Industry innovators are tackling the missing participant problem. Is RCH’s Auto Portability Program the solution?
Ilene H. Ferenczy, Esq.
One of the most difficult issues facing plan sponsors and administrators nowadays is that of missing participants. As more and more people are covered by a retirement plan, the possibility increases that while an employee may leave a company, his or her benefit funds remain in the plan.
This may mean that no one reviews the account’s investments and ensures that they continue to be appropriate for the participant. The fees for the maintenance of the account may be charged to the account, thereby depleting the benefits. Financially it may be better for the participant to have all of his or her retirement plan money commingled, but that may not occur because the participant has become inattentive.
The problem becomes even more critical if the plan is terminated. At that point, it must pay out all benefits, and it may not be able to find the participant. There are several options available to the plan if that occurs, including rolling all benefits into an IRA, moving the funds to the PBGC’s Missing Participant Program, purchasing an annuity (if the plan permits and the account is sufficiently large), or even setting up a bank account in the participant’s name.
None of these solutions is hugely satisfying, however, because there is always the concern that the participant will never find the right path to locate those funds.
The problem, at its core, is one of portability. Moving one’s retirement plan funds from one plan to another or into an IRA takes time and energy, and requires some expertise that the average plan participant might not possess. Many participants’ reluctance to communicate with a former employer is a major reason why they go missing. Once the link between a former employee and that individual’s retirement funds is severed, it can be very hard to reestablish it.
As a result, some in our industry have turned their attention to finding a way to improve the chances that former participants can be reunited with their retirement funds. One proposed solution, Retirement Clearinghouse’s “Auto Portability Program” (APP) has received a positive ruling from the Department of Labor (DOL) regarding how it would work, and Retirement Clearinghouse is now awaiting the receipt of a Prohibited Transaction Exemption regarding the fees that would be charged. While this is not the only concept in the wings, it has received a good amount of publicity due to the DOL ruling. Let’s take a closer look at it.
THE AUTO PORTABILITY PROGRAM CONCEPT
Retirement Clearinghouse, LLC (RCH), a recordkeeper, has proposed the APP as a way of helping to reunite missing participants with their retirement plan funds. Something like a version of the Ancestry.com method of finding relatives, the APP seeks to search the financial universe to link funds with their missing participants.
Under the program, plan sponsors and administrators, financial institutions, and recordkeepers would agree to provide the APP with information about accounts they maintain for the benefit of separated participants. The process would begin with automatic rollover of funds to an IRA recordkept by RCH or the plan’s recordkeeper. If RCH is the recordkeeper, the funds would be held by an unrelated custodian and invested in products provided by a financial institution unrelated to RCH.
Once the rollover IRA is established, RCH or the other financial institution would send the participant a welcome letter describing the IRA options and fees. In addition, the letter would advise the participant of a separate RCH program in which RCH would provide information on an at-least-monthly basis to the recordkeepers who have agreed to be part of the APP to identify potential matches between the IRA rollovers and active employer retirement plans.
If a match is found, RCH would validate the information and send a “consent letter” to the participant using the address provided by the active plan. This letter would advise the participant of the match and give the participant the opportunity to accept or decline the rollover of the IRA into the active plan. If the participant approves or fails to respond, and the employer that sponsors the active plan agrees, the IRA amount would be rolled over to the active plan. As a result, the participant’s “old” and “new” retirement funds would be joined in a single active account that is more easily managed by the participant.
This proposed process would better enable the retirement monies of a given participant to “keep up” with the participant’s employment changes, offering an enhanced potential that the funds will not be lost.
In Advisory Opinion 2018- 01, the DO L confirmed that plan sponsors which participate in the APP will be acting as fiduciaries when they decide to take part in the program. They will cease to be fiduciaries with regard to participants’ funds once the funds are rolled over to an IRA, and will not be fiduciaries in relation to any subsequent rollover to an active plan.
The DOL also confirmed that the accepting plan (i.e., the active plan) sponsor or trustee will not be fiduciaries in relation to the rollover decision, although they would be responsible for ensuring that the roll-in of the funds is consistent with the active plan’s terms. Also, RCH would be a fiduciary in regard to the transfer of the funds to the active plan unless the participant affirmatively approves the rollover.
RCH has applied to the DOL for a Prohibited Transaction Exemption to allow it to receive fees in relation to the transactions embodied in the APP.
While the APP has the potential of improving the process of keeping participants’ plan funds where they can be properly administered and used at retirement, it is clear that the complex web of retirement plan distribution and rollover rules prevents simple portability of these monies. It certainly would be easier to keep participants and their funds together if the distribution and rollover process were less onerous. It also would be better if participants would help their former employers keep track of their whereabouts so that they can be paid benefits when due.
Ilene H. Ferenczy is the Managing Partner of Ferenczy Benefits Law Center in Atlanta, GA. An ASPPA member since 1984, she is a former member of the Leadership Council, a former Chair of the Government Affairs Committee, and a frequent speaker at ASPPA conferences.