Auto-Portability Feature Sidesteps Fiduciary Advice
Much progress has been made over the last decade to protect retirement investors from imprudent advice and unsuitable products. The recent push to automate portability in the 401(k) space may unwind this progress. The basic premise of auto-portability is to have plan accounts follow a worker from one plan to another through an automated rollover process that recognizes that the employee has changed employers. At face value, this seems to make sense. Few people want to spend time trying to figure out how to process a rollover, so automagically moving it could be perceived as a valuable service while also reducing systematic account leakage and solving many of the issues with missing participants. Looking deeper though, it will favor 401(k) accounts transfers without accounting for the possibility that an IRA (or other vehicle) may be in the best interest of the participant. To look at why this matters, let's review what regulators have done on this front recently.
Haven't we Been Here Before?
Following the release of a 2013 study conducted by the Government Accountability Office that found participants were often steered towards IRAs without analysis of a participants financial condition or options when seeking rollover guidance, the Department of Labor (DOL), Securities & Exchange Commission (SEC) and Financial Industry Regulatory Authority (FINRA) have each weighed in regarding expectations for industry participants to protect investors with regards to rollover recommendations. Regulation Best Interest, promulgated by the SEC, requires financial institutions to mitigate conflicts of interest to avoid incentives for the financial institution to place their interests ahead of investors. FINRA reminded its registrants of its expectations with regard to meeting suitability standards in Regulatory Notice 13-45. The DOL issued Prohibited Transaction Exemption 2020-02 to promote investment advice, including rollover recommendations, that is in the best interests of retirement investors. While these regulatory requirements apply to different groups and each have their own nuances, the expectations from regulators are quite similar - there's an expectation that advice consider available options and make a recommendation that is best for the investor, looking at a variety of product factors and overall financial circumstances. Automatically transferring a 401(k) account to another 401(k) account has similar flaws to the practice that led to the flurry of rule making, albeit without any actual recommendations being made, effectively side-stepping the onerous requirements under PTE 2020-02.
Plan Sponsor Considerations
The decision to add an auto-portability service and choose a provider will likely fall on plan sponsors. While there are many nuances to consider here, we'll focus on whether the service is necessary and whether the service is in the best interests of plan participants here. Plans have run for decades without an auto-portability service. This would seem to indicate that there is no necessity for this service, although it may be desirable for the plan sponsor as it alleviates certain burdens with regard to missing participants. Fiduciaries should carefully analyze and document whether and to what extent an auto-portability service would benefit their plan before opting into the service.
The determination of whether an auto-portability service is in the best interest of plan participants will prove to be an interesting challenge. The determination that a rollover is prudent is multifaceted, as we can see from underlying regulations. For some plans with low costs relative to peers, such a service may be expected to increase fees for participants. For plans with higher cost structures, moving accounts may be expected to lower participant fees, but this should also raise questions as to why participants are better off in another plan than their own and, if that's the case, what actions could be undertaken to reduce expenses in the plan so participants wouldn't be advantaged in a transition to another plan. Making this more complex are IRA options, which can be very inexpensive (or expensive) relative to a 401(k) plan depending on the nature of services provided. The determination of whether the automatic transfer of accounts away from your plan is in the best interest of your participants in the aggregate will prove to be a highly nuanced and complex process that will likely raise more questions than it answers.
Rather than automate distributions which may be good or bad for plan participants, there are things you can do to solve the administrative challenges through other means that could yield better results for the plan and participants. Incentivizing participants to return distribution paperwork quickly following termination of employment by picking up the distribution fee if the paperwork is returned timely (e.g., within 60 days) provides a financial incentive to participants to respond quickly. Offering employees a financial planning service in addition to the plan would also provide participants with the unconflicted advice they need to make wise decisions with their account based on their unique circumstances.
There's no such thing as a one-size-fits-all financial decision. Everyone has unique circumstances and every savings vehicle and service has its nuances. If your provider is pushing you to employ a one-size-fits-all feature, whether it's auto-portability, auto-enrollment, or any of the other automated features that are trending, reach out and we'll help you see through the underlying agenda and maintain a plan that truly puts your employees first.