potential for a high volume of retirement assets that are
``abandoned'' by participants. Over time, DC plan account holders that
have separated from their employers may become disconnected from their
retirement assets as a result of mandatory distributions into Default
IRAs. Abandonment of these accounts may be attributable to any number
of reasons but are often the result of participants that are missing
(cannot be found by the plan provider), unresponsive (failing to
respond to communications from the plan provider), or unaware that an
account has been established on their behalf. Goodman, Mukherjee, and
Ramnath (2023) found that 0.4 percent of retirement-aged IRA owners
abandoned their IRAs, amounting to $66 million (in 2016 dollars).\100\
Because this figure only relates to retirees, it represents only a
fraction of the assets that exist in abandoned IRAs for the larger pool
of IRA owners of all ages; a portion of these IRA owners would have
been impacted by mandatory distributions. The Department estimates that
1.0 percent of Default IRA owners will abandon their IRAs, which is
consistent with Goodman, Mukherjee, and Ramnath (2023).\101\ It seems
likely that IRA owners who experienced force-outs may have higher
abandonment rates than other IRA owners. Owners who experienced force-
outs allowed themselves to be defaulted into an IRA instead of taking
action to perform a rollover or obtain a cashout, indicating they may
have a tendency to be unaware or passive, characteristics that may
increase the likelihood of abandonment. From FY 2017 through FY 2023,
EBSA benefit advisors have located 4,732 participants through a joint
initiative with the Pension Benefit Guaranty Corporation (PBGC) to
connect individuals with retirement benefits valued at $227.6 million.
---------------------------------------------------------------------------
\100\ In this study, account abandonment is proxied by a failure
to claim the account over ten years after a legal requirement to do
so; specifically, the required minimum distribution requirement.
Goodman, Mukherjee, and Ramnath, ``Set It and Forget It,'' 2023.
\101\ Id.
---------------------------------------------------------------------------
Given the threshold for mandatory distributions increases to $7,000
in 2024 while the adoption of auto-enrollment policies by plan sponsors
continues to expand, there will be an increased number of potential
Default IRAs, and, as a result, the number of accounts that might be
abandoned or have missing participants will also increase.\102\
However, over time the Department estimates a minimum of approximately
37,000 accounts will be saved from abandonment with the statutory
exemption over the 10-year estimation period (1.0 percent of the
approximately 3.6 million accounts that will be consolidated through
automatic portability transactions when compared to the baseline). The
Department further estimates the consolidation of abandoned accounts
would provide approximately $109.6 million in undiscounted benefits for
participants over the 10-year estimation window when compared to the
baseline.\103\ The Department requests comment on these estimates.
---------------------------------------------------------------------------
\102\ Id.
\103\ The estimate is calculated as follows: 3,654,330 account
consolidations from automatic portability transactions x 1% of
retirement accounts that are abandoned = 36,544 abandoned accounts
consolidated. 36,544 accounts x $3,000 average account balance for
Default IRAs = $109,632,000. At a discount rate of 3 percent, this
results in $90,685,800 in total benefits. At a discount rate of 7
percent, this results in $71,592,717 in total benefits.
---------------------------------------------------------------------------
5.1.3. Improve Asset Allocation
Upon job separation, some employees with small-balance accounts
between $1,001 and $7,000 (in 2024) \104\ can be forced out of their
previous employer's plan by a mandatory distribution of
[[Page 5648]]
their accumulated retirement assets that is automatically rolled over
to a Default IRA.\105\ The Department has issued regulations providing
a safe harbor that requires the employee's former employer to invest
amounts held in a Default IRA in an investment product that preserves
principal and provides a reasonable rate of return.\106\ In practice,
many plans seek to implement the safe harbor by investing in money
markets funds; however, the tradeoff for relative safety is potential
returns. A 2014 GAO study reported that the average return for money
market funds in the preceding 10 years was 1.5 percent, considerably
lower than the average 6.3 percent return for target date funds common
among 401(k) plans.\107\ Moreover, few participants take action to
reallocate these default investments away from money market funds.\108\
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\104\ See Code section 411(a)(11)(D) for circumstances where the
amount of a distribution may be greater than $5,000 ($7,000
beginning in 2024) if a participant made a previous roll-in to a
plan from an individual retirement plan. In such circumstances, the
roll-in funds are not considered in determining the $5,000 vested
accrued balance, so a larger amount of assets could be subject to a
mandatory distribution under the terms of the plan.''
\105\ Code section 401(a)(31)(B); see SECURE 2.0 Act, Sec. 304,
Updating Dollar Limit for Mandatory Distributions.
\106\ 29 CFR 2550.404a-2(c)(3)(i).
\107\ Government Accountability Office (GAO). ``401(k) Plans:
Greater Protections Needed for Forced Transfers and Inactive
Accounts.'' (2014).
\108\ Goodman, Mukherjee, and Ramnath, ``Set It and Forget It,''
2023. Investment Company Institute. ``The IRA Investor Profile.''
2018. 80% is an estimate of the share of IRAs below the current
mandatory distribution threshold of $5,000, established from a
rollover, that remain fully invested in money market funds after one
year of opening. See Figure A.2 in the Appendix.
---------------------------------------------------------------------------
The difference in the average rate of return between these two
typical investment strategies could have a substantial impact on the
value of retirement assets for investors with small-balance accounts,
which are susceptible to capital erosion from fees and inflation. GAO
projected investment outcomes over 30 years and found that an initial
balance of $1,000 was estimated to be valued at over $2,700 under the
average returns for target-date funds (6.3 percent) but $0 under the
average returns for money market funds (1.5 percent), largely as a
result of account fees outweighing minimal returns.\109\ This suggests
that assets transferred into Default IRA accounts, which are typically
invested in low-risk money market funds, could be better preserved and
invested elsewhere.\110\ Consolidating these assets in a DC plan could
improve the asset allocation of, and potentially better preserve,
retirement assets for many retirement investors.
---------------------------------------------------------------------------
\109\ Government Accountability Office (GAO). ``401(k) Plans:
Greater Protections Needed for Forced Transfers and Inactive
Accounts.'' (2014).
\110\ Id.
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As presented in table 4 of the Affected Entities section, the
Department estimates that just over 10 million Default IRAs will be
created in the ten-year estimation period, compared to 8.1 million in
the baseline, a change of approximately 2.0 million accounts. Of these
10 million Default IRAs, 8.3 million are assumed to be in the automatic
portability network under the rule (compared with 5.3 million at the
baseline). The results are that 7.1 million accounts will be moved into
a new employer's DC plan via automatic portability, compared with 3.4
million in the baseline, an improvement of 3.7 million between the two
scenarios. This results in an asset allocation with a more favorable
return for account owners.
Similar to the GAO analysis, the Department utilized updated data
covering the 15 most recent years to estimate the returns to money
market funds characteristic of Default IRAs and for target-date funds
(TDFs) typical of DC plans, further supporting an analysis of how the
change in asset allocation might potentially alter investment outcomes
as a result of automatic portability transactions. Returns to money
market funds from 2008 to 2022 averaged 0.7 percent, while returns to
TDFs averaged 8.1 percent over the same period.
The Department estimates that this reallocation of assets from
Default IRAs to DC plans would result in approximately $2.0 billion in
additional benefits when compared to the baseline value.\111\
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\111\ Returns from DC plans are estimated using an asset
distribution characteristic of typical default investments for TDFs,
80% stocks (S&P 500 annual returns) and 20% bonds (Baa Corporate
returns). Returns for Default IRAs are estimated using an asset
distribution characteristic of typical default investments for
Default IRAs, 98% Treasury Bills and 2% Treasury Bonds. NYU Stern
School of Business. Historical Returns on Stock, Bonds, and T-Bills:
1928-2022. Accessed: https://pages.stern.nyu.edu/~adamodar/
New_Home_Page/data.html. At a discount rate of 3 percent, this
results in $1,699,169,773 in benefits. At a discount rate of 7
percent, this results in $1,422,157,975 in benefits.
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5.1.4. Reduced Participant Benefits Because More Participants Are
Subject to Mandatory Distributions
The increase in the mandatory distribution threshold from $5,000 to
$7,000 means that some separating participants will have fewer choices
about how to deal with their account. This reduces the net benefits for
those plan participants. Prior to the passage of the SECURE 2.0 Act,
many separating participants in this account balance range would have
left their account in their former employer's plan, but some of those
participants would now be subject to a mandatory distribution into a
Default IRA. If the account assets end up in a Default IRA, the
Department expects that the participant would generally be worse off
than in their former employer's plan because the assets would be
subject to little or no growth given that they typically would be
invested in money market funds and subject to relatively high fees.
Other separating participants in the $5,000 to $7,000 range may end up
being rolled into a new employer's plan; they would be better or worse
off depending on how the services, products, and fees in the new
employer's plan compared to the former employer's plan and depending on
how long the assets lingered in the Default IRA before being rolled
over into the new employer's plan. Overall, the affected participants
would be worse off on average.
5.2. Benefits for Plans, Automatic Portability Providers, and Other
Service Providers
The estimated benefits for participants that are described in the
preceding subsection result from the predictability the proposed rule
provides to the marketplace. This predictability is intended to
encourage the growth and efficiency of the automatic portability
market. RCH/PSN will no longer need an administrative individual
exemption or to apply to the Department for additional relief when the
term PTE 2019-02 expires in 2024. For the same reason, the proposed
rule removes barriers to entry for potential future automatic
portability providers. The proposed rule will bring increased certainty
to the robust network of entities involved in automatic portability
arrangements, consisting of the automatic portability provider(s),
recordkeepers, plans and plan sponsors, and plan participants and
Default IRA owners, which will increase the reach, efficiency, and
long-term viability of automatic portability transactions.
5.3. Benefits for Financial Institutions
Financial institutions would benefit from more assets being kept in
consolidated, retirement savings accounts and being invested rather
than being cashed out because the financial institutions would earn
more fees. Cashouts from small balance accounts are typically taken as
cash and spent. The loss of retirement assets associated with cashing
out small balance accounts and Default IRAs will be considerably
curtailed with the adoption of automatic portability programs by plans
sponsors and recordkeepers. At job separation, a small balance account
holder (who has an account with $5,000 or less, or beginning in 2024,
an account with $7,000 or less) can be forced out of their former
employer's retirement plan.
[[Page 5649]]
While a rollover may result in procedural or paperwork burdens for the
participant, a cashout is often the most straightforward option.
Automatic portability programs, however, have the potential to reduce
such burdens for participants, resulting in a higher volume of
rollovers and fewer cashouts. Because cashouts are negatively
correlated with the size of account balances (i.e., small account
balances are more likely to be cashed out), the likelihood of cashouts
at future job separations is expected to decrease as more assets remain
in an individual's DC plan account, compounding the benefits of
automatic portability transactions over time.
Table 6--Accounting Statement
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
Benefits:
Non-Quantified:
Increased mandatory distribution threshold leads to cost savings for plans but reduced benefits
for separating participants.
Increased ease of retirement planning due to account consolidation.
----------------------------------------------------------------------------------------------------------------
Estimate Year dollar Discount rate Period covered
(primary) (%)
----------------------------------------------------------------------------------------------------------------
Annualized Monetized ($ Millions/Year).......... $191.12 2023 7 2024-2033
234.19 2023 3 2024-2033
Costs:
Annualized Monetized ($ Millions/Year)...... $1.21 2023 7 2024-2033
1.42 2023 3 2024-2033
----------------------------------------------------------------------------------------------------------------
Transfers:
Non-Quantified:
Requiring automatic portability providers to offer the same terms to any plan will ensure
sponsors not be restricted from engaging with more than one provider. This reduces barriers to entry,
which is a transfer to providers entering the market, and encourages lower fees, which is a transfer to
participants.
Increasing the mandatory distribution threshold will reduce participant choice in how they
handle their accounts. Conversely, this will give sponsors increased latitude in how they handle
accounts. No longer having to administer small accounts is a transfer from participants to sponsors.
Decreasing the number of Default IRA accounts will affect financial institutions that service
these accounts. This will represent a transfer to institutions that service employer plans.
----------------------------------------------------------------------------------------------------------------
Annualized Monetized ($ Millions/Year).......... 52.00 2023 7 2024-2033
65.55 2023 3 2024-2033
----------------------------------------------------------------------------------------------------------------
6. Costs
This analysis estimates the changes to cost burdens associated with
the provision of automatic portability services under the proposed rule
when compared to a baseline where the automatic portability provider
operates under PTE 2019-02. The costs presented can be generally
grouped into two categories: start-up and ongoing. The start-up costs
are associated with updating processes or documents to bring existing
practices into compliance with the proposed rule where there is a
difference between operations under the PTE when compared to the
proposed rule. The ongoing costs generally represent costs incurred due
to both the increase in the threshold from $5,000 to $7,000 which is
expected to create more default IRA accounts which is the group that
automatic portability transactions occur within, and the growth of the
automatic portability system which is assumed to result from the
proposed rule. Over the first 10 years, the Department estimates an
undiscounted cost of approximately $16,206,196, annualized to
$1,620,620.\112\ The undiscounted stream of estimated costs is
presented in table 7 below.
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\112\ Using a 3 percent discount rate results in a cost savings
of approximately $14,160,023, annualized to $1,416,002. Using a 7
percent discount rate results in a cost savings of approximately
$12,073,029, annualized to $1,207,303.
Table 7--Estimated Costs Associated With Rule
[$ in thousands]
--------------------------------------------------------------------------------------------------------------------------------------------------------
Year 1 2 3 4 5 6 7 8 9 10 Total
--------------------------------------------------------------------------------------------------------------------------------------------------------
Materials and Postage.......... $2 $3 $9 $14 $16 $19 $21 $22 $24 $23 $154
Labor Costs.................... 6,206 88 572 895 1,041 1,226 1,415 1,483 1,580 1,547 16,052
------------------------------------------------------------------------------------------------------------------------
Total All Cost............. 6,208 90 581 909 1,057 1,245 1,436 1,505 1,604 1,570 16,206
Present Value of Total Cost:
3 Percent.................. 6,027 85 532 808 912 1,042 1,168 1,188 1,229 1,168 14,160
7 Percent.................. 5,802 79 474 693 754 829 894 876 872 798 12,073
--------------------------------------------------------------------------------------------------------------------------------------------------------
6.1. Preliminary Assumptions and Cost Estimate Inputs
For purposes of this analysis, the Department assumes that the
percent of retirement investors receiving electronic disclosures would
be similar to the percent of plan participants receiving electronic
disclosures under the Department's 2002 and 2020 electronic disclosure
safe harbors.\113\ Accordingly, the Department estimates that 96.1
percent of the disclosures sent to plan participants would be sent
electronically, and the remaining 3.9 percent would be sent by
mail.\114\ For disclosures sent by mail, the Department estimates that
entities will
[[Page 5650]]
incur a cost of $0.66 \115\ for postage and $0.05 per page for material
and printing costs.
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\113\ 67 FR 17264, 85 FR 31884.
\114\ The Department estimates 96.1 percent of retirement
investors receive disclosures electronically. This is the sum of the
estimated share of retirement investors receiving electronic
disclosures under the 2002 electronic disclosure safe harbor (58.3
percent) and the estimated share of retirement investors receiving
electronic disclosures under the 2020 electronic disclosure safe
harbor (37.8 percent).
\115\ United States Postal Service. ``First-Class Mail.''
(2023). https://www.usps.com/ship/first-class-mail.htm.
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Additionally, the Department assumes that several types of
personnel would perform the tasks associated with information
collection requests at an hourly wage rate of $63.45 for clerical
personnel, $128.11 for a top executive, $116.86 for an auditor, $132.93
for a plan fiduciary, $155.61 for a web designer, $159.34 for a legal
professional, and $190.63 for a financial manager.\116\
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\116\ Internal DOL calculation based on 2023 labor cost data.
For a description of the Department's methodology for calculating
wage rates, see https://www.dol.gov/sites/dolgov/files/EBSA/laws-and-regulations/rules-and-regulations/technical-appendices/labor-cost-inputs-used-in-ebsa-opr-ria-and-pra-burden-calculations-june-2019.pdf.
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6.2. Acknowledgement of Fiduciary Status
Pursuant to the statutory text authorizing the Secretary to specify
the time and format of such an acknowledgment, Sec. 2550.4975f-
12(b)(1) of this proposed regulation requires the automatic portability
provider to acknowledge in writing that it is a fiduciary as defined in
Code section 4975(e)(3) upon being engaged by a plan fiduciary, as well
as in the required notices and disclosures to plan participants and IRA
owners that are described below.
The automatic portability provider's acknowledgment of its
fiduciary status may include a description of the scope of the
fiduciary status of the automatic portability provider and may explain
that the automatic portability provider is not a fiduciary, consistent
with Code section 4975(e)(3), with respect to any assets or
administration of the plan or IRA with respect to which the automatic
portability provider does not (1) have any discretionary authority,
discretionary control or discretionary responsibility, (2) exercise any
authority or control, and (3) render investment advice for a fee or
other compensation, nor have any authority or responsibility to render
such investment advice.
Although PTE 2019-02 discussed RCH's fiduciary status, it did not
explicitly require a fiduciary acknowledgement as a condition of the
exemption. Therefore, the proposed regulation has the potential to
incrementally increase the costs to RCH/PSN. The Department assumes the
time it would take to draft the fiduciary acknowledgment would be
minimal and anticipates that a single standard acknowledgement would be
included in contracts with plan sponsors. If language is not already
included in contracts, the Department estimates that RCH/PSN would send
a one-page supplemental acknowledgement to each plan sponsor with an
estimated cost of $159 in legal costs to develop the supplemental
acknowledgement and $391,275 in clerical costs \117\ to provide the
notices to the estimated 185,000 plans RCH/PSN currently services at an
incremental cost of $2.12 per plan. Contracts executed after the date
of a final rule would likely incorporate the acknowledgement for a de
minimis additional cost.
---------------------------------------------------------------------------
\117\ The hour burden is estimated as: 185,000 plan fiduciaries
x 2/60 hours = 6,167 hours. The equivalent cost is estimated as:
185,000 plan fiduciaries x 2/60 hours x $63.45 = 391,275.
---------------------------------------------------------------------------
The Department also anticipates the acknowledgement in each of the
three notices to plans participants/IRA owners (initial enrollment,
pre-transaction, and post-transaction notices) would use a standardized
and identical acknowledgment. The Department requests information about
other costs associated with the requirement to disclose fiduciary
status.
6.3. Data Usage and Protection
The statutory exemption specifically prohibits the automatic
portability provider from marketing or selling data relating to the IRA
or to the plan participants. Section 2550.4975f-12(b)(3) of the
proposed regulation parallels the statutory language by not permitting
the use of data for any purpose other than the execution of automatic
portability transactions or locating missing participants. The
Department is not proposing any exceptions to this restriction. A
similar restriction was placed on RCH in PTE 2019-02, so the Department
does not expect an additional cost to RCH/PSN due to the proposal.
The Department, however, did not include an express data protection
condition in PTE 2019-02 similar to that included in the proposed
regulation. Therefore, compared to existing requirements on RCH/PSN,
the Department expects that the proposed regulation could add costs.
However, the Department also expects that these costs would fall under
normal operating expenses borne by businesses when dealing with the
types of sensitive data necessarily required to execute automatic
portability transactions. The Department requests comment on this
assumption.
6.4. Cost of Transactions Fees
As previously discussed, there is a transaction fee stated to be
roughly between $15 and $30 per transferred account, depending on the
account balance. This fee is applied only when a transfer occurs and is
deducted from the funds in the account being transferred. The
Department estimates there to be an additional 60,265 transactions in
year one, and an average of 399,341 transactions annually in years two
through ten. The Department uses the mid-point of the fee range stated,
$22.50, as the expected average fee. Therefore, the Department
estimates the aggregate transaction fees to be approximately $1.4
million in year one, and period two through ten to have aggregate fees
on average of nearly $9 million per year.\118\
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\118\ 60,265 additional transactions x $22.50 transaction fee =
$1,355,963 in year 1. In years 2-10, an average of 399,341
additional transactions x $22.50 per transaction = $8,985,163.
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6.5. Notices and Disclosures
6.5.1. Notice to the Secretary of Labor
Under the proposed regulation, within 90 calendar days of the date
that the automatic portability provider begins operating an automatic
portability transaction program that is intended to rely on prohibited
transaction relief provided by Code section 4975(d)(25), the automatic
portability provider must notify the Secretary at [email protected] that it is operating as an automatic portability
provider in accordance with Code section 4975(d)(25). The automatic
portability provider must report the legal name of each business entity
relying upon the exemption and any name (e.g., trade or DBA name) the
business entity may be operating under. This notification needs to be
updated to report a change to the legal or operating name(s) of the
automatic portability provider that is relying upon the exemption.
Because PTE 2019-02 was issued to a single entity, there was no
such requirement in the exemption. However, the Department believes
based on the small number of expected automatic portability providers
entering the market, that the possible cost burden associated with
submitting the simple notice via email to the Department to be roughly
$16, which is estimated as 15 minutes of a clerical worker's time with
an hourly wage rate of $63.45. While this notification would need to be
updated to report a change to the legal or operating name(s) of the
automatic portability provider that is relying upon the exemption, the
Department expects that such a change would be rare and thus does not
estimate an associated cost.
[[Page 5651]]
6.5.2. Fee and Compensation Disclosure
The proposed regulations incorporate the existing standard
regarding reasonable compensation for the provision of services found
at 26 CFR 54.4975-6(e). This proposed regulation mirrors the text of
the statutory exemption by requiring the automatic portability provider
to disclose the information that a service provider to the plan would
be required to disclose under 29 CFR 2550.408b-2(c) to a responsible
plan fiduciary of the transfer-in plan. For purposes of this
requirement, the disclosures would relate to the automatic portability
provider's services performed as an automatic portability provider but
not to other services that may be provided.
The proposed regulation includes text that mirrors the statutory
text allowing a direct fee to be paid by a plan sponsor if it is in
lieu of a fee imposed on an IRA owner. The proposed regulation includes
one exception to the general restriction on third-party compensation.
Specifically, under the proposal, an automatic portability provider
would be able to share a portion of its fee or compensation with
another automatic portability provider as long as the overall fee paid,
directly or indirectly, by the plan or IRA does not increase as
compared to the fees disclosed to plan fiduciaries, plan participants,
and IRA owners.
PTE 2019-02 requires RCH to fully disclose fees to a plan fiduciary
and receive written approval from the plan fiduciary. Therefore, the
Department expects that no change in cost will occur as a result of
this requirement in the proposed regulation.
6.5.3. Initial Enrollment Notice
The Department proposes that the initial enrollment notice would
include a variety of information regarding the nature of the automatic
portability transaction and additional aspects of the IRA arrangement
(the same information to be included in the pre-transaction notice),
discussed below. The Department anticipates that this notice
requirement could be satisfied by including the information in the
notice otherwise required under Code section 401(a)(31)(B) upon the
establishment of a Default IRA.
PTE 2019-02 requires a ``Mandatory Distribution Letter'' be sent to
participants before establishing a Default IRA. PTE 2019-02 also
requires a ``Welcome Letter'' to be sent to the same individual no
later than three business days after the Default IRA receives the
distributed assets. Together, these two letters must include all the
information required in the initial enrollment notice in the proposed
regulation. The Department estimates the revision and combination of
these documents to satisfy the proposed rule will take an hour of an
attorney's time at a wage rate of $159.34 resulting in a total cost of
$159.34 to RCH/PSN. Because RCH/PSN is permitted to consolidate the two
notices required under PTE 2019-02 into a single notice, a burden
savings of 22,182 hours in the first year and 20,194 hours in
subsequent years of a clerical worker's time with an equivalent cost
savings of approximately $1.3 million each year would result.\119\
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\119\ The Department assumes RCH will combine these notices as a
cost savings measure, resulting in 6,117,708 fewer notices needing
to be prepared and sent over the 10-year period. The cost savings is
calculated as -6,117,708 notices x 2/60 hours to prepare each notice
on average x $63.45 wage rate for clerical staff = -$12,938,952.42,
annualized to $1,293,895.24.
---------------------------------------------------------------------------
The mailing and material costs are also expected to be reduced due
to the combination of two notices into one. As previously noted, the
Department assumes that 3.9 percent of recipients enumerated in the
previous paragraph will receive mailed notices, and that the remainder
will receive notices electronically, resulting in roughly 665,458 fewer
notices in the first year and on average 605,806 fewer in subsequent
years being mailed. since the initial enrollment notice provides an
opportunity for RCH/PSN to consolidate two notices into one. This
reduction of notices being sent has an associated estimated cost
savings of nearly $23,600 in the first year and $21,500, on average, in
subsequent years.\120\
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\120\ The materials and mailing burden is calculated as: Year
one--665,458 fewer notices required x 3.9% mailed = 25,953 fewer
notices. Each notice is estimated as 5 pages and mailed first class
at a cost of $0.66 per notice. The cost is (5 pages x $0.05 per
page) = $0.25 per notice + $0.66 for postage, resulting in a cost of
$0.91 per notice. $0.91 x -25,953 fewer notices = a savings of
S23,617.10. Subsequent years average: 605,806 fewer notices required
x 3.9% mailed = 23,626 fewer notices. Each notice is estimated as 5
pages and mailed first class at a cost of $0.66 per notice. The cost
is (5 pages x $0.05 per page) = $0.25 per notice + $0.66 for
postage, resulting in a cost of $0.91 per notice. $0.91 x 23,626
fewer notices = a savings of $21,500.04.
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6.5.4. Pre-Transaction Notice
Section 2550.4975f-12(b)(5)(iv) of the proposed regulation
incorporates the statutory provisions of Code section
4975(f)(12)(B)(v). The proposed regulation provides additional
clarification regarding the timing of the pre-transaction notice by
requiring that the notice be sent no earlier than 90 days in advance of
the automatic portability transaction.
PTE 2019-02 included a pre-transaction notice, referred to as a
``Consent Letter.'' The letter is required to be sent before moving
Default IRA assets into a transfer-in plan after the locate and match
service makes a match. The content of the Consent Letter is
substantially the same as the pre-transaction notice required by the
statute and incorporated into the proposed regulation. The Department
believes there will be a minimal transition cost to RCH/PSN
attributable to bringing the ``Consent Letter'' into compliance to
serve as the pre-transaction notice. This is estimated to take one hour
of a legal professional's time at a wage rate and total cost of
$159.34.
The Department estimates that there will be a 61,121 increase in
pre-transaction notices in the first year and that there will be, on
average, 384,265 additional notices in subsequent years. This increase
will result in roughly 2,037 hours in year one and, on average, 12,809
hours in subsequent years of clerical workers' time at 2 minutes per
notice on average, at a rate of $63.45 for a total net cost of roughly
$129,271 in year one and, on average, $812,720 in subsequent years. The
notices are expected to consist of no more than two pages. The mailing
and materials cost associated with the pre-transaction notices are
estimated as 2,384 notices being sent in the first year at an estimated
cost of $1,812 and, on average, 14,986 notices sent in subsequent years
with an estimated average cost of $11,390.\121\
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\121\ The materials and mailing burden is calculated as: Year
one 61,121 notices x 3.9% mailed = 2,384 notices. Each notice is
estimated as 2 pages and mailed first class at a cost of $0.66 per
notice. The cost is (2 pages x $0.05 per page) = $0.10 per notice +
$0.66 for postage, resulting in a cost of $0.76 per notice. $0.76 x
2,384 notices = S1,811.63. Subsequent years average: 384,265 x 3.9%
mailed = 14,986 notices. Each notice is estimated as 2 pages and
mailed first class at a cost of $0.66 per notice. The cost is 2
pages x $0.05 per page) = $0.10 per notice + $0.66 for postage,
resulting in a cost of $0.76 per notice. $0.76 x 14,986 notices =
$11,389.60.
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6.5.5. Post-Transaction Notice
This post-transaction notice, which would occur after a transfer-in
plan receives an individual's IRA funds, is the last notice that the
automatic portability provider would be required to provide to the IRA
owner or plan participant. Section 2550.4975f-12(b)(5)(v) of this
proposed regulation incorporates the statutory requirements. The
statute requires that no later than three business days after the
completion of an automatic portability transaction, the automatic
portability provider shall
[[Page 5652]]
provide notice to the IRA owner of the actions taken by the automatic
portability provider with respect to the IRA. The statute also requires
the notice to include all relevant information regarding the location
and amount of any transferred assets, a statement of fees charged
against the IRA or transfer-in plan account in connection with the
transfer, and a customer service contact phone number for the automatic
portability provider.
PTE 2019-02 did not require a post-transaction notice. Therefore,
as compared to the statutory requirements, this new requirement has the
potential to add cost to PSN/RCH as an automatic portability provider.
The Department estimates the development of a model notice will take a
legal professional two hours at an hourly wage rate of $159.34 for a
total cost of $319 in the first year.
The Department estimates that in the first year 397,749 notices
will be sent to account owners and, on average, 736,825 notices to IRA
owners subsequent years within the projection window creating an hour
burden of 13,258 and 24,561 respectively, assuming 2 minutes per
notice, on average, of clerical workers' time. The post-transaction
notice is expected to be no longer than two pages. Therefore, the
Department estimates an equivalent cost of approximately $0.8 million
in the first year and an average of $1.6 million in each subsequent
year within the projection window.\122\
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\122\ Values calculated as follows: Year 1--397,749 notices x 2/
60 clerical hours = 13,258 burden hours. $63.45 clerical worker wage
x 13,258 burden hours = $841,239. Subsequent years: 736,825 notices
x 2/60 clerical hours = 24,561 burden hours. $63.45 clerical worker
wage x 25,572 burden hours = $1,558,384.
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As discussed at the beginning of this section, the Department
estimates that 3.9 percent of the notices would be sent by mail. The
Department estimates that an automatic portability provider would incur
a cost of $0.76 to send each disclosure, which is comprised of $0.66
for postage and $0.10 for the paper and printing costs of two pages.
Therefore, the materials and postage costs are estimated as 15,512
notices at $0.76 per notice totaling $11,789 in the first year and an
average of 28,736 notices at $0.76 per notice totaling $21,839, on
average, in years 2 through 10.
6.5.6. Culturally and Linguistically Appropriate Notices
The proposed regulation would require that notices and disclosures
to participants and IRA owners be provided in a culturally and
linguistically appropriate manner if their address is in a county where
10 percent or more of the population is literate only in the same non-
English language. To determine whether a county meets this threshold,
the Department relies on American Community Survey (ACS) data published
by the United States Census Bureau. In the 2016-2020 ACS data, 230
counties or county equivalents met or exceeded the 10 percent threshold
(rounded to the nearest percent).\123\
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\123\ The relevant ACS data set used is the U.S. Census, 2016-
2020 American Community Survey 5-Year Estimates, Table B16001,
Language Spoken at Home by Ability to Speak English for the
Population 5 Years and Over, available at https://data.census.gov/cedsci/table?tid=ACSDT5Y2020.B16001.
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In these counties, the automatic portability provider must include
in the English versions of all required notices and disclosure, a
statement prominently displayed in any applicable non-English language,
which clearly indicates how to access the language services provided by
the automatic portability provider. The Department estimates that
satisfying this requirement would result in a de minimis cost. The
automatic portability provider would also be required to provide oral
language services (such as a telephone customer assistance hotline)
that include answering questions in any applicable non-English language
and providing assistance with automatic portability transactions in any
applicable non-English language.
Additionally, the automatic portability provider would be required
to provide, upon request, a notice or disclosure in any applicable,
non-English language. In the 2016-2020 ACS, the Department identified
eight languages that met the 10 percent threshold in at least one
county. The eight languages were Spanish, Chinese, Navajo, Tagalog,
Samoan, Carolinian, and Chamorro. For the purposes of this analysis,
the Department estimates that an automatic portability provider will
need to translate the notices into eight languages. Document
translation costs vary depending on the length of the document, the
complexity of the document, and the complexity of the language.\124\
One source estimates that the average translation cost per page ranges
between $20 and $130.\125\ Due to the potential complexity of the
documents, the Department assumes the cost will be towards the higher-
end of the range and therefore, on average, it will cost $100 per page
to translate the notices in this proposal. The Department requests
comment on this cost assumption. The translation costs for the initial
enrollment notice, pre-transaction notice, and the post-transaction
notice are summarized in the table below.
---------------------------------------------------------------------------
\124\ American Translators Association, How Much Does a
Translation Cost? (May 2023), https://www.atanet.org/client-assistance/how-much-does-translation-cost/.
\125\ Lettier, Mariel, Translation Rates in 2023--A Complete
Guide, Rush Translate, (2023), https://rushtranslate.com/blog/
translation-rates#:~:text=for%201000%20words.-
,What%20is%20the%20average%20rate%20for%20translation%20per%20page%3F
,certified%20translation%20and%20charges%20%2424.95.
Table 8--Translation Costs
----------------------------------------------------------------------------------------------------------------
Languages Pages Cost per page Cost
----------------------------------------------------------------------------------------------------------------
Initial Enrollment Notice....................... 8 5 $100 $4,000
Pre-Transaction Notice.......................... 8 2 100 1,600
Post Transaction Notice......................... 8 2 100 1,600
---------------------------------------------------------------
Total....................................... .............. 9 .............. 7,200
----------------------------------------------------------------------------------------------------------------
A similar analysis conducted by the Department estimated that the
average requests for translations of written documents averages 0.098
requests per 1,000 health benefit plan members.\126\ For the purposes
of this analysis, the Department assumes that recipients of the notices
in this proposal would request translations at the same rate. The
estimated number of translated notices requested is summarized in the
table below. The Department requests comment on how frequently
translations would be requested for such notices.
---------------------------------------------------------------------------
\126\ 81 FR 92316.
[[Page 5653]]
Table 9--Translated Notices Requested
------------------------------------------------------------------------
Years 2-10
Year 1 (average)
------------------------------------------------------------------------
Initial Enrollment Notice:
Total Initial Enrollment Notice..... 954,786 1,014,438
x Percent Requesting Translated 0.0098% 0.0098%
Notice.............................
= Translated Notices Distributed.... 94 100
Pre-Transaction Notice:
Total Pre-Transaction Notice........ 403,397 747,287
x Percent Requesting Translated 0.0098% 0.0098%
Notice.............................
= Translated Notices Distributed.... 40 74
Post-Transaction Notice:
Total Post-Transaction Notice....... 397,749 736,825
x Percent Requesting Translated 0.0098% 0.0098%
Notice.............................
= Translated Notices Distributed.... 39 73
-------------------------------
Total Translated Notices Distributed.... 173 246
------------------------------------------------------------------------
Note: Components may not sum to parts due to rounding.
The Department assumes that it would take a clerical professional
two minutes to prepare and send each disclosure. The Department assumes
that all of the translated notices would be sent by mail. The
Department requests comment on this assumption. Additionally, the
Department estimates that an automatic portability provider would incur
a cost of $0.76 to send each disclosure, including $0.66 for postage
and $0.05 for the printing costs of each page. The hour burden,
equivalent cost, postage, and material costs are summarized in the
table below.
Table 10--Burden To Prepare and Send Translated Disclosures
------------------------------------------------------------------------
Years 2-10
Year 1 (average)
------------------------------------------------------------------------
Prepare and Send Notice (automatic
portability provider):
Number of Notices................... 173 246
x Annual Hour Burden per Transaction 2/60 2/60
(Hours)............................
= Total Hours....................... 5.8 8.2
x Labor Cost (Clerical Professional) $63.45 $63.45
= Equivalent Cost................... $366 $528
------------------------------------------------------------------------
Material and Postage Cost (automatic
portability provider):
Initial Enrollment Notices:
Number of Notices Sent by Mail...... 94 100
x Postage and Material Cost per $0.91 $0.91
Notice (5 Pages)...................
= Postage and Material Cost......... $86 $91
Pre-Transaction Notices:
Number of Notices Sent by Mail...... 40 74
x Postage and Material Cost per $0.76 $0.76
Notice (2 Pages)...................
= Postage and Material Cost......... $30 $56
Post-Transaction Notices:
Number of Notices Sent by Mail...... 39 73
x Postage and Material Cost per $0.76 $0.76
Notice (2 Pages)...................
= Postage and Material Cost......... $30 $55
-------------------------------
Total Hour Burden....................... 6 8
Total Equivalent Cost................... $366 $528
Total Postage and Material Cost......... $146 $202
------------------------------------------------------------------------
Note: Components may not sum to parts due to rounding.
6.5.7. Summary Plan Description
The Department proposes a requirement that the automatic
portability provider provide the administrator of participating plans
with a model description of the automatic portability program,
including fees and expenses, that the administrator could use in
fulfilling its SPD obligations, as applicable.
PTE 2019-02 included an SPD condition but was silent on which party
had the obligation to ensure compliance. However, given the fact that
RCH was the entity in control of the fees, the Department expects that
the SPD condition of PTE 2019-02 would have been fulfilled in a manner
similar to that in the proposed regulation. Therefore, the Department
estimates no additional incremental burden to RCH/PSN as a result of
the proposed regulation.
6.6. Searches
The proposed regulation parallels the Code section
4975(f)(12)(B)(viii) requirement that the automatic portability
provider query on at least a monthly basis whether any individual with
an IRA has an account in a transfer-in plan. Under the proposal, the
automatic portability provider must perform ongoing participant address
validation searches via automated checks of National Change of Address
[[Page 5654]]
records, two separate commercial locator databases, any internal
databases maintained by the automatic portability provider, and a
manual internet-based search if a valid address is not obtained from
the automated checks. The proposal would require these verification
steps to be performed at least twice in the first year an account is
entered into the automatic portability provider system and once a year
thereafter.
PTE 2019-02 included an identical requirement regarding monthly
searches. The Department assumes that this process is automated via
technology and has de minimis marginal cost with respect to number or
records being searched; therefore, this aspect of the proposal is not
expected to add additional cost to RCH/PSN. PTE 2019-02 also included a
general requirement to take ``all prudent actions necessary to
reasonably ensure that the Plan's participant and beneficiary data is
current and accurate.'' Although RCH represented to the Department that
it would perform address validation searches in line with the
requirement in the proposed regulation, the condition in PTE 2019-02
did not specify the frequency of those searches nor the additional
parameters in the proposal regarding participant address validation
searches. The Department believes, due to the representation from RCH
in connection with the individual exemption, that the proposed
regulation will therefore not add additional cost. However, the
Department requests comment on whether the current framework for
executing automatic portability transactions of RCH/PSN is expected to
include a process for ongoing address validation searches for Default
IRAs that are included in the arrangement (i.e., those which are
eligible to be moved into a transfer-in plan through the execution of
an automatic portability transaction).
6.7. Monitoring Transfers
Section 2550.4975f-12(b)(7) of the proposed regulation requires
that the automatic portability provider ensure that each transfer-in
plan for whom the automatic portability provider performs automatic
portability transactions designates a plan official responsible for
monitoring transfers into the plan and confirming that amounts received
on behalf of a participant are invested properly.
Although the Department believes that monitoring transfers is a
necessary component of an automatic portability arrangement, PTE 2019-
02 did not include a condition explicitly mandating that a plan
official monitor transfers into the plan. As compared to PTE 2019-02,
the Department does not believe the proposed requirement regarding
monitoring transfers will likely add cost because that should be a
normal act of routine plan administration when assets are rolled into a
plan.
6.8. Policies and Procedures
Section 2550.4975f-12(b)(9) incorporates the statutory limitation
on discretion and expands upon the statutory text by specifying that an
automatic portability provider will be deemed to satisfy the limited
discretion requirement if it establishes, maintains, and follows
policies and procedures regarding the process for executing automatic
portability transactions.
PTE 2019-02 included a condition on the limitation of discretion
but did not include a policies and procedures component that would
result in the condition being satisfied. The Department believes that
it would be standard business practice for RCH/PSN to have policies and
procedures in place to govern the various conditions of PTE 2019-02 to
ensure that all automatic portability transactions are executed
consistently and in a manner that can be independently audited.
Although an automatic portability provider is not required to establish
the policies and procedures to satisfy the limited discretion aspect of
the statute and proposed regulation, the Department anticipates that
RCH/PSN will choose to take advantage of the ``deemed satisfied''
aspect of the proposed regulation. The Department assumes that a legal
professional with a wage rate of $159.34 will spend 10 hours reviewing
the existing policies and procedures to ensure compliance with the
requirements in the proposed rule, resulting in an equivalent cost of
$1,593.40.\127\ In subsequent years, 2 hours is assumed for a legal
professional to review and update the procedures at an estimated cost
of $319 per annum.\128\
---------------------------------------------------------------------------
\127\ The hour burden is estimated as: 1 automatic portability
provider x (10 hours) = 10 hours. The equivalent cost is estimated
as: 1 automatic portability provider x (10 hours) x $159.34 =
$1,593.40, rounded to $1,593.
\128\ The hour burden is estimated as: 1 automatic portability
provider x (30/60 hours) = 30/60 hours. The equivalent cost is
estimated as: 1 automatic portability provider x (2 hours) x $159.34
= $318.69, rounded to $319.
---------------------------------------------------------------------------
6.9. Audit
Code section 4975(f)(12)(B)(xi) includes an annual audit
requirement to be conducted in accordance with regulations promulgated
by the Secretary. The statute requires that an audit be conducted that
demonstrates compliance with Code section 4975(f)(12) and any
regulations thereunder and that identifies any instances of
noncompliance with the statute or such regulations. The statute
requires the automatic portability provider to submit a copy of the
auditor's report to the Secretary in such form and manner as specified
by the Secretary.
PTE 2019-02 required an annual audit conducted by an independent
auditor. The auditor is required to review a representative sample of
transactions and related undertakings, sufficient for the auditor to
make a variety of determinations regarding compliance with PTE 2019-02.
Those findings must then be included in a report that is sent to the
Office of Exemption Determinations at the Department, the cost of which
is discussed below.
The timing for submission of the audit report in the proposed
regulation follows the timing from PTE 2019-02. However, as compared to
PTE 2019-02, the proposed regulation has a minor difference as a result
of the proposed correction provisions. Rather than have the auditor
submit the report directly to the Department as was the case under PTE
2019-02, the proposed regulation requires that the audit report shall
be provided first to the automatic portability provider, who will
thereafter submit the report to the Department after reviewing the
audit report and certifying that it has done so.
The parameters of the audit in the proposed regulation, while
intended to align with the PTE 2019-02 audit, provide more detail
regarding the form and content of the audit, in consideration of the
statutory requirements and other areas where the Department has
proposed requirements for the purposes of regulatory clarity. The audit
requirement of the proposed regulation also accounts for the
corrections that may occur in accordance with this proposal. PTE 2019-
02 did not specifically include correction parameters. The cost
associated with the proposed correction mechanisms is described in the
next section.
The Department anticipates the audit parameters of the proposed
regulation will add cost to RCH/PSN as compared to what they might
otherwise have incurred under PTE 2019-02. First, the proposed
regulation requires the audit report to include the total number of
completed automatic portability transactions during the audit period.
Second, the proposed regulation requires the audit report to address
specifically whether, in the reviewed
[[Page 5655]]
sample, the appropriate accounts in the transfer-in plan received all
the assets due as a result of the automatic portability transaction.
Due to the increase in required actions for the audit, the
Department estimates the proposed regulation will increase the cost of
performing the audit by roughly 20 percent. The Department estimates
audit costs in the absence of the proposed rule to be close to $25,000
per year. Therefore, the Department estimates that the proposed rule
will increase audit costs by approximately $5,000 per year. The
Department seeks comment on this estimate.
There are several actions the automatic portability provider will
need to take in support of the audit requirements, which are outlined
below. To ensure the accuracy of certain information that the Secretary
is required to provide to Congress periodically, the proposed
regulation requires the audit report to include information that was
not specifically contemplated under PTE 2019-02, and which may not be
directly in the automatic portability provider's possession. If the
information is not in the possession of the automatic portability
provider, the proposed regulation requires the automatic portability
provider to require contractually that the information to be provided
in connection with its services as an automatic portability provider.
If this obligation is not already included in RCH/PSN's contracts with
recordkeepers and plans, RCH/PSN may need to update those agreements.
The Department estimates updating the standardized contracts would take
a lawyer one hour at a wage rate and total cost of $159.34. Assuming
that all 185,000 plans currently covered by the automatic portability
provider would have their contracts updated with the standard contract,
the Department estimates that a plan fiduciary will spend 15 minutes to
execute the updated contract. This results in a burden of 46,250 hours
of plan fiduciaries' time, at a wage rate of $134.93, resulting in a
total cost of $6,240,513.\129\ Combining these two components of this
portion of the proposed rule results in an equivalent cost of
$6,240,672.
---------------------------------------------------------------------------
\129\ The cost to update the contracts is calculated as: 185,000
participating plans x (15/60) hours x $134.93 plan fiduciary wage
rate = $6,240,512.50. Accounting for the $159.34 cost for a lawyer
to update the contract results in a total of $6,240,671.84, which is
rounded in the text.
---------------------------------------------------------------------------
Although anticipated under PTE 2019-02, there was not an explicit
condition for the automatic portability provider to include a
certification filed with the written audit report, under penalty of
perjury, that the automatic portability provider has reviewed the audit
report. Nor was there a condition requiring the automatic portability
provider to certify that it has addressed, corrected, or remedied any
noncompliance or inadequacy in its compliance or has an appropriate
written plan to address any such issues identified in the audit report.
Because the Department believes RCH/PSN would necessarily be reviewing
the audit under PTE 2019-02, it has not attributed a cost to that
specific aspect of the proposed regulation. However, with respect to
the certifications, the Department estimates that it will take a legal
professional 3 hours to draft the certifications and a senior executive
30 minutes to execute the certification, for an added cost of $542 in
the first year and $64 in subsequent years.\130\
---------------------------------------------------------------------------
\130\ The cost to draft the certification is a one-time cost
calculated as: 3 hours x $159.34 lawyer wage rate = $478.02, rounded
to $478. A senior executive would need to execute the certification
annually. The certification cost is calculated as (30/60) hours x
$128.11 sr. executive wage rate = $64.06, rounded to $64. Therefore,
the first year cost is $478.02 + $64.06 = 542.08.
---------------------------------------------------------------------------
Finally, there would be additional resources expended in collecting
and providing the additional records and for the plan to submit the
audit report to the Department in place of the auditor. The Department
estimates a clerical worker with a wage rate of $63.45 would spend an
additional 5 hours collecting and providing documentation and records
for the audit and approximately 15 minutes sending the report once
finalized. The resulting cost burden for these actions is $333.\131\
---------------------------------------------------------------------------
\131\ The cost to support and transmit the audit by a clerical
worker is estimated as: (5 hours x $63.45 wage = $317.25) + ((15/60)
hours x $63.45 wage rate = $15.86) = $333.11.
---------------------------------------------------------------------------
6.10. Corrections
To effectuate the intent of this provision, the Department is
proposing three components for corrections in the event the auditor
determines the automatic portability provider was not in compliance
with the statute and related regulations: an opportunity for an
automatic portability provider to make certain self-corrections;
additional recommendations from the auditor; and the Secretary
requiring an automatic portability provider to submit to supplemental
audits and corrective actions if significant compliance issues are
uncovered.
Although PTE 2019-02 did not include any correction provisions, the
Department believes the availability of self-correction will generally
provide a benefit to RCH/PSN as opposed to a cost. However, in
connection with the proposed regulation's correction provisions, the
automatic portability provider must establish policies for the
corrections permitted by the proposal. The Department expects that RCH/
PSN will need to develop policies related to corrections that may not
already be included in other pre-existing policies and procedures
governing their program. The Department assumes the policies would be
developed by an in-house attorney with a wage rate of $159.34 and would
take roughly 20 hours resulting in a one-time cost of $3,187.
Additionally, the proposed regulation also includes provisions
relating to the auditor's review of the automatic portability
provider's compliance that were not specifically included in PTE 2019-
02. If the auditor identifies any instances of noncompliance, then RCH/
PSN would be required by the proposal to correct those issues as soon
as reasonably practicable. The Department believes there may be some
added cost associated with remediating compliance issues. The
Department lacks the information necessary to identify the extent of
noncompliance issues that might be uncovered. However, in order to
correct issues, the Department assumes that both a Senior Executive and
a lawyer would likely be involved. The Department estimates each would
spend 10 hours considering and developing remedies to audit findings.
The cost for the lawyer is estimated as 10 hours at a wage rate of
$159.34 resulting in a cost of $1,593. The cost for the Senior
Executive is similarly estimated as 10 hours at a wage rate of $128.11
resulting in a cost of $1,281.10. Lastly, a summary of the corrective
actions taken is to be sent to the auditor. The Department assumes that
a clerical worker with a wage rate of $63.45 will spend two hours
organizing and communicating the summary to the auditors, at a cost of
$127. The total annual cost to address audit findings and communicate
the summary of actions taken is estimated as the sum of these three
costs, $3,001.
The ability of the Department to impose additional supplemental
audits and corrective actions could also add cost. For instance, if the
Department were to impose a supplemental audit, the expected cost to
RCH/PSN would likely be the same as the cost of the required annual
audit. The Department estimates that no more than one supplemental
audit would be imposed in any particular year, but also expects the
imposition to be rare. To account for the possibility, the Department
assumes one supplemental audit would occur in
[[Page 5656]]
the fifth year of the estimation window at a cost of $30,000, which is
the estimated cost of the annual audit.
If the Department were to impose a temporary prohibition on relying
upon the statutory exemption, the cost to RCH/PSN associated with that
would generally be a function of the number of automatic portability
transactions multiplied by the revenue per transaction for the period
in which they could not use the exemption. Due to the novelty of the
arrangement, the Department currently lacks data to estimate the
magnitude of this cost.
6.11. Website
The proposed regulation in paragraph (d) parallels the statutory
language in Code section 4975(f)(B)(xii) requiring the automatic
portability provider to: (1) maintain a website which contains a list
of recordkeepers with respect to which the automatic portability
provider carries out automatic portability transactions; (2) list all
fees paid to the automatic portability provider; and (3) indicate the
number of plans and participants covered by each recordkeeper. Under
the proposed regulation, the list would have to include the fees and
the identity of the party or account that is paying the particular fee.
The proposal would also require the website to display automatic
portability transaction-related information in a way that
differentiates that information from other information or elements of
the website (e.g., separately identifying the automatic portability
transaction fees and services from fees and services in connection with
establishing and maintaining custody of a Default IRA).
PTE 2019-02 required a website that includes a list of all
participating recordkeepers but did not require the additional detail
regarding a list of all fees paid to the automatic portability
provider, or the number of plans and participants covered by each
recordkeeper. The Department anticipates that this information will be
readily available to RCH/PSN and that they will update their website to
include all the information in a format that meets the requirements in
the proposed rule.
The Department estimates that a Senior Executive would spend one
hour providing a web designer the requirements for the disclosures in
the first year, resulting in an equivalent cost of $128.\132\
Additionally, the Department estimates that it would take a web
designer five hours to update and test the website in the first year,
resulting in an equivalent cost of $778.\133\ The Department estimates
that it would take a web developer one hour in subsequent years to make
any necessary revisions or updates to the disclosures, resulting in an
equivalent cost of $156.\134\
---------------------------------------------------------------------------
\132\ The hour burden is estimated as: 1 automatic portability
provider x (1 hour) = 1 hour. The equivalent cost is estimated as: 1
automatic portability provider x (1 hour) x $128.11 = $128.11,
rounded to $128.
\133\ The hour burden is estimated as: 1 automatic portability
provider x (5 hours) = 5 hours. The equivalent cost is estimated as:
1 automatic portability provider x (5 hours) x $155.61 = $778.05,
rounded to $778.
\134\ The hour burden is estimated as: 1 automatic portability
provider x (1 hour) = 1 hour. The equivalent cost is estimated as: 1
automatic portability provider x (1 hour) x $155.61 = $155.61,
rounded to $156.
---------------------------------------------------------------------------
6.12. Limitations on Exculpatory Provisions
The limitation on exculpatory provisions in the proposed regulation
is substantially identical to the limitation in PTE 2019-02. Therefore,
the Department anticipates no additional cost to RCH/PSN.
6.13. Record Retention
This proposed regulation incorporates the statutory language in
Code section 4975(f)(12)(xi)(I) regarding record retention by requiring
an automatic portability provider to maintain, for not less than six
years, records sufficient to demonstrate compliance with the
requirements of the statute and this proposed regulation and make them
available to authorized employees of the Department and the Department
of the Treasury within 30 calendar days of a written request.
PTE 2019-02 had a broader recordkeeping provision with respect to
who could request records as compared to the statutory provision. The
Department believes this could result in cost savings to RCH/PSN
because plan fiduciaries and IRA owners can no longer request the
records. However, the Department does not believe this will change the
cost of retaining the records. The Department does not know how many
plan fiduciaries or IRA owners would request records, but expects it
would be infrequent, resulting in a de minimis cost reduction to RCH/
PSN.
7. Transfers
7.1. Transfers Resulting From Open Participation
Section 2550.4975f-12(g) of this proposed regulation parallels Code
section 4975(f)(12)(B)(iv) by requiring, as a condition of the
availability of the exemption, that the automatic portability provider
offer automatic portability transactions on the same terms to any
transfer-in plan. The Department is also proposing that open
participation would require that the automatic portability provider not
restrict or limit the ability of an employer-sponsored retirement plan,
IRA custodian or IRA provider, or recordkeeper to engage other
automatic portability providers to execute automatic portability
transactions. PTE 2019-02 required RCH to offer the program in a
functionally identical manner as the open participation requirement of
the statute. However, it did not include a condition similar to the
proposed regulation requirement that ensures a plan sponsor is not
restricted from engaging more than one automatic portability provider.
Since this requirement reduces barriers to entry, it will tend to
encourage RCH/PSN to keep its fee low to discourage other automatic
portability providers from competing in the market. This would
represent a transfer from RCH/PSN to participants in the form of lower
fees and to other automatic portability providers (if others enter the
market), in the form of lower barriers to entry.
7.2. Transfer of Foregone Government Revenue to Participants
Assets that stay in the tax-preferred retirement system rather than
being cashed out will not be subject to regular income tax until a
future date when they are distributed. They will also avoid altogether
the 10 percent penalty tax on early distributions that would have
applied to many cashouts. As the participants pay less in taxes, this
represents a transfer from the government to participants in the form
of increased tax expenditures supporting the retirement system.
The Department estimates that over the ten-year estimation period
the proposed rule will lead to 1.5 million fewer cashouts with a value
of approximately $4.6 billion. The Department assumes that the marginal
income tax rate for small account holders would be 12 percent.\135\ The
Department also assumes that a 10 percent tax penalty applies to half
of the foregone cashouts. The other foregone cashouts are assumed to
fall under one of the exceptions; for example, the separating
participant turns 55 or older
[[Page 5657]]
in the calendar year in which they take the distribution, or they are
disabled, or they have certain medical expenses.\136\ The Department
estimates that the amount of the transfer from the government to
participants would be about $790 million.\137\
---------------------------------------------------------------------------
\135\ U.S. Internal Revenue Service, ``IRS Provides Tax
Inflation Adjustments for Tax Year 2024'' website at https://
www.irs.gov/newsroom/irs-provides-tax-inflation-adjustments-for-tax-
year-
2024#:~:text=Marginal%20rates%3A%20For%20tax%20year,for%20married%20c
ouples%20filing%20jointly).&text=The%20lowest%20rate%20is%2010,for%20
married%20couples%20filing%20jointly).
\136\ U.S. Internal Revenue Service, ``401(k) Resource Guide--
Plan Participants--General Distribution Rules'' website, at https://www.irs.gov/retirement-plans/plan-participant-employee/401k-resource-guide-plan-participants-general-distribution-rules#tax-on-early-distributions.
\137\ ($4,646,579,157 * 12%) + ($4,646,579,157 * 50% * 10%) =
$789,918,457. Using a 3 percent discount rate, this results in
transfers totaling $655,539,147. Using a 7 percent discount rate,
this results in transfers totaling $519,964,549.
---------------------------------------------------------------------------
8. Regulatory Alternatives
Section 6(a)(3)(C)(iii) of Executive Order 12866 requires a
significant regulation, and encourages other regulations, to include an
assessment of the costs and benefits of potentially effective and
reasonable alternatives to the planned regulation. The Department
considered several alternative approaches in developing this proposed
regulation which are discussed below.
8.1. Do Not Issue Regulations--Rely Only on Sub-Regulatory Guidance
The Department considered not proposing regulations with respect to
the automatic portability provision included in section 120 of the
SECURE 2.0 Act. Section 120(c) directs the Secretary of Labor to
``issue such guidance as may be necessary to carry out the purposes of
the amendments made by this section, including regulations or other
guidance'' no later than 12 months after the enactment of the statute.
To this end, the Department has considered whether its responsibilities
under section 120(c) could be satisfied by issuing only sub-regulatory
guidance. The Department considered issuing guidance stating that
compliance with the individual exemption would be sufficient to comply
with the statutory exemption. However, since the Department anticipates
that entities not engaging in automatic portability transactions may
wish to enter the automatic portability market in the future, the
Department maintains that issuing the proposed regulation would address
any uncertainty on complying with the statutory exemption in a manner
that is consistent with directives expressed in section 120(c).
8.2. Issue More Limited Regulations
The Department considered issuing limited regulations concerning
only the portions of section 4975(f)(12) focused on the audit and the
acknowledgement of fiduciary status, both of which called on the
Department to promulgate regulations to determine compliance. In so
doing, the Department could have issued sub-regulatory guidance with
respect to compliance with the rest of the exemption. The Department
did ensure that these proposed regulations provide the necessary
blueprint for completing a comprehensive audit and sufficient
acknowledgement of fiduciary status. However, given that regulations
were to be proposed, the Department believes that more comprehensive
regulations ensure that automatic portability transactions are
protective of plan participants and beneficiaries. Furthermore, the
Department believes that the novel nature of automatic portability
transactions necessitates comprehensive proposed regulations followed
by a notice-and-comment process in which stakeholders can provide
input.
8.3. Do Not Require an Initial Enrollment Notice
The Department considered not including a requirement for an
initial enrollment notice in the proposed regulations. The statute only
requires that an automatic portability provider furnish IRA owners with
a pre-transaction notice and a post-transaction notice. However,
section 120(c)(1) gives the Department the statutory authority to
require that automatic portability providers furnish a notice ``in
advance of'' the pre-transaction notice. The Department was not
mandated to require additional notices and could have considered the
pre-transaction notice sufficient to provide IRA owners with
information regarding the automatic portability transactions. However,
the Department determined that the initial enrollment notice helps to
ensure the IRA owner's awareness and understanding of the automatic
portability transaction, including but not limited to, the individual's
right to affirmatively elect not to participate in the transaction, the
other available distribution options, the procedures to take advantage
of such options, and the procedures for doing so.
8.4. Audit Does Not Have To Be ``Independent''
The Department considered proposing an audit that could be
conducted as an internal audit. However, the Department determined that
the factors which led to the inclusion of an independent audit in PTE
2019-02 still exist with respect to the execution of automatic
portability transactions, even under the new statutory exemption. The
novelty of these types of transactions leads the Department to believe
that the enhanced oversight and credibility associated with an
independent audit favors the Department's approach in the proposed
regulation.
8.5. Exemptive Relief for Default IRAs Involving Rollovers of Accounts
With a Value of $1,000 or Less
In section E of the preamble the Department is requesting comments
on whether it should exercise its general exemption authority under
ERISA section 408(a) to provide the same exemptive relief to mandatory
distributions with a value of $1,000 or less that the statutory
exemption provides to mandatory distributions described in Code section
401(a)(31)(B) with a value between $1,001 and $7,000. The estimated
benefits and costs in the regulatory impact analysis for this proposed
rule include all accounts with balances of $7,000 or less. As discussed
in section E, that analysis aligns with the scope of Department's safe
harbor regulation at 29 CFR 2550.404a-2 for automatic rollovers to
individual retirement plans and with PTE 2019-02. Excluding accounts
with balances of $1,000 or less from the regulatory impact analysis for
the proposed rule results in a reduction in the ten-year undiscounted
total estimated benefit to $1.7 billion \138\ (compared to $2.8 billion
in the main analysis),\139\ reduction in incremental costs to $12.6
million \140\ (compared to $16.2 million in the main analysis),\141\
and an increase of 2.3 million automatic portability transactions
(compared to an increase of 3.7 million in the main analysis). This
results in lower net benefits, but those net benefits are still
substantial.
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\138\ Using a 3 percent discount rate, this results in total
benefits of $1,451,914,016. Using a 7 percent discount rate, this
results in total benefits of $1,184,887,753.
\139\ Using a 3 percent discount rate, this results in total
benefits of $2,341,907,159. Using a 7 percent discount rate, this
results in total benefits of $1,911,200,700.
\140\ Using a 3 percent discount rate, this results in total
costs of $11,259,790. Using a 7 percent discount rate, this results
in total costs of $9,869,114.
\141\ Using a 3 percent discount rate, this results in total
costs of $14,160,023. Using a 7 percent discount rate, this results
in total costs of $12,073,029.
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The Department has substantial uncertainty surrounding these
estimates and made simplifying assumptions to obtain the estimates. The
Department seeks comment and data on the following issues. The number
of mandatory distributions or accounts with a balance of $1,000 or less
is not certain. The most relevant data available comes from a 2023
Public Retirement Research Lab report concerning public
[[Page 5658]]
defined contribution plans which indicated that 16 percent of all
account balances were $1,000 or less. The report also found that 42
percent of all accounts had balances less than $7,000.\142\ The primary
analysis assumes that all accounts below the distribution threshold are
treated the same and the account owners respond similarly regardless of
the account balance. The Department seeks data on whether mandatory
distributions with $1,000 or less are treated differently by plan
sponsors and how the account owners' responses may differ.
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\142\ Public Retirement Research Lab, Secure 2.0 Act Low-Balance
Distribution Limit Changes: A Look by Age and Tenure, (2023), SECURE
2.0 Act Low-Balance Distribution Limit Changes: A Look by Age and
Tenure (ebri.org).
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9. Uncertainty
The Department acknowledges that there is significant uncertainty
in how the automatic portability provider market will develop in the
future. The Department requests comments on these sources of
uncertainty. For instance, there may be only one automatic portability
provider in the future, PSN, or there may be multiple automatic
portability providers, which would allow for specialization on the part
of the automatic portability providers. If additional firms ultimately
enter the market as automatic portability providers, resulting in a
less concentrated market with more competitors, that would likely lead
to lower fees, better quality service, and less profits for RCH/PSN.
These benefits and transfers would accrue to the other automatic
portability providers and to participants.
In the baseline scenario, the number of recordkeepers joining PSN
was expected to be flat. However, additional recordkeepers could join
the network. The model was adjusted to have the number of recordkeepers
increase at half the rate as was used for the post-statute and
regulation scenario. Changing this assumption led to a ten-year
undiscounted total estimated benefit of $615.0 million \143\ (compared
to $2.8 billion in the main analysis),\144\ $9 million in incremental
costs \145\ (compared to $16.2 million in the main analysis),\146\ and
an increase of 1.3 million automatic portability transactions (compared
to an increase of 3.7 million in the main analysis). Changing this
assumption results in lower net benefits, but those net benefits are
still substantial.
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\143\ Using a 3 percent discount rate, this results in total
benefits of $529,400,846. Using a 7 percent discount rate, this
results in total benefits of $439,280,667.
\144\ Using a 3 percent discount rate, this results in total
benefits of $2,341,907,159. Using a 7 percent discount rate, this
results in total benefits of $1,911,200,700.
\145\ Using a 3 percent discount rate, this results in total
costs of $8,265,330. Using a 7 percent discount rate, this results
in total costs of $7,488,188.
\146\ Using a 3 percent discount rate, this results in total
costs of $14,160,023. Using a 7 percent discount rate, this results
in total costs of $12,073,029.
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There is uncertainty about the number of future automatic
portability transactions, in large part because the Department is
unclear how the proposed rule will impact DB plans and participants.
While the Department believes that the statutory regulation applies to
both DB and DC plan participants, the Department assumes that DB plan
participants will rarely be affected by this proposed rule. DB plan
benefits are generally derived from a formula based on an employee's
wages and years of service, which an employee is only entitled to once
they are fully vested. Vesting periods vary, however, with five-year
``cliff'' vesting being very common and for which few vested
participants would separate from service with benefits that are less
than $7,000. However, participants in DB plans with graded vesting
would be more likely to have accrued benefits below the threshold. The
Department requests comments on the number of DB plans and participants
that would be affected by this statutory exemption and how they would
be impacted.
While the share of workers covered by DB plans has continued to
decline, those covered by DC plans have increased substantially, with
45 percent of civilian workers participating in DC plans compared to
just 19 percent participating in DB plans.\147\ If DC plan coverage
continues to increase in the future, the amount of automatic
portability transactions will likely also increase.
---------------------------------------------------------------------------
\147\ U.S. Bureau of Labor Statistics, National Compensation
Survey, (March, 2023).
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Workers affected on the margin by increased retirement plan
coverage would likely have a lower income on average than workers
currently covered by a retirement plan and therefore would tend to
contribute less to their plan. Employers sponsoring new plans may also
contribute less. These factors would lead to more small balance
accounts that would be subject to forced transfers into Default IRAs.
These workers would also be more likely to experience a larger number
of job turnovers on average, so there would be more Default IRA owners.
Under the assumption that DC plan coverage will increase in the future,
Default IRA owners would be more likely to have coverage at their new
jobs, leading to more automatic portability transactions.
There are also many factors at the level of individual employee
behavior that will affect the impact of the statutory exemption and any
accompanying regulations. This includes employee decisions about
whether to contribute to their DC plan, which will be influenced by
plan designs that have automatic enrollment. Furthermore, employee
decisions about how to handle their account when separating from a job
will be key. It is difficult to know what the trends will be around
such decisions in the future since they may be affected by financial
advice, and any possible changes to the scope of coverage under DB
pension plans and Social Security. While the scale of such developments
is difficult to predict, they will surely have a substantial impact on
the scope of automatic portability transactions, the number of
participants, plans, and financial institutions affected, as well as
the size of the benefits and costs.
G. Paperwork Reduction Act
As part of its continuing effort to reduce paperwork and respondent
burden, the Department conducts a preclearance consultation program to
allow the general public and Federal agencies to comment on proposed
and continuing collections of information in accordance with the
Paperwork Reduction Act of 1995 (PRA). This helps ensure that the
public understands the Department's collection instructions,
respondents can provide the requested data in the desired format,
reporting burden (time and financial resources) is minimized,
collection instruments are clearly understood, and the Department can
properly assess the impact of collection requirements on respondents.
The Department is soliciting comments regarding the information
collection request (ICR) included in the NPRM. To obtain a copy of the
ICR, contact the PRA addressee below or go to RegInfo.gov. The
Department has submitted a copy of the rule to the Office of Management
and Budget (OMB) in accordance with 44 U.S.C. 3507(d) for review of its
information collections. The Department and OMB are particularly
interested in comments that:
Evaluate whether the collection of information is
necessary for the functions of the agency, including whether the
information will have practical utility;
Evaluate the accuracy of the agency's estimate of the
burden of the collection of information, including the
[[Page 5659]]
validity of the methodology and assumptions used;
Enhance the quality, utility, and clarity of the
information to be collected; and
Minimize the burden of the collection of information on
those who are to respond, including through the use of appropriate
automated, electronic, mechanical, or other technological collection
techniques or other forms of information technology (e.g., permitting
electronically delivered responses).
Commenters may send their views on the Department's PRA analysis in
the same way they send comments in response to the proposed rule as a
whole (for example, through the www.regulations.gov website), including
as part of a comment responding to the broader proposed rule. Comments
are due by March 29, 2024 to ensure their consideration.
ICRs are available at RegInfo.gov (reginfo.gov/public/do/PRAMain).
Requests for copies of the ICR can be sent to the PRA addressee:
By mail: James Butikofer, Office of Research and Analysis, Employee
Benefits Security Administration, U.S. Department of Labor, 200
Constitution Avenue NW, Room N-5718, Washington, DC 20210
By email: [email protected]
1. Preliminary Assumptions and Cost Estimate Inputs
For the purposes of this analysis, the Department assumes that the
percent of retirement investors receiving electronic disclosures would
be similar to the percent of plan participants receiving electronic
disclosures under the Department's 2002 and 2020 electronic disclosure
safe harbors.\148\ Accordingly, the Department estimates that 96.1
percent of the disclosures sent to retirement investors would be sent
electronically, and the remaining 3.9 percent would be sent by
mail.\149\ For disclosures sent by mail, the Department estimates that
entities will incur a cost of $0.66 \150\ for postage and $0.05 per
page for material and printing costs.
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\148\ 67 FR 17264, 85 FR 31884.
\149\ The Department estimates 96.1 percent of retirement
investors receive disclosures electronically. This is the sum of the
estimated share of retirement investors receiving electronic
disclosures under the 2002 electronic disclosure safe harbor (58.3
percent) and the estimated share of retirement investors receiving
electronic disclosures under the 2020 electronic disclosure safe
harbor (37.8 percent).
\150\ United States Postal Service. ``First-Class Mail.''
(2023). https://www.usps.com/ship/first-class-mail.htm.
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Additionally, the Department assumes that several types of
personnel would perform the tasks associated with information
collection requests at an hourly wage rate of $63.45 for clerical
personnel, $128.11 for a Senior Executive, $134.93 for a plan
fiduciary, $155.61 for a web developer, and $159.34 for a legal
professional.\151\
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\151\ Internal DOL calculation based on 2023 labor cost data.
For a description of the Department's methodology for calculating
wage rates, see https://www.dol.gov/sites/dolgov/files/EBSA/laws-and-regulations/rules-and-regulations/technical-appendices/labor-cost-inputs-used-in-ebsa-opr-ria-and-pra-burden-calculations-june-2019.pdf.
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2. Summary of Affected Entities
As discussed in the Affected Entities section of the Regulatory
Impact Analysis, the Department expects that the statutory exemption
and accompanying proposed regulation would impose paperwork burdens on
automatic portability providers and plans. For the purposes of this
analysis, the Department assumes that there will only be one entity
providing automatic portability provider services. The Department
acknowledges that there is significant uncertainty in how the automatic
portability provider market will develop in the future. For a larger
discussion on the factors the Department considered in this estimate,
refer to the Affected Entities section of the Regulatory Impact
Analysis.
In 2023, PSN noted that their member recordkeepers represent over
185,000 employer-sponsored retirement plans.\152\ PSN does not clarify
what type of plans are included in this estimate or whether all of
these plans are eligible for automatic portability services. The
Department relies on this estimate for purposes of this analysis with
the acknowledgement of this uncertainty. The Department requests
comment on how many plans are expected be eligible for automatic
portability services in the near future, as well as what percentage of
plans might be eligible in the future.
---------------------------------------------------------------------------
\152\ Portability Services Network, An Industry Led Utility,
(2023), https://psn1.com/.
---------------------------------------------------------------------------
As discussed in the Affected Entities section of the Regulatory
Impact Analysis, the Department estimates that there are 954,786
account holders for whom default IRAs will be established in the first
year, 976,384 in year two and 994,897 in year three. The Department
requests comment on this estimate, as well as how it would likely
change after the exemption becomes effective. The table below
summarizes the Department's estimate for the accounts eligible for
automatic portability transactions, the number of accounts that would
opt out of automatic portability transactions, and the number of
executed automatic portability transactions. For more information on
how these estimates were calculated, refer to the Affected Entities
section of the Regulatory Impact Analysis.
Table 11--Affected Participants/Accounts
------------------------------------------------------------------------
Year 1 Year 2 Year 3
------------------------------------------------------------------------
Participants (Total)................... 954,786 976,384 994,897
Accounts Located and Matched for 403,397 526,984 639,538
Automatic Portability.............
Accounts Opting Out of Automatic 5,648 8,953 8,953
Portability.......................
Automatic Portability Transactions. 397,749 519,606 630,585
------------------------------------------------------------------------
3. Acknowledgement of Fiduciary Status
The proposed regulation requires the automatic portability provider
to acknowledge in writing that it is a fiduciary upon being engaged by
a plan fiduciary. The Department anticipates that a single standard
acknowledgement would be included in contracts with plan sponsors. The
Department estimates that it would take a legal professional one hour
to draft this acknowledgement in the first year, resulting in an hour
burden of one hour with an equivalent cost of $159.\153\
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\153\ The hour burden is estimated as: 1 automatic portability
provider x 1 hour = 1 hour. The equivalent cost is estimated as: 1
automatic portability provider x 1 hour x $159.34 = $159.34, rounded
to $159.
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Additionally, the Department estimates that 185,000
acknowledgements of fiduciary status \154\ would be sent to plan
[[Page 5660]]
fiduciaries in the first year and that it would take a clerical
professional two minutes to prepare and send the acknowledgement. This
results in an hour burden of 6,167 hours with an equivalent cost of
$391,275.\155\ The Department expects that acknowledgements sent in
subsequent years would be included in contract documents and would
result in a de minimis burden.
---------------------------------------------------------------------------
\154\ As of 2023, PSN estimated that their members represented
185,000 employer-sponsored retirement plans. (Portability Services
Network, A Retirement Industry-Led Utility, (2023), https://psn1.com/learning-center/about-psn/a-retirement-industry-led-utility.)
\155\ The hour burden is estimated as: 185,000 plan fiduciaries
x 2/60 hours = 6,167 hours. The equivalent cost is estimated as:
185,000 plan fiduciaries x 2/60 hours x $63.45 = $391,275.
---------------------------------------------------------------------------
The Department assumes that the acknowledgement of fiduciary status
generally would be sent electronically. Therefore, the Department
assumes there would be no associated material or postage cost.
4. Summary Plan Description
The proposal would require the automatic portability provider to
provide the administrator of participating plans with a model
description of the automatic portability program for plan sponsors to
include in their summary plan description (SPD), including fees and
expenses, as applicable. The Department anticipates that the automatic
portability provider would draft and send the same standard model
description to all plans. The Department estimates that drafting the
SPD would take a legal professional 10 hours, resulting in an hour
burden of 10 hours with an equivalent cost of $1,593 in the first
year.\156\ The Department estimates that it would take a clerical
professional two minutes to prepare and send the summary plan
description to each of the 185,000 plans, resulting in an annual hour
burden of 6,167 hours and an equivalent cost of $391,275.\157\
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\156\ The hour burden is estimated as: 1 automatic portability
provider x 10 hours = 10 hours. The equivalent cost is estimated as:
1 automatic portability provider x 10 hours x $159.34 = $1,593.40,
rounded to $1,593.
\157\ The hour burden is estimated as: 185,000 plans x 2/60
hours = 6,167 hours. The equivalent cost is estimated as: 185,000
plans x 2/60 hours x $63.45 = $391,275.
---------------------------------------------------------------------------
The Department assumes that this document would be sent
electronically and thus would not incur any postage or material costs.
5. Policies and Procedures
The proposal requires automatic portability providers to establish,
maintain, and follow written policies and procedures to ensure that
they obtain or have access to current and accurate census and contact
data on individual participants and IRA owners and to specify standards
and timeframes that apply to all automatic portability transactions.
The proposal also includes the ability for the automatic portability
provider to establish policies and procedures in connection with the
limitation on the exercise of discretion. An automatic portability
provider will be deemed to satisfy the limited discretion requirement
if it establishes, maintains, and follows policies and procedures
regarding the process for executing automatic portability transactions.
The Department estimates that it would take a legal professional
approximately 10 hours to establish, or modify as applicable, policies
and procedures satisfying the requirements in the first year, resulting
in an hour burden of 10 hours in the first year with an equivalent cost
of $1,593.\158\ In subsequent years, the Department estimates that it
would take a legal professional two hours for the automatic portability
provider to modify the policies and procedures as needed, resulting in
an hour burden of two hours with an equivalent cost of $319.\159\
---------------------------------------------------------------------------
\158\ The hour burden is estimated as: 1 automatic portability
provider x 10 hours = 10 hours. The equivalent cost is estimated as:
1 automatic portability provider x 10 hours x $159.34 = $1,593.40,
rounded to $1,593.
\159\ The hour burden is estimated as: 1 automatic portability
provider x 2 hours = 2 hours. The equivalent cost is estimated as: 1
automatic portability provider x 2 hours x $159.34 = $318.68,
rounded to $319.
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6. Audit
The proposal requires automatic portability providers to retain an
independent auditor to conduct an annual audit to demonstrate
compliance and identify any noncompliance issues. The auditor shall, at
a minimum, review: the policies and procedures, a representative sample
of the required disclosures, a representative sample of automatic
portability transactions, and the requirements of section 4975(d)(25),
4975(f)(12), and these regulations. The auditor shall prepare a written
audit report signed by the auditor.
The Department estimates that it would take a clerical professional
five hours to collect and provide records to the independent auditor,
resulting in an annual hour burden of five hours with an equivalent
cost of $317.\160\ While the Department lacks precise information on
how much it would cost an automatic portability provider to hire an
independent auditor to satisfy the required conditions, the Department
estimates that it would cost $30,000. This estimate is based on
information previously provided by stakeholders for similar audits, and
the Department requests comment on this figure.
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\160\ The hour burden is estimated as: 1 automatic portability
provider x 5 hours = 5 hours. The equivalent cost is estimated as: 1
automatic portability provider x 5 hours x $63.45 = $317.25, rounded
to $317.
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The Department estimates that it will take a legal professional
three hours to draft the certification in the first year, resulting in
an hour burden of three hours and equivalent cost of $478.\161\ The
Department estimates that it would take a senior executive 30 minutes
to execute the certification, resulting in an annual hour burden of 30
minutes with an equivalent cost of $64.\162\ Finally, the Department
approximates that it would take a clerical professional 15 minutes to
send the report to the Department once finalized, resulting in an hour
burden of 15 minutes and an equivalent cost of $16.\163\
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\161\ The hour burden is estimated as: 1 automatic portability
provider x 3 hours = 3 hours. The equivalent cost is estimated as: 1
automatic portability provider x 3 hours x $159.34 = $478.02,
rounded to $478.
\162\ The hour burden is estimated as: 1 automatic portability
provider x 30/60 hours = 30/60 hours. The equivalent cost is
estimated as: 1 automatic portability provider x 30/60 hours x
$128.11 = $64.06, rounded to $64.
\163\ The hour burden is estimated as: 1 automatic portability
provider x 15/60 hours = 15/60 hours. The equivalent cost is
estimated as: 1 automatic portability provider x 15/60 hours x
$63.45 = $15.86, rounded to $16.
---------------------------------------------------------------------------
The proposal requires that the written audit include certain
information, described in the regulatory text. If the automatic
portability provider does not have direct access to this information,
the proposal would require the partnering recordkeepers and
participating plans to provide such information as a condition of
receiving the automatic portability provider's services. This
obligation may require an automatic portability provider to update
requirements with its recordkeepers and plans. The Department estimates
that updating the standardized contracts would take a legal
professional at the automatic portability provider one hour, resulting
in an hour burden of one hour and an equivalent cost of $159.\164\
Additionally, the Department estimates that it would take 15 minutes
for plan fiduciaries to execute the updated contract, resulting in an
hour burden of 46,250 hours with an equivalent cost of $6,240,513.\165\
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\164\ The hour burden is estimated as: 1 automatic portability
provider x 1 hour = 1 hour. The equivalent cost is estimated as: 1
automatic portability provider x 1 hour x $159.34 = $159.34, rounded
to $159.
\165\ The hour burden is estimated as: 185,000 plans x 15/60
hour = 46,250 hours. The equivalent cost is estimated as: 185,000
plans x 15/60 hour x $134.93 = $6,240,512.50, rounded to $6,240,513.
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[[Page 5661]]
7. Corrections
If the auditor determines the automatic portability provider was
not in compliance with the statute and related regulations, the
proposal includes an opportunity for self-correction.
As such, the proposal would require the automatic portability
provider to establish policies for the corrections permitted by the
proposal. The Department assumes that establishing such policies and
procedures would take a legal professional 20 hours in the first year,
resulting in an hour burden of 20 hours and an equivalent cost of
$3,187.\166\
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\166\ The hour burden is estimated as: 1 automatic portability
provider x 20 hours = 20 hours. The equivalent cost is estimated as:
1 automatic portability provider x 20 hours x $159.34 = $3.186.80,
rounded to $3,187.
---------------------------------------------------------------------------
In the case of a violation, the automatic portability provider
would be required to correct the violation and document the correction
in writing within 30 calendar days of correction. The Department does
not expect that an automatic portability provider would have a
violation on an annual basis, and the Department acknowledges that the
correction and related documentation could vary significantly,
depending on the nature of the violation. For the purposes of this
analysis, the Department considers the cost on an average annual basis.
The Department estimates that, on average, it would take a clerical
professional two hours to draft and send the documentation of the
correction, resulting in an average annual hour burden of two hours and
an equivalent cost of $127.\167\
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\167\ The hour burden is estimated as: 1 automatic portability
provider x 2 hours = 2 hours. The equivalent cost is estimated as: 1
automatic portability provider x 2 hours x $63.46 = $126.90, rounded
to $127.
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8. Notices and Disclosures
8.1. Notice to the Secretary of Labor
Under the proposed regulation, within 90 calendar days of the date
that the automatic portability provider begins operating an automatic
portability transaction program that is intended to rely on prohibited
transaction relief, the automatic portability provider must notify the
Secretary. Because PTE 2019-02 was issued to a single entity, there was
no such requirement in the exemption. However, the Department believes
based on the small number of expected automatic portability providers
entering the market, that the possible cost burden associated with
submitting the simple notice via email to the Department to be roughly
$16, which is estimated as 15 minutes of a clerical worker's time with
an hourly wage rate of $63.45. This notification needs to be updated to
report a change to the legal or operating name(s) of the automatic
portability provider that is relying upon the exemption. The Department
expects that such a change would be rare and thus does not estimate an
associated cost.
8.2. Fee and Compensation Disclosure Requirement
The proposed regulation requires the automatic portability provider
to disclose fees and compensation to a fiduciary of the employer-
sponsored plan and receive an approval in writing in advance of the
transaction. This includes fees and compensation received, directly or
indirectly, by the automatic portability provider (including its
affiliates) for services provided in connection with the automatic
portability transaction. The Department assumes that the disclosure
would be standard across transactions, requiring an update no more
frequently than once a year. The Department requests comment on this
assumption.
The Department estimates that preparing the disclosures of fees and
compensation would take a legal professional two hours in the first
year to draft the disclosure. This results in a burden of two hours and
an equivalent cost of $319 in the first year.\168\ The Department
estimates that it would take a clerical professional two minutes to
prepare and send the disclosure to the fiduciary of the estimated
185,000 plans, resulting in a burden of 6,167 hours in the first year
and an equivalent cost of $391,275.\169\
---------------------------------------------------------------------------
\168\ The hour burden is estimated as: 1 automatic portability
provider x 2 hours = 2 hours. The equivalent cost is estimated as: 1
automatic portability provider x 2 hours x $159.34 = $318.68,
rounded to $319.
\169\ The hour burden is estimated as: 185,000 plans x 2/60
hours = 6,167 hours. The equivalent cost is estimated as: 185,000
plans x 2/60 hours x $63.45 = $391,275.
---------------------------------------------------------------------------
The Department assumes that the disclosure and approval would be
sent electronically between the automatic portability provider and the
plan. Therefore, the Department assumes there would be no associated
material or postage cost.
8.3. Initial Enrollment Notice
The proposal requires an automatic portability provider to send
each individual on whose behalf the individual retirement plan was
established an initial notice within 15 calendar days of the individual
retirement plan's enrollment or participation in an arrangement that
includes the possibility of a future automatic portability transaction
executed by the automatic portability provider. The Department
estimates that preparing this disclosure would take a legal
professional two hours, resulting in an hour burden of two hours and an
equivalent cost of $319.\170\
---------------------------------------------------------------------------
\170\ The hour burden is estimated as: 1 automatic portability
provider x 2 hours = 2 hours. The equivalent cost is estimated as: 1
automatic portability provider x 2 hours x $159.34 = $318.68,
rounded to $319.
---------------------------------------------------------------------------
As discussed above, the Department estimates that the disclosures
would be sent to an average of 975,35 individuals in the first three
years, and that it would take a clerical professional two minutes to
prepare and send the disclosures. This results in an average hour
burden of 32,512 hours with an average equivalent cost of roughly $2
million per year.\171\ The Department estimates that an automatic
portability provider would incur $0.66 for postage and $0.25 for the
paper and printing costs of five pages, which the Department estimates
to cost on average $34,615 per year in the first three years.\172\
---------------------------------------------------------------------------
\171\ The detailed annual hour burden is estimated as:
Year 1: 954,786 individuals x 2/60 hours = 31,826 hours. The
equivalent cost is estimated as: 31,826 hours x $63.45 = $2,019,372.
Year 2: 976,384 individuals x 2/60 hours = 32,546 hours. The
equivalent cost is estimated as: 32,546 hours x $63.45 = $2,065,052.
Year 3: 994,897 individuals x 2/60 hours = 33,163 hours. The
equivalent cost is estimated as: 33,163 hours x $63.45 = $2,104,207.
\172\ The detailed cost is estimated as: [(((954,786 year 1) +
(976,384 year 2) + (994,897 year 3)) = 2,926,067 x 3.9% = 114,117 x
(5 pages x $0.05+ $0.66 postage) = $103,846 total for the three
years. $103,846.47/3 = $34,615 period average.
---------------------------------------------------------------------------
8.4. Pre-Transaction Notice
639,538 in the third year. The Department estimates that drafting
this notice would take a legal professional two hours in the first year
and that preparing and sending each disclosure would take a clerical
professional two minutes.
As discussed at the beginning of this section, the Department
estimates that 3.9 percent of the notices would be sent by mail. The
Department estimates that an automatic portability provider would incur
a cost of $0.76 to send each disclosure, including $0.66 for postage
and $0.10 for the paper and printing costs of two pages. The hour
burden, equivalent cost, postage, and material costs are summarized in
the table below.
[[Page 5662]]
Table 12--Burden and Cost to Draft Notice
[Automatic portability provider]
----------------------------------------------------------------------------------------------------------------
Year 1 Year 2 Year 3
----------------------------------------------------------------------------------------------------------------
Affected Entities............................................. 1 ............... ...............
x Annual Hour Burden per Entity (Hours)....................... 2 ............... ...............
= Total Hours................................................. 2 ............... ...............
x Labor Cost (Legal Professional)............................. $159.34 ............... ...............
= Equivalent Cost............................................. $318.68 ............... ...............
----------------------------------------------------------------------------------------------------------------
Note: Components may not sum to parts due to rounding.
Table 13--Burden and Cost To Prepare and Send Notice
[Automatic portability provider]
----------------------------------------------------------------------------------------------------------------
Year 1 Year 2 Year 3
----------------------------------------------------------------------------------------------------------------
Number of Notices............................................. 403,397 526,984 639,538
x Annual Hour Burden per Transaction (Hours).................. 2/60 2/60 2/60
= Total Hours................................................. 13,447 17,566 21,318
x Labor Cost (Clerical Professional).......................... $63.45 $63.45 $63.45
= Equivalent Cost............................................. $853,184.66 $1,114,570.24 $1,352,623.70
----------------------------------------------------------------------------------------------------------------
Note: Components may not sum to parts due to rounding.
Table 14--Material and Postage Cost
[Automatic portability provider]
----------------------------------------------------------------------------------------------------------------
Year 1 Year 2 Year 3
----------------------------------------------------------------------------------------------------------------
Number of Notices............................................. 403,397 526,984 639,538
x Percent of Notices Sent by Mail............................. 3.9% 3.9% 3.9%
= Number of Notices Sent by Mail.............................. 15,732 20,552 24,942
x Postage and Material Cost per Notice........................ $0.76 $0.76 $0.76
= Material and Postage Cost................................... $11,956.32 $15,619.52 $18,955.92
----------------------------------------------------------------------------------------------------------------
Note: Components may not sum to parts due to rounding.
8.5. Post-Transaction Notice
The proposal requires an automatic portability provider, not later
than three business days after an automatic portability transaction is
completed, to provide notice to the individual on whose behalf the
individual retirement plan was established. As discussed above, the
Department estimates that 397,749 automatic portability transactions
would occur in first year, 519,606 in the second year, and 630,585 in
the third year. The Department estimates that drafting this notice
would take a legal professional two hours in the first year and that
preparing and sending each disclosure would take a clerical
professional two minutes.
As discussed at the beginning of this section, the Department
estimates that 3.9 percent of the notices would be sent by mail. The
Department estimates that an automatic portability provider would incur
a cost of $0.76 to send each disclosure, including $0.66 for postage
and $0.10 for the paper and printing costs of two pages. The hour
burden, equivalent cost, postage, and material costs are summarized in
the table below.
Table 15--Burden To Draft Notice
[Automatic portability provider]
----------------------------------------------------------------------------------------------------------------
Year 1 Year 2 Year 3
----------------------------------------------------------------------------------------------------------------
Affected Entities............................................. 1 ............... ...............
x Annual Hour Burden per Entity (Hours)....................... 2 ............... ...............
= Total Hours................................................. 2 ............... ...............
x Labor Cost (Legal Professional)............................. $159.34 ............... ...............
= Equivalent Cost............................................. $318.68 ............... ...............
----------------------------------------------------------------------------------------------------------------
Note: Components may not sum to parts due to rounding.
Table 16--Burden To Prepare and Send Notice
[Automatic portability provider]
----------------------------------------------------------------------------------------------------------------
Year 1 Year 2 Year 3
----------------------------------------------------------------------------------------------------------------
Number of Notices............................................. 397,749 519,606 630,585
x Annual Hour Burden per Transaction (Hours).................. 2/60 2/60 2/60
= Total Hours................................................. 13,258 17,320 21,020
x Labor Cost (Clerical Professional).......................... $63.45 $63.45 $63.45
[[Page 5663]]
= Equivalent Cost............................................. $841,239.14 $1,098,966.69 $1,333,687.28
----------------------------------------------------------------------------------------------------------------
Note: Components may not sum to parts due to rounding.
Table 17--Material and Postage Cost
[Automatic portability provider]
----------------------------------------------------------------------------------------------------------------
Year 1 Year 2 Year 3
----------------------------------------------------------------------------------------------------------------
Number of Notices............................................. 397,749 519,606 630,585
x Percent of Notices Sent by Mail............................. 3.9% 3.9% 3.9%
= Number of Notices Sent by Mail.............................. 15,512 20,265 24,593
x Postage and Material Cost per Notice........................ $0.76 $0.76 $0.76
= Equivalent Cost............................................. $11,789.12 $15,401.40 $18,690.68
----------------------------------------------------------------------------------------------------------------
Note: Components may not sum to parts due to rounding.
8.6. Culturally and Linguistically Appropriate Notices
The proposed regulation would require that notices and disclosures
to participants and IRA owners be provided in a culturally and
linguistically appropriate manner if the address of a recipient is in a
county where 10 percent or more of the population is literate only in
the same non-English language. In these counties, the automatic
portability provider must include in the English versions of all
required notices and disclosure, a statement prominently displayed in
any applicable non-English language clearly indicating how to access
the language services provided by the automatic portability provider.
The Department estimates that satisfying this requirement would result
in a de minimis cost.
Additionally, the automatic portability provider would be required
to provide, upon request, a notice or disclosure in any applicable non-
English language. In the 2016-2020 ACS data, 230 counties or county
equivalents met or exceeded the 10 percent threshold (rounded to the
nearest percent).\173\ In the 2016-2020 ACS, the Department identified
eight languages that met the 10 percent threshold in at least one
county. The eight languages were Spanish, Chinese, Navajo, Tagalog,
Samoan, Carolinian, and Chamorro. For the purposes of this analysis,
the Department estimates that an automatic portability provider will
need to translate the notices into eight languages. Document
translation costs vary depending on the length of the document, the
complexity of the document, and the complexity of the language.\174\
One source, estimates that the average translation cost per page ranges
between $20 and $130.\175\ The Department assumes that, on average, it
will cost $100 per page to translate the notices in this proposal. The
translation costs for the initial enrollment notice, pre-transaction
notice, and the post-transaction notice are summarized in the table
below.
---------------------------------------------------------------------------
\173\ The relevant ACS data set used is the U.S. Census, 2016-
2020 American Community Survey 5-Year Estimates, Table B16001,
Language Spoken at Home by Ability to Speak English for the
Population 5 Years and Over, available at https://data.census.gov/cedsci/table?tid=ACSDT5Y2020.B16001.
\174\ American Translators Association, How Much Does a
Translation Cost? (May 2023), https://www.atanet.org/client-assistance/how-much-does-translation-cost/.
\175\ Lettier, Mariel, Translation Rates in 2023--A Complete
Guide, Rush Translate, (2023), https://rushtranslate.com/blog/
translation-rates#:~:text=for%201000%20words.-
,What%20is%20the%20average%20rate%20for%20translation%20per%20page%3F
,certified%20translation%20and%20charges%20%2424.95.
Table 18--Translation Costs
------------------------------------------------------------------------
Cost per
Languages Pages page Cost
------------------------------------------------------------------------
Initial Enrollment Notice....... 8 5 $100 $4,000
Pre-Transaction Notice.......... 8 2 100 1,600
Post Transaction Notice......... 8 2 100 1,600
---------------------------------------
Total....................... .......... 9 ......... 7,200
------------------------------------------------------------------------
A similar analysis conducted by the Department estimated that the
average requests for translations of written documents averages 0.098
requests per 1,000 health benefit plan members.\176\ For the purposes
of this analysis, the Department assumes that recipients of the notices
in this proposal would request translations at the same rate. The
estimated number of translated notices requested is summarized in the
table below. The Department requests comment on how frequently
translations would be requested for such notices.
---------------------------------------------------------------------------
\176\ 81 FR 92316.
[[Page 5664]]
Table 19--Translated Initial Enrollment Notices Requested
------------------------------------------------------------------------
Year 1 Year 2 Year 3
------------------------------------------------------------------------
Total Initial Enrollment Notices....... 954,786 976,384 994,897
x Percent Requesting Translated Notice. 0.0098% 0.0098% 0.0098%
= Translated Notices Distributed....... 94 96 97
------------------------------------------------------------------------
Note: Components may not sum to parts due to rounding.
Table 20--Translated Pre-Transaction Notices Requested
------------------------------------------------------------------------
Year 1 Year 2 Year 3
------------------------------------------------------------------------
Total Pre-Transaction Notices.......... 403,397 526,984 639,538
x Percent Requesting Translated Notice. 0.0098% 0.0098% 0.0098%
= Translated Notices Distributed....... 40 52 63
------------------------------------------------------------------------
Note: Components may not sum to parts due to rounding.
Table 21--Translated Post-Transaction Notices Requested
------------------------------------------------------------------------
Year 1 Year 2 Year 3
------------------------------------------------------------------------
Total Post-Transaction Notices......... 397,749 519,606 630,585
x Percent Requesting Translated Notice. 0.0098% 0.0098% 0.0098%
= Translated Notices Distributed....... 39 51 62
------------------------------------------------------------------------
Note: Components may not sum to parts due to rounding.
The Department assumes that it would take a clerical professional
two minutes to prepare and send each disclosure. The Department assumes
that all of the translated notices would be sent by mail. The
Department requests comment on this assumption. Additionally, the
Department estimates that an automatic portability provider would incur
a cost of $0.66 for postage and $0.05 for the material and printing
costs of each page. The hour burden, equivalent cost, postage, and
material costs are summarized in the table below.
Table 22--Burden To Prepare and Send Translated Disclosures
[Automatic portability provider]
------------------------------------------------------------------------
Year 1 Year 2 Year 3
------------------------------------------------------------------------
Number of Notices...................... 173 199 222
x Annual Hour Burden per Transaction 2/60 2/60 2/60
(Hours)...............................
= Total Hours.......................... 5.8 6.6 7.4
x Labor Cost (Clerical Professional)... $63.45 $63.45 $63.45
= Equivalent Cost...................... $365.90 $420.89 $469.53
------------------------------------------------------------------------
Note: Components may not sum to parts due to rounding.
Table 23--Material and Postage Cost for the Translated Initial
Enrollment Notices
------------------------------------------------------------------------
Year 1 Year 2 Year 3
------------------------------------------------------------------------
Initial Enrollment Notices:
Number of Notices Sent by Mail..... 94 96 97
x Postage and Material Cost per $0.91 $0.91 $0.91
Notice (5 Pages)..................
= Postage and Material Cost........ $85.54 $87.36 $88.27
------------------------------------------------------------------------
Note: Components may not sum to parts due to rounding.
Table 24--Material and Postage Cost for the Translated Pre-Transaction
Notices
------------------------------------------------------------------------
Year 1 Year 2 Year 3
------------------------------------------------------------------------
Pre-Transaction Notice:
Number of Notices Sent by Mail..... 40 52 63
x Postage and Material Cost per $0.76 $0.76 $0.76
Notice (2 Pages)..................
= Postage and Material Cost........ $30.40 $39.52 $47.88
------------------------------------------------------------------------
Note: Components may not sum to parts due to rounding.
[[Page 5665]]
Table 25--Material and Postage Cost for the Translated Post-Transaction
Notices
------------------------------------------------------------------------
Year 1 Year 2 Year 3
------------------------------------------------------------------------
Post-Transaction Notice:
Number of Notices Sent by Mail..... 39 51 62
x Postage and Material Cost per $0.76 $0.76 $0.76
Notice (2 Pages)..................
= Postage and Material Cost........ $29.64 $38.76 $47.12
------------------------------------------------------------------------
Note: Components may not sum to parts due to rounding.
9. Website
The proposal would require the automatic portability provider to
maintain a website with three categories of disclosures: (1) a
description of all the fees and compensation received, directly or
indirectly, by the automatic portability provider for services provided
in connection with the automatic portability transaction; (2) a list of
recordkeepers for each employer-sponsored retirement plan with respect
to which the automatic portability provider carries out automatic
portability transactions; and (3) the number of plans and participants
covered by each recordkeeper. The Department assumes that an automatic
portability provider would already have such a website, readily
available access to the required information, and would only incur
costs associated with drafting and posting the required disclosures.
The Department estimates that a senior executive employed by the
automatic portability provider would spend one hour providing a web
designer the requirements for the disclosures in the first year,
resulting in an hour burden of one hour with an equivalent cost of
$128.\177\ Additionally, the Department estimates that it would take a
web designer five hours to update and test the website in the first
year, resulting in an hour burden of five hours and equivalent cost of
$778.\178\ The Department estimates that it would take a web developer
one hour in subsequent years to make any necessary revisions or updates
to the disclosures, resulting in an hour burden of one hour with an
equivalent cost of $156.\179\
---------------------------------------------------------------------------
\177\ The hour burden is estimated as: 1 automatic portability
provider x 1 hour = 1 hour. The equivalent cost is estimated as: 1
automatic portability provider x 1 hour x $128.11 = $128.11, rounded
to $128.
\178\ The hour burden is estimated as: 1 automatic portability
provider x 5 hours = 5 hours. The equivalent cost is estimated as: 1
automatic portability provider x 5 hours x $155.61 = $778.05,
rounded to $778.
\179\ The hour burden is estimated as: 1 automatic portability
provider x 1 hour = 1 hour. The equivalent cost is estimated as: 1
automatic portability provider x 1 hour x $155.61 = $155.61, rounded
to $156.
---------------------------------------------------------------------------
10. Recordkeeping
An automatic portability provider would be required to maintain
records sufficient to demonstrate compliance with the requirements of
Code section 4975(f)(12) and this regulation. The Department expects
adequate records will be automatically generated through the systems
created by the automatic portability provider and thus would not create
an additional burden.
The proposal would require the records to be made available to any
duly authorized employee or representative of the Department of Labor
or the Department of the Treasury within 30 calendar days of the date
of a written request for such records. The Department estimates that
providing records to the Department would take a clerical professional
two hours on average to prepare and send requested records, resulting
in a per request equivalent cost of $127.\180\ The Department expects
that such requests would occur rarely. As such, the Department
estimates that one request a year would result in an average annual
burden of $127.
---------------------------------------------------------------------------
\180\ The hour burden is estimated as: 1 automatic portability
provider x 2 hours = 2 hours. The equivalent cost is estimated as: 1
automatic portability provider x 2 hours x $63.45 = $126.90, rounded
to $127.
---------------------------------------------------------------------------
11. Summary
The paperwork burden estimates are summarized as follows:
Type of Review: New collection.
Agency: Employee Benefits Security Administration, Department of
Labor.
Title: Automatic Portability Transaction Regulations.
OMB Control Number: 1210-NEW.
Affected Public: Business or other for-profit institution.
Estimated Number of Respondents: 185,001.
Estimated Number of Annual Responses: 2,384,846.
Frequency of Response: Initially, Annually, and when engaging in
exempted transaction.
Estimated Total Annual Burden Hours: 92,887.
Estimated Total Annual Burden Cost: $97,985.
H. Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA) \181\ imposes certain
requirements on rules subject to the notice and comment requirements of
section 553(b) of the Administrative Procedure Act or any other
law.\182\ Under section 603 of the RFA, agencies must submit an initial
regulatory flexibility analysis (IRFA) of a proposal that is likely to
have a significant economic impact on a substantial number of small
entities, such as small businesses, organizations, and governmental
jurisdictions. The Department's IRFA is below.
---------------------------------------------------------------------------
\181\ 5 U.S.C. 601 et seq.
\182\ 5 U.S.C. 601(2), 603(a); also see 5 U.S.C. 551.
---------------------------------------------------------------------------
The Affected Entities of the Regulatory Impact Analysis identifies
automatic portability providers, recordkeepers, and plans as entities
potentially impacted by the proposal. While there may be a substantial
number of small recordkeepers and plans affected by the proposal, the
Department has determined that there would not be a significant impact
on these entities.\183\ The analysis below estimates the effect on
small automatic portability providers.
---------------------------------------------------------------------------
\183\ For recordkeepers, the proposal would require automatic
portability providers to contractually require certain information
be provided in connection with its services as an automatic
portability provider. This would likely require the automatic
portability provider to update contracts with plans. The Department
estimates that this would require plan fiduciaries to execute the
updated contract. The Department estimates that this would take a
plan fiduciary 15 minutes. The Department does not consider this to
be a significant impact on plans. For plans, the proposal would not
require a substantial action, with respect to the requirements under
PTE 2019-02.
---------------------------------------------------------------------------
1. Need for and Objectives of the Rule
Section 120 of the SECURE 2.0 Act of 2022 amended Code section 4975
to add a statutory exemption for the receipt of fees and compensation
by an automatic portability provider for services provided in
connection with an automatic portability transaction. This proposed
rule implements the statutory prohibited transaction under Code section
4975 for automatic portability transactions.
When a plan participant intentionally or unintentionally leaves
money in a former employer's defined contribution
[[Page 5666]]
plan, depending on plan provisions the former employer has the option
to cash out balances of $5,000 or less and to force a transfer of
balances between $1,001 and $5,000 to a Default IRA. This Default IRA
transfer is commonly referred to as a ``force-out'' and is only
implemented if the participant does not elect to have the account
balance paid directly to an eligible retirement plan or to receive the
balance directly. As part of the SECURE 2.0 Act, the $5,000 threshold
is being raised to $7,000.\184\
---------------------------------------------------------------------------
\184\ See SECURE 2.0 Act, Sec. 304.
---------------------------------------------------------------------------
Default IRAs, while intended to preserve retirement assets in
conservatively managed accounts, typically yield only minimal returns
for investors while often imposing considerable fees.\185\
Additionally, these Default IRAs, established on behalf of
participants, are more susceptible to being abandoned or forgotten
while potentially exposing those with multiple accounts to unnecessary
losses from duplicated fees that might otherwise be avoided were their
assets consolidated into a single account. Cashouts also directly
impact participants by removing their assets from tax-favored
retirement accounts.\186\
---------------------------------------------------------------------------
\185\ Government Accountability Office (GAO). ``401(k) Plans:
Greater Protections Needed for Forced Transfers and Inactive
Accounts.'' (2014).
\186\ The Code does not require a mandatory distribution of
$1000 or less to be rolled into an IRA.
---------------------------------------------------------------------------
Automated portability services allow plan providers to transfer
assets into the plan of a participant's new employer, effectively
automating roll-ins from Default IRAs established on behalf of the
separated employee to consolidate assets into an active, employer-
sponsored defined contribution plan.
2. Affected Small Entities
The Department anticipates an automatic portability provider would
be classified as NAICS 522320, Financial Transactions Processing,
Reserve, and Clearinghouse Activities. According to the size standards
set by the Small Business Administration, entities with NAICS 522320
are considered small if they have average annual receipts less than $47
million.\187\ According to data published by the NAICS Association, by
this standard, approximately 99 percent of entities with NAICS 522320
are considered small entities.\188\
---------------------------------------------------------------------------
\187\ U.S. Small Business Administration, Table of Small
Business Size Standards Matched to North American Industry
Classification System Codes, (March 17, 2023), https://www.sba.gov/sites/sbagov/files/2023-03/Table%20of%20Size%20Standards_Effective%20March%2017%2C%202023%20%281%29%20%281%29_0.pdf.
\188\ This estimate is based on data released by the NAICS
Association. (NAICS Association, Market Analysis Profile: NAICS Code
& Annual Sales, (2022), https://www.naics.com/custom-market-analysis-profiles/.)
---------------------------------------------------------------------------
As discussed in the Regulatory Impact Analysis, the Department
assumes that only one entity would rely on the proposed exemption. This
entity, RCH, in service of PSN, has stated that the maximum per-
transaction fee for its services is $30.\189\ Further, as discussed in
the Regulatory Impact Analysis, the Department estimates that there
would be 60,265 additional transactions in the first year and an
average of 399,341 additional transactions in years two through ten. If
the average transaction fee ranged between $15 and $30, the annual
additional receipts in the first year for this service would be between
$0.9 and $1.8 million \190\ and between $6.0 million and $12.0 million
in years two through ten.\191\
---------------------------------------------------------------------------
\189\ Portability Services Network, Our Fees, https://psn1.com/
learning-center/about-psn/what-are-psns-
fees#:~:text=Key%20aspects%20of%20PSN's%20fee,be%20processed%20at%20n
o%20charge.
\190\ The lower bound estimate is calculated as 60,265
additional transactions x $15 = $903,975. The upper bound estimate
is calculated as 60,265 additional transactions x $30 = $1,807,950.
\191\ The lower bound estimate is calculated as 399,341
additional transactions x $15 = $5,990,115. The upper bound estimate
is calculated as 399,341 additional transactions x $30 =
$11,980,230.
---------------------------------------------------------------------------
The automatic portability services operations at RCH represent just
one portion of the business. However, because the entity is private,
the Department does not have access to its total annual receipts. While
the Department estimates that the annual receipts of RCH may exceed the
small entity size thresholds, the Department cannot confirm.
Accordingly, the Department has conducted an analysis of the costs
imposed by the proposal.
3. Impact of the Rule
As discussed in the Regulatory Impact Analysis, the Department
assumes that one entity would rely on the proposed exemption. The
Department is presenting the estimated costs and costs savings of this
entity, RCH/PSN. RCH/PSN currently operates under an individual
exemption, PTE 2019-02. The Regulatory Impact Analysis considers the
costs and cost savings this proposal would impose, with respect to the
requirements under PTE 2019-02.
The Department estimates that the proposal would result in a cost
savings for an automatic portability provider operating under the
conditions in PTE 2019-02. The table below summarizes the costs and
cost savings under the proposal. For more information on these
estimates, refer to the Cost section of the Regulatory Impact Analysis.
Table 26--Per Entity Costs and Cost Savings for Automatic Portability
Providers
------------------------------------------------------------------------
Years 2-10
Year 1 (average)
------------------------------------------------------------------------
Acknowledgment of Fiduciary $391,434.34 ..................
Status.........................
Policies and Procedures......... 1,593.40 $318.68
Independent Audit............... 6,034.53 5,397.17
Corrections to Audit............ 6,188.20 3,001.40
Website Requirements............ 906.16 155.61
Notice to the Secretary of Labor 15.86 ..................
Initial Enrollment Notice \a\... \b\ (1,426,704.81) \b\ (1,302,599.20)
Pre-Transaction Notice \a\...... 132,859.13 824,218.62
Post Transaction Notice \a\..... 855,059.22 1,580,430.41
---------------------------------------
Total....................... \b\ (32,613.97) 1,110,922.70
------------------------------------------------------------------------
Note: Components may not sum to parts due to rounding.
\a\ Includes costs associated with providing disclosures in a culturally
and linguistically appropriate manner.
\b\ This value represents a cost savings, when compared to requirements
for RCH/PSN under PTE 2019-02.
[[Page 5667]]
4. Duplicate, Overlapping, or Relevant Federal Rules
The proposal is intended to align with the requirements in the
individual exemption PTE 2019-02. The proposal also incorporates the
statutory exemption requirements in the SECURE 2.0 Act and supplements
them accordingly. While PTE 2019-02 and the statutory exemption, as
supplemented by this proposal, differ slightly, the Department has
worked to ensure that the requirements are complimentary. Because PTE
2019-02 and the statutory exemption provide prohibited transaction
relief for the same categories of transactions, RCH/PSN will only need
to rely on either the statutory or individual exemption. Therefore, it
is important for the requirements of the statutory and individual
exemptions to be aligned.
Please note that RCH/PSN most likely will rely on the statutory
exemption, because it has an unlimited term while the class exemption
is limited to a five-year term that expires on July 31, 2024. The
Department expects that RCH/PSN will rely upon the statutory exemption
and this proposal once it becomes effective rather than PTE 2019-02.
Because PTE 2019-02 is an individual exemption granted solely to RCH
and its affiliates, any other automatic portability providers that
enter the market will only be able to rely upon the statutory exemption
and this proposal, so there will be no duplicative requirements imposed
on them.
5. Description of Alternatives Considered
This section of the IRFA analysis addresses alternatives the
Department considered when developing the proposal. As stated above in
this Regulatory Impact Analysis, the Department estimates that only one
automatic portability provider would operate under the proposal.
Therefore, the regulatory alternatives considered for small entities
does not differ from those considered in the Regulatory Impact
Analysis. The Department considered the following alternatives:
Relying Only on Sub-Regulatory Guidance--Section 120(c)
directs the Secretary of Labor to ``issue such guidance as may be
necessary to carry out the purposes of the amendments made by this
section, including regulations or other guidance'' no later than 12
months after the enactment of the statute. The Department considered
whether its responsibilities under section 120(c) of SECURE 2.0 could
be satisfied by issuing only sub-regulatory guidance.
Issuing More Limited Regulations--The Department
considered issuing limited regulations concerning only the portions of
Code section 4975(f)(12) focused on the audit and the acknowledgement
of fiduciary status, both of which called on the Department to
promulgate regulations to determine compliance. In so doing, the
Department could have issued sub-regulatory guidance with respect to
compliance with the rest of the exemption.
Not Requiring an Initial Enrollment Notice--The Department
considered not including a requirement for an initial enrollment notice
in the proposed regulations. The statute only requires that an
automatic portability provider furnish IRA owners with a pre-
transaction notice and a post-transaction notice. Additional notices
were left to the discretion of the Department in connection with
carrying out the purposes of the statutory exemption.
Not Requiring the Audit to be an Independent Audit--The
Department considered proposing an audit that could be conducted as an
internal audit.
A more in-depth discussion of the regulatory alternatives and the
Department's decision process is included in the Regulatory
Alternatives section of the Regulatory Impact Analysis above.
I. Unfunded Mandates Reform Act
Title II of the Unfunded Mandates Reform Act of 1995 requires each
Federal agency to prepare a written statement assessing the effects of
any Federal mandate in a proposed or final agency rule that may result
in an expenditure of $100 million or more (adjusted annually for
inflation with the base year 1995) in any one year by state, local, and
tribal governments, in the aggregate, or by the private sector.\192\
For purposes of the Unfunded Mandates Reform Act, as well as Executive
Order 12875, this proposal does not include any Federal mandate that
the Department expects would result in such expenditures by state,
local, or tribal governments, or the private sector.\193\
---------------------------------------------------------------------------
\192\ 2 U.S.C. 1501 et seq. (1995).
\193\ Enhancing the Intergovernmental Partnership, 58 FR 58093
(Oct. 28, 1993).
---------------------------------------------------------------------------
J. Federalism Statement
Executive Order 13132 outlines fundamental principles of
federalism, and requires adherence by Federal agencies to specific
criteria in the process of their formulation and implementation of
policies that have ``substantial direct effects'' on the states, the
relationship between the national government and states, or on the
distribution of power and responsibilities among the various levels of
government.\194\ Federal agencies promulgating regulations that have
federalism implications must consult with state and local officials and
describe the extent of their consultation and the nature of the
concerns of state and local officials in the preamble to the final
rule.
---------------------------------------------------------------------------
\194\ Federalism, 64 FR 153 (Aug. 4, 1999).
---------------------------------------------------------------------------
In the Department's view, this proposal will not have federalism
implications because it would not have direct effects on the states, on
the relationship between the national government and the states, nor on
the distribution of power and responsibilities among various levels of
government. The Department welcomes input from affected states
regarding this assessment.
Statutory Authority
This regulation is issued pursuant to the authority in section 505
of ERISA (Pub. L. 93-406, 88 Stat. 894; 29 U.S.C. 1135), section 102 of
Reorganization Plan No. 4 of 1978, 5 U.S.C. App. 237, Public Law 117-
328, 136 Stat. 4459, and under Secretary of Labor's Order No. 1-2011,
77 FR 1088 (Jan. 9, 2012).
List of Subjects in 29 CFR Part 2550
Employee benefit plans, Individual retirement accounts, Pensions,
Plans.
For the reasons set forth in the preamble, the Department is
proposing to amend 29 CFR part 2550 as follows:
PART 2550--RULES AND REGULATIONS FOR FIDUCIARY RESPONSIBILITY
0
1. The authority citation for part 2550 is revised to read as follows:
Authority: 29 U.S.C. 1135 and Secretary of Labor's Order No. 1-
2011, 77 FR 1088 (January 9, 2012). Sec. 102, Reorganization Plan
No. 4 of 1978, 5 U.S.C. App. At 727 (2012). Sec. 2550.401c-1 also
issued under 29 U.S.C. 1101. Sec. 2550.404a-1 also issued under sec.
657, Pub. L. 107-16, 115 Stat 38. Sec. 2550.404a-2 also issued under
sec. 657 of Pub. L. 107-16, 115 Stat. 38. Sections 2550.404c-1 and
2550.404c-5 also issued under 29 U.S.C. 1104. Sec. 2550.408b-1 also
issued under 29 U.S.C. 1108(b)(1). Sec. 2550.408b-19 also issued
under sec. 611, Pub. L. 109-280, 120 Stat. 780, 972. Sec. 2550.412-1
also issued under 29 U.S.C. 1112. Sec. 2550.4975f-12 also issued
under Pub. L. 117-328, 136 Stat. 4459.
0
2. Add Sec. 2550.4975f-12 to read as follows:
[[Page 5668]]
Sec. 2550.4975f-12 Rules relating to automatic portability
transactions.
(a) In general and scope of exemption. (1) Internal Revenue Code
(Code) section 4975(d)(25) exempts from the excise taxes imposed by
Code section 4975(a) and (b), by reason of Code sections 4975(c)(1)(D)
and (E), the receipt of fees and compensation by an automatic
portability provider for services provided in connection with an
automatic portability transaction. Code section 4975(d)(25) further
exempts from the excise taxes imposed by Code section 4975(a) and (b),
by reason of Code section 4975(c)(1)(F), the receipt of a fee by an
automatic portability provider from an employer-sponsored retirement
plan sponsor in lieu of a fee imposed on an individual retirement plan
owner. Code section 4975(f)(12) establishes conditions for automatic
portability transactions to be covered by the exemption. Effective
December 31, 1978, section 102 of the Reorganization Plan No. 4 of
1978, 5 U.S.C. App. 237, transferred the authority of the Secretary of
the Treasury to promulgate regulations of the type published herein to
the Secretary of Labor. This section implements the statutory exemption
and conditions set forth at Code section 4975(d)(25) and (f)(12).
(2) Automatic portability transaction. An automatic portability
transaction is a transfer of assets made:
(i) From an individual retirement plan which is established on
behalf of an individual and to which amounts were transferred under
Code section 401(a)(31)(B)(i),
(ii) To an employer-sponsored retirement plan described in clause
(iii), (iv), (v), or (vi) of Code section 402(c)(8)(B) (other than a
defined benefit plan) in which such individual is an active
participant, and
(iii) After such individual has been given advance notice of the
transfer and has not affirmatively opted out of such transfer.
(3) Automatic portability provider. An automatic portability
provider is a person, other than an individual, that executes transfers
described in paragraph (a)(2) of this section.
(4) Code section 4975(d)(25) does not contain an exemption for
other acts described in Code section 4975(c)(1)(D) and (E) (relating to
transfer to, or use by or for the benefit of, a disqualified person of
the income or assets of a plan and to fiduciaries as defined in Code
section 4975(e)(3) dealing with the income or assets of plans in their
own interest or for their own account) that are not services provided
in connection with automatic portability transactions. Services shall
not be considered provided in connection with an automatic portability
transaction if the services would have been provided in the absence of
an automatic portability transaction or anticipation of a future
automatic portability transaction. Except as described in paragraph
(a)(1) of this section, Code section 4975(d)(25) does not contain an
exemption for acts described in Code section 4975(c)(1)(F) (relating to
fiduciaries as defined in Code section 4975(e)(3) receiving
consideration for their own personal account from any party dealing
with a plan in connection with a transaction involving the income or
assets of the plan). Such acts are separate transactions not described
in Code section 4975(d)(25). Code section 4975(d)(25) also does not
contain an exemption from other provisions of the Code, such as section
401, or other provisions of law which may impose requirements or
restrictions relating to the transactions which are exempt under
section 4975(d)(25).
(b) This paragraph (b) sets forth conditions that must be satisfied
in order for an automatic portability transaction to be covered by the
statutory exemption in Code section 4975(d)(25).
(1) Acknowledgment of fiduciary status. The automatic portability
provider shall acknowledge in writing that it is a fiduciary with
respect to the individual retirement plan in connection with its
processing of automatic portability transactions:
(i) Upon being engaged by an employer-sponsored retirement plan;
and
(ii) In the notices to individuals described in paragraphs
(b)(5)(iii) through (v) of this section.
(2) Fees and compensation. The fees and compensation received,
directly or indirectly, by the automatic portability provider
(including its affiliates) for services provided in connection with the
automatic portability transaction (including any fees or compensation
in connection with, but received before, the transaction):
(i) Do not exceed reasonable compensation, as the term is defined
in 26 CFR 54.4975-6(e); and
(ii) Are fully disclosed to and approved in writing in advance of
the transaction by a fiduciary of the employer-sponsored retirement
plan described in paragraph (a)(2)(ii) of this section which is
independent of the automatic portability provider. The information that
shall be disclosed includes the information that is required to be
disclosed under Sec. 2550.408b-2(c) by a covered service provider as
defined in Sec. 2550.408b-2(c)(1)(iii)(A) (services as a fiduciary
within the meaning of ERISA section 3(21)) and Sec. 2550.408b-
2(c)(1)(iii)(B) (recordkeeping services).
(iii) An automatic portability provider (including its affiliates)
may not receive or pay third-party fees or compensation to any party in
connection with an automatic portability transaction. This restriction
on third-party compensation does not apply to a fee paid by the sponsor
of an employer-sponsored retirement plan that is in lieu of a fee
imposed on an individual retirement plan owner or a fee that is shared
with another automatic portability provider, as long as the overall fee
associated with the automatic portability transaction does not increase
as compared to the fees disclosed to the plan administrator and
individuals in the notices described in paragraphs (b)(5)(ii) and (iii)
of this section. This restriction does not prevent an automatic
portability provider (or its affiliates) from receiving fees for
services provided to an individual retirement plan or employer-
sponsored retirement plan that are in addition to services provided in
connection with the execution of automatic portability transactions.
The prohibited transaction relief provided in Code section 4975(d)(25)
does not apply to fees or compensation paid by an employer-sponsored
retirement plan or to fees or compensation for such additional
services.
(iv) Automatic portability provider-sponsored plan. An automatic
portability provider (including its affiliates) shall not receive any
fees or compensation in connection with an automatic portability
transaction involving a plan that is sponsored or maintained by the
automatic portability provider or an affiliate.
(3) Data usage and protection. An automatic portability provider
(including its affiliates) shall not market or sell to third parties
participant-related data or individual retirement plan data that the
automatic portability provider accesses or obtains in connection with
an automatic portability transaction. An automatic portability provider
shall take all necessary steps that a reasonable fiduciary would take
to safeguard participant and individual retirement plan data to the
extent the automatic portability provider exercises control over the
data. If data is improperly accessed, the automatic portability
provider shall take appropriate remedial actions that to safeguard the
data based on the sensitivity of the accessed data and the nature and
severity of the breach.
(4) Open participation and limitation on exclusive engagements. (i)
The
[[Page 5669]]
automatic portability provider shall offer to execute automatic
portability transactions on the same terms to any employer-sponsored
retirement plan described in paragraph (a)(2)(ii) of this section.
(ii) The automatic portability provider shall not restrict or limit
the ability of unrelated third parties to develop, market, and/or
maintain a locate-and-match process or to execute automatic portability
transactions separate from the automatic portability provider. The
automatic portability provider also shall not restrict the ability of
an employer-sponsored retirement plan, individual retirement plan
provider (including custodians, trustees, and issuers), or recordkeeper
to engage other automatic portability providers to execute automatic
portability transactions.
(5) Notices--(i) Notice to the Secretary of Labor. Within 90
calendar days of the date that the automatic portability provider
begins operating an automatic portability transaction program that is
intended to rely on the prohibited transaction relief provided by Code
section 4975(d)(25), the automatic portability provider shall notify
the Secretary of Labor at [email protected] that it is operating
as an automatic portability provider and relying on Code section
4975(d)(25), (f)(12), and these regulations. Each automatic portability
provider that relies upon the exemption must report the legal name of
each business entity relying upon the exemption in the email to the
Secretary and any name under which the automatic portability provider
may be operating. This notification needs to be reported only once
unless there is a change to the legal name or operating name(s) of the
automatic portability provider relying upon the exemption. The
automatic portability provider shall have 90 calendar days to report a
change to the legal or operating name. The automatic portability
provider may notify the Secretary if it is no longer operating in
reliance upon this exemption.
(ii) Notice to plan administrator. The automatic portability
provider shall provide each plan administrator a model description of
the automatic portability program, including fees and expenses related
to the automatic portability program and automatic portability
transactions. For any employer-sponsored plan that is subject to
ERISA's summary plan description requirement, the automatic portability
provider shall send a notice to each administrator of such plan that
participates in an arrangement with the automatic portability provider
that the administrator must fully describe the automatic portability
program and disclose fees related to an automatic portability
transaction in its summary plan description or summary of material
modifications. The model description must be written in a manner so
that it could be used by the plan administrator to fulfill summary plan
description or summary of material modifications obligations, as
relevant.
(iii) Initial enrollment notice. The automatic portability provider
shall furnish each individual on whose behalf the individual retirement
plan was established an initial notice within 15 calendar days of the
individual retirement plan's enrollment or participation in an
arrangement that includes the possibility of a future automatic
portability transaction executed by the automatic portability provider.
The notice shall include:
(A) A description of the automatic portability transaction,
including that the automatic portability provider will send a notice at
least 60 calendar days, but no more than 90 calendar days, in advance
of executing an automatic portability transaction;
(B) A description of the applicable account fees that will be
charged in connection with the automatic portability transaction;
(C) A clear and prominent description of the individual's right to
affirmatively elect not to participate in the transaction, the other
available distribution options, and the procedures to take advantage of
such options;
(D) The contact information for the automatic portability provider
and the individual retirement plan provider (if not the automatic
portability provider), including toll-free customer service numbers;
and
(E) The right to designate a beneficiary and the procedures to do
so, including the appropriate party to contact if the automatic
portability provider is not the provider of the individual retirement
plan.
(iv) Pre-transaction notice. The automatic portability provider
shall furnish each individual on whose behalf the individual retirement
plan was established a pre-transaction notice. The notice shall be
provided at least 60 calendar days, but not more than 90 calendar days,
in advance of an automatic portability transaction. The notice shall
include:
(A) A description of the automatic portability transaction and a
complete and accurate statement of all fees which will be charged and
all compensation which will be received by the automatic portability
provider (including its affiliates) in connection with the transaction.
The description of the automatic portability transaction shall include
that the individual retirement plan assets will not be transferred for
at least 60 calendar days from the date of the notice, that the
individual has been matched with an account in an employer-sponsored
retirement plan of a current employer, the name of the employer, and
the name of the plan;
(B) A statement requesting the individual's affirmative consent to
transfer the assets from the individual retirement plan to the account
in the employer-sponsored retirement plan;
(C) A description of the individual's right to affirmatively elect
not to participate in the transaction, the other available distribution
options, the deadline by which the individual must make an election,
and the procedures for doing so. The description shall indicate that if
the individual does not affirmatively consent or elect not to
participate by the deadline, the automatic portability provider will
consider the individual to have given consent to the automatic
portability transaction;
(D) The contact information for the automatic portability provider
and the individual retirement plan provider (if not the automatic
portability provider) including toll-free customer service numbers that
the individual may contact to make an election, pursue other available
distributions options, or for other information or assistance with the
automatic portability program; and
(E) The right to designate a beneficiary and the procedures to do
so for the individual retirement plan if it is not transferred to an
employer-sponsored retirement plan in which the individual is an active
participant, including the appropriate party to contact if the
automatic portability provider is not the provider of the individual
retirement plan.
(v) Post-transaction notice. Not later than 3 business days after
an automatic portability transaction is completed, the automatic
portability provider shall provide notice to the individual on whose
behalf the individual retirement plan was established of:
(A) The actions taken by the automatic portability provider with
respect to the individual retirement plan, including that the
individual was matched with an account in an employer-sponsored
retirement plan of the individual's current employer;
(B) All relevant information regarding the location and amount of
any transferred assets which includes, but is not limited to, the name
of the employer and the name of the plan;
(C) A statement of fees charged against the individual retirement
plan
[[Page 5670]]
by the automatic portability provider or its affiliates in connection
with the transfer; and
(D) A customer service telephone number at which the individual can
contact the automatic portability provider.
(vi) Accessibility of notices. (A) The notices described in
paragraphs (b)(5)(iii) through (v) of this section shall be written in
a manner calculated to be understood by the average person, which for
purposes of these regulations, is the average intended recipient. The
disclosures must be accurate, not include inaccurate or misleading
statements, and be sufficiently comprehensive to apprise the individual
of their rights and obligations under the automatic portability
program, must not be formatted to have the effect of misleading,
misinforming or failing to inform the recipient, and be written in a
culturally and linguistically appropriate manner. In fulfilling these
requirements, the automatic portability provider shall exercise
considered judgment and discretion by taking into account such factors
as the level of comprehension and education of the typical intended
recipient and the complexity of the terms of the program. Consideration
of these factors will usually require the limitation or elimination of
technical jargon and of long, complex sentences, the use of clarifying
examples and illustrations, the use of clear cross references, and a
table of contents be included.
(B) Standards for culturally and linguistically appropriate
notices. An automatic portability provider is considered to provide
relevant notices and disclosures in a ``culturally and linguistically
appropriate manner'' if the automatic portability provider meets all
the requirements of the paragraph (b)(5)(vi)(C) of this section with
respect to the applicable non-English languages described in paragraph
(b)(5)(vi)(D) of this section.
(C) Requirements. (1) The automatic portability provider must
provide oral language services (such as a telephone customer assistance
hotline) that include the ability to answer questions in any applicable
non-English language and provide assistance with automatic portability
transactions in any applicable non-English language;
(2) The automatic portability provider must provide, upon request,
a notice or disclosure in any applicable non-English language; and
(3) The automatic portability provider must include in the English
versions of all required notices and disclosure, a statement
prominently displayed in any applicable non-English language clearly
indicating how to access the language services provided by the
automatic portability provider.
(D) Applicable non-English language. With respect to an address in
any United States county to which a notice is sent, a non-English
language is an applicable non-English language if ten percent or more
of the population residing in the county is literate only in the same
non-English language, as determined in guidance published by the
Secretary of Labor.
(vii) Ensuring participants receive notices and disclosures. The
automatic portability provider shall adopt and implement prudent
policies and procedures to ensure that it obtains or has access to
current and accurate census and contact data on individual participants
and individuals on whose behalf an individual retirement plan is
established, necessary to effectively administer the automatic
portability program. An individual cannot participate in the automatic
portability provider's automatic portability transaction program unless
the automatic portability provider has a reasonable basis for believing
the automatic portability provider has a valid address for the
individual. Notices and disclosures to participants and individuals
must be made using methods that satisfy the disclosure requirements in
Sec. 2520.104b-1(b) of this chapter.
(6) Frequency of searches. The automatic portability provider shall
use a locate-and-match service to query cooperating record-keepers, on
at least a monthly basis, whether the individual for whose benefit the
individual retirement plan is established has an active account in an
employer-sponsored retirement plan. The automatic portability provider
shall take prudent steps to verify the accuracy of the individual's
information (including such information as the participant's social
security number, first name, last name, middle name or initial, date of
birth, phone number, etc.) to ensure the match is correct. The
verification steps must include ongoing participant address validation
searches via automated checks of:
(i) National Change of Address records;
(ii) Two separate commercial locator databases; and
(iii) Any internal databases maintained by the automatic
portability provider. If a valid address is not obtained from the
automated checks, the automatic portability provider must also perform
a manual internet-based search. These verification steps must be
performed at least twice in the first year an account is entered into
the automatic portability provider system and once a year thereafter.
(7) Monitoring transfers into an employer-sponsored retirement
plan. The automatic portability provider shall ensure that an employer-
sponsored retirement plan that accepts transfers into the plan in
connection with an automatic portability transaction designates a plan
official responsible for monitoring transfers into the plan due to
automatic portability transactions, including ensuring the amounts
received on behalf of a participant are invested properly. Amounts
received are deemed to be invested properly if made in accordance with
the participant's current investment election under the plan or, if no
election is made or permitted, in the plan's qualified default
investment alternative under Sec. 2550.404c-5 or in another investment
selected by a fiduciary with respect to such plan.
(8) Timeliness of automatic portability transaction execution. If
the automatic portability provider identifies a match, and the affected
individual does not affirmatively elect not to participate in the
transaction within the timeframe indicated in the pre-transaction
notice, the automatic portability provider shall, after liquidating the
assets of the individual retirement plan to cash in accordance with the
timeframes established in the policies and procedures adopted pursuant
to paragraph (b)(9) of this section, transfer the account balance of
such plan as soon as practicable to the participant's account in the
employer-sponsored retirement plan.
(9) Limitation on exercise of discretion and on policies and
procedures. The automatic portability provider shall neither have nor
exercise discretion to affect the timing or amount of the transfer,
other than to deduct the appropriate fees as described in paragraph
(b)(2) of this section. An automatic portability provider will be
deemed to satisfy this paragraph (b)(9) if it establishes, maintains,
and follows written policies and procedures that set specific standards
and timeframes that apply to all automatic portability transactions.
The policies and procedures shall, at a minimum, address:
(i) The process to ensure that an employer-sponsored retirement
plan that accepts transfers into the plan in connection with an
automatic portability transaction designates a representative that will
be responsible for monitoring transfers into the plan due to automatic
portability transactions and investment of amounts received;
[[Page 5671]]
(ii) The process and timing for liquidating the assets of the
individual retirement plan to cash and closing the individual
retirement plan;
(iii) The process for verifying and validating that the correct
fees are withdrawn from the individual retirement plan;
(iv) The process and timing for transmitting assets to employer-
sponsored retirement plans;
(v) The process for verifying the assets were received by the
employer-sponsored retirement plan; and
(vi) The process for sending all required notices to plan
participants or individuals on whose behalf an individual retirement
plan is established, in accordance with paragraph (h) of this section.
(c) Annual audit and corrections. (1) An automatic portability
provider shall retain an independent auditor to conduct an annual audit
to assist the automatic portability provider in demonstrating
compliance with the automatic portability provider's policies and
procedures, the requirements of Code section 4975(d)(25), (f)(12), and
these regulations and identifying any instances of noncompliance. The
auditor shall, at a minimum, review: the policies and procedures, a
representative sample of the required disclosures, a representative
sample of automatic portability transactions, and the requirements of
Code section 4975(d)(25), 4975(f)(12), and these regulations. The
auditor shall have appropriate technical training and proficiency with
respect to ERISA Title I, the Code, and the automatic portability
transactions described in these regulations to conduct the audit.
(2) Independence of auditor. An auditor is independent if the
automatic portability provider does not have an ownership interest in
or control the auditor and the auditor derives no more than two percent
of its annual revenue from services provided directly or indirectly to
the automatic portability provider or any of its affiliates.
(3) Access to information. The automatic portability provider shall
grant the auditor access to its automatic portability operations and
records (including, as necessary, the operations and records of its
affiliates) sufficient to allow the auditor to make the determinations
and findings required by these regulations.
(4) Audit report findings and determinations. The auditor shall
prepare a written audit report signed by the auditor. The written audit
report shall include the following findings and determinations:
(i) The total number of completed automatic portability
transactions during the audit period;
(ii) Whether the notices in the reviewed sample met the timing and
content requirements of Code section 4975(f)(12) and these regulations
and were delivered in a manner reasonably designed to ensure affected
individuals would receive the notices;
(iii) Whether any required notices were returned as undeliverable
and what steps were taken by the automatic portability provider to
address undeliverable notices;
(iv) Whether the notices in the reviewed sample were written in a
manner reasonably calculated to be understood by the average intended
recipient, including whether the notices include inaccurate or
misleading statements;
(v) Whether the appropriate accounts in the employer-sponsored
retirement plan in the reviewed sample received all the assets due as a
result of the automatic portability transaction;
(vi) A summary of the fees individuals were charged by the
automatic portability provider (and any affiliates) for services
provided in connection with automatic portability transactions,
including whether those fees increased since the last report;
(vii) Whether the fees and compensation received by the automatic
portability provider (including its affiliates) in connection with the
automatic portability transactions are consistent with the fees
authorized by appropriate plan fiduciaries and did not exceed
reasonable compensation, as described in paragraph (b)(2)(i) of this
section;
(viii) Whether all requirements of Code section 4975(f)(12) and
these regulations were satisfied with respect to:
(A) The policies and procedures; and
(B) The transactions and disclosures that were reviewed;
(ix) A summary of compliance issues reported to or discovered by
the auditor, the auditor's recommendations, and the extent to which the
automatic portability provider has addressed or is addressing the
issues pursuant to the correction procedures in paragraph (c)(9) of
this section;
(x) Any other recommendations from the auditor to improve the
policies and procedures and overall execution of automatic portability
transactions to ensure compliance with the requirements of Code section
4975(f)(12) and these regulations; and
(xi) A description of the auditor's methodology and procedures in
performing the audit.
(5) Additional information to be included in the audit report. The
written audit report shall also include:
(i) The number of mandatory distributions into individual
retirement plans described in paragraph (a)(2)(i) of this section for
which the automatic portability provider is conducting searches as
required by paragraph (b)(6) of this section; and
(ii) The number of individual retirement plans described in
paragraph (a)(2)(i) of this section:
(A) Which have been transferred to designated beneficiaries;
(B) For which the automatic portability provider is searching for
next of kin due to the death of an account holder without a designated
beneficiary; and
(C) That were reduced to a zero balance while in the automatic
portability provider's custody.
(6) Records not in possession of the automatic portability
provider. If the automatic portability provider does not have access to
the records or information to be included in the audit report, the
automatic portability provider, as a condition of its services, shall
require that the appropriate information is provided to the automatic
portability provider.
(7) Timing of the audit report and submission to the Secretary of
Labor. The written audit report shall be completed within 180 calendar
days following the annual period to which the audit relates. The
automatic portability provider shall submit the written audit report to
the Secretary of Labor at [email protected] within 30
calendar days of completion.
(8) Certification of audit review and addressing compliance issues.
The automatic portability provider shall include a certification filed
with the written audit report, under penalty of perjury, that the
automatic portability provider reviewed the audit report. The automatic
portability provider shall also certify that it has addressed,
corrected, or remedied any noncompliance or inadequacy in its
compliance or has an appropriate written plan to address any such
issues identified in the audit report.
(9)(i) Correction procedures. The automatic portability provider
shall establish procedures for the correction of failures to comply
with Code section 4975(f)(12) and these regulations. The procedures
shall, at a minimum, require the automatic portability provider to
notify the auditor during the applicable audit cycle of any
correction(s) the automatic portability provider made on its own. The
automatic portability provider may engage in corrections on
[[Page 5672]]
its own, without the auditor's input and without losing relief under
Code section 4975(d)(25), if:
(A) Either the violation did not result in losses to the individual
retirement plan or the automatic portability provider made the
individual retirement plan whole for any resulting losses;
(B) The automatic portability provider corrects the violation and
documents the correction in writing within 30 calendar days of
correction;
(C) The correction occurs no later than 90 calendar days after the
automatic portability provider learned of the violation or reasonably
should have learned of the violation; and
(D) All instances of noncompliance and accompanying corrections are
reported in writing to the auditor.
(ii) Auditor recommendations. If the auditor determines the
automatic portability provider was not in compliance with any provision
of Code section 4975(f)(12) or these regulations during the audit
period, the auditor shall identify the instances of noncompliance in
the audit report along with a description of corrective actions taken
by the automatic portability provider and any recommended additional
corrections. An automatic portability provider will not be treated as
having failed to comply with any provision of Code section 4975(f)(12)
or these regulations, provided it corrects any instance of
noncompliance identified by the auditor as soon as reasonably
practicable.
(10) Additional corrective actions. The Secretary of Labor may
require the automatic portability provider to submit to supplemental
audits and corrective actions, including a temporary prohibition from
relying on the exemption if the automatic portability provider or an
affiliate is found to be:
(i)(A) Engaging in a systematic pattern or practice of violating
any provision of Code section 4975(f)(12) or this regulation;
(B) Intentionally violating any provision of Code section
4975(f)(12) or this regulation; or
(C) Providing materially misleading information to the Secretary of
Labor, Secretary of the Treasury, or the auditor in connection with
automatic portability transactions; or
(ii) The subject of a foreign or domestic criminal conviction:
(A) Involving or arising out of the conduct of the automatic
portability program or any automatic portability transaction; or
(B) For any felony involving larceny, theft, robbery, extortion,
forgery, counterfeiting, fraudulent concealment, embezzlement,
fraudulent conversion, misappropriation of funds or securities, or
conspiracy to commit any such crimes or a crime in which any of the
foregoing crimes is an element.
(d) Website. (1) The automatic portability provider shall maintain
a website which displays:
(i) A description of all the fees and compensation received,
directly or indirectly, by the automatic portability provider for
services provided in connection with the automatic portability
transaction;
(ii) A list of recordkeepers for each employer-sponsored retirement
plan with respect to which the automatic portability provider carries
out automatic portability transactions; and
(iii) The number of plans and participants covered by each
recordkeeper.
(2) The website is not required to be limited to the information
described in paragraphs (d)(1)(i) through (iii) of this section, and
may include other information, for example, about the automatic
portability provider, the automatic portability program, or other
services provided to employer-sponsored retirement plans or individual
retirement plans, but the automatic portability provider must ensure
that the information described in paragraphs (d)(1)(i) and (ii) of this
section is displayed in a way that clearly sets forth the automatic
portability transaction fees and compensation separately from other
fees and compensation.
(e) Limitation on exculpatory provisions. The automatic portability
provider shall not include exculpatory provisions in its contracts or
communications with individuals described in paragraph (a)(2)(i) of
this section disclaiming or limiting the automatic portability
provider's liability in the event the automatic portability provider
causes an improper transfer of assets in connection with an automatic
portability transaction. This limitation does not prohibit disclaimers
for:
(1) Liability caused by an error, a misrepresentation, or
misconduct of a party independent of the automatic portability provider
and its affiliates, or
(2) Damages arising from acts outside the control of the automatic
portability provider.
(f) Record retention requirements. (1)(i) An automatic portability
provider shall, for not less than 6 years after the automatic
portability transaction has occurred, maintain records sufficient to
demonstrate compliance with the requirements of Code section
4975(f)(12) and this regulation.
(ii) No prohibited transaction will be considered to have occurred
solely on the basis of the unavailability of such records if they are
lost or destroyed due to circumstances beyond the control of the
automatic portability provider before the end of the six-year period.
An automatic portability provider's failure to maintain the records
necessary to determine whether the conditions of Code section
4975(f)(12) and this regulation have been met will result in the loss
of the relief provided by Code section 4975(d)(25) and this regulation
only for the transaction or transactions for which such records are
missing or have not been maintained.
(2) The records maintained to demonstrate compliance with the
requirements of Code section 4975(f)(12) and this regulation shall be
made available to any duly authorized employee or representative of the
Department of Labor or the Department of the Treasury within 30
calendar days of the date of a written request for such records by the
Department of Labor or the Department of the Treasury.
(g) Definitions. (1) A person or entity is an affiliate if,
directly or indirectly (through one or more intermediaries) it
controls, is controlled by, or is under common control with such person
or entity; or is an officer, director, or employee of, or partner in,
such person or entity. Unless otherwise specified, an affiliate refers
to an affiliate of the automatic portability provider.
(2) The term control means the power to exercise a controlling
influence over the management or policies of an entity or person other
than an individual.
(3) The term individual retirement plan means:
(A) An individual retirement account described in Code section
408(a); and
(B) An individual retirement annuity described in Code section
408(b).
Signed at Washington, DC, this 16th day of January 2024.
Lisa M. Gomez,
Assistant Secretary, Employee Benefits Security Administration, U.S.
Department of Labor.
[FR Doc. 2024-01208 Filed 1-26-24; 8:45 am]
BILLING CODE 4510-29-P
