The U.S. Department of Labor (the “DOL”) recently published Advisory Opinion 2018-01A (the “Opinion”), which deals with an interesting approach for handling retirement plan participants’ small accounts that have been distributed from a retirement plan and automatically rolled over into an IRA. As background, many retirement plans provide that if a terminated participant’s vested account does not exceed $5,000.00, then the plan sponsor can distribute (i.e. cash-out) that account without the participant’s consent and roll it over into an IRA for the participant. At that point, the participant is responsible for paying any fees associated with that IRA, and the amount in the IRA no longer constitutes assets of the plan sponsor’s plan.
In the Opinion, the applicant is an entity (the “Company”) that offers a program with the following chief characteristics:
- First, under agreements with sponsors of ERISA-covered defined contribution plans (e.g., 401(k) plans) and third-party recordkeepers, the program deals with the process of cashing-out small accounts and having them automatically rolled over into IRAs. This part of the program involves participating plan sponsors agreeing to adopt plan amendments and resolutions necessary to carry out the rollovers and agreeing that the plan will make disclosures to plan participants regarding the program. For example, the program agreements require plan administrators to describe the program and to disclose all program fees and expenses to participants in the plan’s summary plan description. In addition, the Company receives from the employer or recordkeeper information identifying separated participant accounts that are subject to the plan’s cash-out provisions. For those participants, the Company or record-keeper sends out a “mandatory distribution letter” to separated participants that explains the plan’s distribution options, discloses all fees and features of the program, and includes an Internal Revenue Code Section 402(f) notice explaining various tax rules for eligible rollover distributions. The letter also advises participants that their plan account will be automatically rolled over into an IRA unless they provide affirmative direction regarding the distribution of their account. Then, soon after a participant’s cashed-out retirement plan account is rolled over to the IRA, the Company or the recordkeeper sends a welcome letter to the individual (who is now the IRA owner). The welcome letter describes the IRA’s investment options and the program’s fees and features.
- Second, the program facilitates the subsequent automatic rollover of IRA funds to a retirement plan sponsored by the IRA owner’s new employer when he or she obtains a new job. Here, the program uses a “locate, match, and transfer” technology involving periodic queries of cooperating retirement plan recordkeepers’ systems, to determine whether the IRA owner has become a participant in a retirement plan as a result of a new job. If the IRA owner is in that situation, then the Company typically effectuates a transfer of funds from the individual’s IRA to the new employer’s plan. However, that transfer only occurs after the Company sends a “consent letter” to the IRA owner, requesting his or her consent to transfer the IRA funds to the new employer’s plan.
In the Opinion, the DOL ruled on the fiduciary status of various parties associated with the program. With respect to sponsors of retirement plans under which a participant’s account is cashed-out and rolled into an IRA, as well as sponsors of plans into which the IRA funds are transferred, the DOL ruled that such sponsors act in a fiduciary capacity when choosing to participate in the Company’s program. For example, they must ensure that the program is a necessary service and that the Company’s compensation is “reasonable” within the meaning of ERISA and the Internal Revenue Code. That analysis includes taking into account the program’s features and the Company’s fees, in light of comparable services that are available in the marketplace. In addition, the DOL ruled that the Company generally acts as a fiduciary when transferring an individual’s IRA funds to the individual’s new employer’s plan.
Here is a link to the Opinion: https://www.dol.gov/sites/default/files/ebsa/employers-and-advisers/guidance/advisory-opinions/2018-01a.pdf