January 2024 Compliance

DOL Proposed Regulation for Automatic Portability Transactions

The Department of Labor (DOL) released a proposed regulation that expands on the limited prohibited transaction exemption (PTE) relief related to automatic portability transactions under Section 120 of the SECURE Act of 2022 (SECURE 2.0).

Background

Automatic portability transactions are a plan design feature that involves the automatic transfer of a participant's account in an individual account plan to a Safe Harbor IRA and then to the eligible retirement plan of the participant’s new employer. The automatic portability transaction occurs with the mandatory small amount distribution from the participant’s prior employer’s plan. As stated by the DOL, the goal of automatic portability is to help workers keep track of their retirement savings accounts and improve retirement security by reducing cash-outs when they change jobs.

An automatic portability provider is a party that will work with cooperating recordkeepers to locate, match, and transfer participant accounts to the participant’s new employer plan (described by the DOL as the “transfer-in plan”). An eligible transfer-in plan includes a qualified defined contribution, governmental 457(b), or 403(b) plan (does not apply to defined benefit plans). The participant must be provided notice of the transfer, with the opportunity to opt out of such transfer.

Section 120 of SECURE 2.0

Section 120 of SECURE 2.0 made an update to allow a PTE so that an automatic portability provider may receive fees and compensation for the services they provide for the automatic portability transaction, if requirements are met.

Proposed Regulation

As explained by the DOL in their press release, the proposed regulation tracks the requirements under the statutory exemption that must be satisfied for the automatic portability transaction to be covered by the PTE. These topics include, among others:

The PTE is limited to the fees and reasonable compensation for services provided in connection with an automatic portability transaction.
Required written notices and disclosures, such as:
- Notice of fees, compensation, and services.
- Acknowledgement of the automatic portability provider’s fiduciary status.
- Notice to the DOL within 90 days prior to operating as an automatic portability provider.
- Description of the automatic portability program within the Summary Plan Description.
- Enrollment, pre-transaction, and post-transaction notification to the IRA owner.
Require at least a monthly review of whether an IRA owner has an account with an eligible transfer-in plan. This includes completing frequent automatic and, if necessary, manual address validation searches.
Record retention requirements.
Annual audit and correction procedures if an auditor determines the automatic portability provider did not comply with the requirements of the statutory exemption and the proposed regulation.
Require transfer-in plan to invest transfers in the participant’s current investment election or, if no election, a default selected by the plan fiduciary.
An automatic portability provider may not:
- Receive payment of third-party compensation other than the fee/compensation related to the automatic portability transaction.
- Use disclaimers or hold harmless language that limits liability if an automatic portability transaction results in an improper transfer.
- Use data obtained for other purposes outside of the automatic portability transaction or locating missing individuals.

Effective Date

At the time of this draft, the proposed regulation has not been published in the Federal Register. Once published, written comments are due within 60 days and must reference RIN 1210-AC21 and may be submitted either through:

Federal eRulemaking Portal at www.regulations.gov.
Mail to Office of Regulations and Interpretations, Employee Benefits Security

Administration, Room N-5655, U.S. Department of Labor, 200 Constitution Ave. NW, Washington, DC 20210, Attention: Automatic Portability Regulation RIN 1210-AC21.

The subject matter in this communication is educational only and provided with the understanding that Principal^® is not rendering legal, accounting, investment or tax advice. You should consult with appropriate counsel, financial professionals and other advisors on all matters pertaining to legal, tax, investment or accounting obligations and requirements.

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