We have noticed an increasing number of employers reaching out with questions about whether they should have their defined contribution plan join the auto-portability network. This new option, introduced by SECURE 2.0, has gained traction as many major recordkeepers have committed to joining the auto-portability network and have begun making this feature available to plan sponsors. There is no doubt that auto-portability will be beneficial for participants and the retirement industry as a whole. Still, these benefits must be weighed against the additional liability on plan sponsors if they join the network.
Auto-portability was introduced to help retirement plan participants manage and keep track of their savings as they change jobs. Most defined contribution plans are already designed to cash out small account balances and roll them over into an Individual Retirement Account (IRA) when an employee terminates employment. If the plan joins the auto-portability network and the former employee later joins a new employer whose plan has also joined the auto-portability network, the balance in the IRA will be automatically rolled over into their new employer's plan. Since the average person changes jobs over 10 times in their career, consolidating multiple accounts will help employees maintain access to their savings and enable better planning for retirement.
The downside is that plan sponsors who choose to participate in the auto-portability network will be subject to additional fiduciary responsibilities. The decision to join the network is considered a fiduciary act. Unlike the safe harbor protections offered for auto-rollover IRAs, the Department of Labor (DOL) has not extended similar protections to employers who opt to participate in the auto-portability network. While we hope the DOL will introduce similar safeguards for employers joining the auto-portability networks in the future, such protections are not currently in place. Additionally, under the auto-portability proposed regulations, employers must meet certain notice requirements and appoint a plan official to oversee transfers into the plan and ensure that received amounts are properly invested.
The auto-portability feature offers valuable benefits to both departing and incoming employees, but plan sponsors should carefully weigh these advantages against the potential fiduciary obligations when determining what is best for their plan. There is no rush in making a decision today and taking a "wait and see" approach may be the best course of action. Concerns regarding fiduciary liability might be diminished by monitoring enforcement actions taken against early adopters or if the DOL issues guidance reducing plan sponsor risk. If you have any questions about evaluating whether to adopt the auto-portability feature or what steps you need to take if you do decide to adopt this feature, please feel free to reach out to any of the attorneys in our Employee Benefits group.
