Auto-portability has been around since 2018 but received a boost when it was included in SECURE 2.0. Articles promoting auto-portability seem to cast a negative light on automatic rollover IRAs. This is puzzling as it ignores auto-portability’s actual business model. In addition, these articles exaggerate survey results in attempting to show auto-portability’s superiority over just using automatic rollover IRAs. Finally, there are other options instead of auto-portability that will result in better financial outcomes for individuals.

This is the first blog in a three-part series discussing auto-portability with the marketing propaganda stripped away. Our objective is to assist you in fully understanding the auto-portability program, process, responsibilities and intended results, so that you can determine if it is right for you or your clients. The subject of the three parts:

1. Understanding The Auto-Portability Structure And Its Value Proposition
2. Beware of Auto-Portability Marketing
3. Better Alternatives To Auto-Portability

Auto-Portability Structure

The auto-portability structure is quite simple. However, there are operational aspects, such as fees, notices and added fiduciary liability, which should be considered in evaluating whether to utilize auto-portability.

First, auto-portability is limited to small balances – $7,000 or less. It does not help any individual who leaves an employer with more than $7,000 in the retirement plan. This can make it very confusing for individuals who – over time – leave multiple employers with balances on each side of the $7,000 threshold. Some balances may be transferred through auto-portability while others will not. This limited effectiveness can be confusing or even misleading to individuals.

Second, there are three components to the auto-portability process:

1. The ‘‘transfer-out’’ plan that initiates a force-out distribution when a participant with a small balance separates from service.
2. The automatic rollover IRA which receives and holds the distributed funds from the “transfer-out” plan via a direct rollover for any participant receiving a force-out distribution.
3. The ‘‘transfer-in’’ plan that receives the roll-in distribution from the automatic rollover IRA when that IRA accountholder is matched with a plan account at a new employer.

The first two components are identical to any existing automatic rollover IRA program. Auto-portability merely adds the third component. Be careful of marketing materials that appear to show balances going right from a “transfer-out” plan to a “transfer-in” plan. The balances must go to an automatic rollover IRA before it can be sent to the “transfer-in” plan. This is required by law.

With the third component being the only “new” part of the auto-portability process, you should understand what fees and responsibilities emerge from its addition.

Charging Fees Without Consent

Auto-portability deducts a fee from each individual’s automatic rollover IRA balance – without their consent – before sending the money to the “transfer-in” plan. The only way for an individual to avoid being charged that fee is for the individual to affirmatively elect to not have the money sent from the automatic rollover IRA to the “transfer-in” plan.

It appears almost certain that the individual will not respond. Their balance was likely placed in an automatic rollover IRA because they failed to respond to an initial notice from the “transfer-out” plan. Auto-portability providers take advantage of this inaction to receive a fee for sending the money to the “transfer-in” plan. Please note this fee is on top of any fee(s) already incurred for opening and maintaining the automatic rollover IRA and distribution fees related to the force-out distribution from the “transfer-out” plan.

Is deducting this additional auto-portability fee from an already small balance – without their consent – really in the best interest of the individuals?

Adding Another Notice To The Pile

The auto-portability process adds three more notices to the list of required retirement plan notices. The value of these notices is questionable. Whether due to bad addresses or failing to read or understand the notices, individuals are unlikely to take action.

This notice obligation adds to the complexity of plan administration as well as the potential consequences if they are not sent in time. Further, the Department of Labor (DOL) wants these notices to “be provided in a culturally and linguistically appropriate manner.” The easiest way to meet this obligation is to have a sentence about the availability of language services in several non-English languages.

In addition to notices, summary plan descriptions (SPDs) will also have to be modified. Both the “transfer-in” and “transfer-out” plans must describe the auto-portability program, including fees. Although the DOL states that a model description will be provided, it has not yet been released. It is unclear who will be drafting the necessary language for the SPDs and notices to meet these requirements.

When evaluating whether to utilize auto-portability, you should consider the added time and costs associated with the notice and SPD obligations.

Added Fiduciary Responsibility For The “Transfer-In” Plan

The “transfer-in” plan must designate a plan representative to have fiduciary responsibility for monitoring transfers into the plan through auto-portability. That representative must confirm that the amounts received on behalf of a participant are invested properly. Do plan sponsors fully appreciate the potential liability of utilizing auto-portability?

Unfortunately, there is minimal, if any, benefit to the “transfer-in” plan in accepting this fiduciary responsibility. Auto-portability provides little value to the employers or plan sponsors. Contrast this with the reduced fiduciary obligations and value added to employers and plan sponsors in just using an automatic rollover IRA program (i.e., just the first two components of auto-portability process).

The law change allowing auto-portability is written to benefit auto-portability providers. These providers have a prohibited transaction exemption for moving money without an individual’s consent from the automatic rollover IRA to the “transfer-in” plan and collecting a fee for doing so. The auto-portability providers receive the most value, with minimal obligations, when employers and plan sponsors utilize auto-portability.

The burden on “transfer-in” plans may not be limited to ensuring the funds are invested properly. What if the “transfer-in” plan receives funds through auto-portability for an employee who has already left the employer? Does auto-portability work with Roth balances? You and your clients should carefully read any agreement from an auto-portability provider. There may be undesirable provisions included which increase fiduciary liability or administrative burden for the employer or service provider.

Does Auto-Portability’s Benefit Outweigh The Cost

Auto-portability is being promoted as providing significantly more value than existing automatic rollover IRA programs. When you factor in auto-portability’s additional fees, fiduciary liability and participant notices, the analysis seems to support the costs exceeding the benefits.

Making matters worse, the marketing efforts of auto-portability providers appear to have hidden or exaggerated different aspects. That topic will be discussed further in the second blog in this series. Hopefully the information above helps you assess and make your own decision on whether auto-portability is best for you or your clients.

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About the Author

Brian Furgala, Esq., CPC, QPA is Senior Director, Retirement Services Strategy for PenChecks, a leader in outsourced retirement plan distribution processing and Automatic Rollover/Missing Participant IRAs and related services. His broad experience as an ERISA attorney and senior executive for several leading retirement plan service providers gives him a unique perspective on the industry.

The views expressed in this article are those of the author and do not necessarily represent the views of PenChecks Trust®, its subsidiaries or affiliates.