The DOL Advisory Opinion 2018-01 on the Retirement Clearinghouse shows the challenges presented by auto-portability in general, and specifically in the use of these types of IRA programs to accomplish it. The specific program, as described in the Advisory Opinion sets up a series of automated transfers of those “small amounts” forced out from retirement plans and into IRAs. Ultimately, the program’s goal appears to be to prevent leakage of those small amounts by using fintech to facilitate those forced rollovers following the participant from employer to employer.
One of these steps in making the program work is the “automated” transfer from the “forced out” IRA into the new employer’s plan of the IRA owner, which the system found.
Here’s the difficulty, which is inherent to bulk IRA programs: IRAs are individually owned investment contracts, which are under the control of the former participant-even though they are set up by the former employer. The program attempts to be able to make the transfer transfer to the new plan from the IRA through a “negative consent” notice and approval process. The participant will be notified of the transfer and, if they do not object, the funds will be transferred from the IRA to the new employer’s plan.
It appears from the Advisory Opinion that the program sponsor may have requested the DOL to rule that the negative consent would relieve the program’s sponsor from any fiduciary obligations related to that transfer. Even if it was not specifically requested, the DOL made it clear that negative consent will not suffice to relieve the program’s sponsor from the fiduciary obligations related to the decision to move the money from the IRA to the new plan. I don’t need to detail what fiduciary steps would then be required to make that happen.
This ruling on negative consent related to “plan” assets (which includes IRA monies) is actually a big deal, of which we should all take note when dealing with auto-portability.
Then there is that nasty problem of securities laws and other state laws which further complicates these types of efforts. IRAs, unlike 401(k) plans, are NOT exempt from securities laws; nor are the investments held under the IRA (unless they are otherwise exempted securities, like certain bank deposits or fixed annuity contracts); nor is state law preempted. The question one always needs to consider when dealing with programs like this is how a fiduciary which is not appointed by the individual IRA holder has any legal authority to do ANYTHING with a registered security (or even any other investment) after it is set up by the original employer, as the investments are legally owned by the former participant. How can you effectively manage these arrangements?
It gets complicated.
My point is this: we are so accustomed to the exempted and preempted status of dealing with plan money, it is easy to overlook the fact that there is a whole range of other laws which come into play when dealing with IRA based auto-portability programs It is, by the way, similar to the sorts of problems we continue to have with 403(b) accounts (which are also non-exempt securities), their related asset allocation models and related issues-a point on which I had previously blogged.
It’s worth repeating: It gets complicated.