Retirement experts are optimistic a new technology could help solve the age-old problem that occurs when job changers fail to roll over their 401(k) balances into a new employer's plan.
After years of groundwork, Retirement Clearinghouse LLC is close to receiving the green light from the Department of Labor to expand its auto portability program, which is expected to reduce plan leakage and missing participants.
When a participant with less than $5,000 in a 401(k) plan changes jobs and does not move his or her money, the plan can transfer the account savings into an individual retirement account. The IRAs are then typically invested in either a money market fund or certificate of deposit, which do not offer high returns. About five years ago, RCH set out to create a service that helps automatically move participants' savings back into retirement plans at their new employers.
RCH has developed a "locate, match and transfer" technology that involves periodic queries of cooperating record-keepers' systems to ascertain if the IRA owner has become a participant in an individual account plan through re-employment and then effects a transfer of funds from the individual's IRA to that new plan, according to the DOL advisory opinion.
Assets must first travel through a safe harbor IRA before transfer to a new employer plan.
The DOL issued two pieces of guidance last month. The first states that RCH has the fiduciary responsibility when the money is transferred from an IRA to a new plan, which is good news for plan sponsors and record keepers, said Michael P. Kreps, Washington-based principal at Groom Law Group, which represents RCH.
"That's consistent with what pretty much everyone thought should be the law but it's helpful that DOL clarified that," he said. "It provides plan sponsors with additional certainty that they're not taking on additional fiduciary responsibility or risk by selecting this product."
The second piece of guidance is a proposed exemption from prohibited transaction restrictions under the Employee Retirement Income Security Act. Because RCH charges a fee to participants for its service, the exemption is required.
"RCH represents that it has no financial incentives that would lead a reasonable person to believe that it is steering accounts to custodians, service providers or investment providers based on its own financial interests, as opposed to the interests of the plan participants and IRA owners," the DOL said in its proposed exemption.
The one-time fee RCH charges participants will average about $35 and can go as high as $59 for larger account balances, according to RCH.
Comments on the exemption are due Dec. 24 to the DOL, but RCH isn't expecting any major changes. "This is something where the department is 90% of the way there," Mr. Kreps said.
The DOL is expected to issue a final decision on the exemption, which will only apply to RCH, after the comment period.
A version of RCH's auto portability program launched last year with one plan sponsor — a company with about 250,000 employees that RCH has declined to name. J. Spencer Williams, founder, CEO and president of RCH in Charlotte, N.C., said the program has been a success. RCH found about 5,000 retirement plan participants who already had a safe-harbor IRA provided by RCH. Safe-harbor IRAs are created when sponsors force out terminated employees with retirement account balances of less than $5,000.
The 5,000 participants were invited to transfer their IRA balances into the company's retirement plan and roughly 1,000 have given their consent to do so. The consent is needed because the DOL exemption has yet to be granted.
"The objective was that we wanted to put a demonstrable, measurable model in place so that anyone who might be skeptical that auto portability would work, we could just turn to this pilot and say, 'actually it is working,'" Mr. Williams said.
While RCH has been appealing to the DOL for legal guidance, it has been in regular contact with major record keepers, Mr. Williams added. "It's too soon for us to make any announcements, but the goal is to get a couple record keepers together to launch it and then build from there," he said.