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On July 31, 2019, DOL published a Notice of Prohibited Transaction Exemption (PTE) Involving Retirement Clearinghouse, LLC (RCH), addressing a potential prohibited transaction issue presented by RCH’s clearinghouse “locate, match, and transfer” model. In what follows, we begin with a discussion of the RCH clearinghouse model generally. Then we review the PTE, consider sponsor fiduciary obligations under the program, and discuss its significance for ongoing issues with respect to missing participants.
Significance for plan sponsors
RCH’s program is interesting in a couple of respects. First, it is an attempt to provide a private sector, clearinghouse-based solution to the problem of money “leaking” from the retirement system when an employee changes jobs. And, second, as part of its program RCH is providing a fairly robust missing participant search service. The result of such a program (on paper at least) is a solution to many of the problems intended to be solved by “Retirement Savings Lost and Found” legislation that has been introduced in Congress.
RCH clearinghouse model
Oversimplifying, the RCH clearinghouse is a “money follows the participant” program that matches a distribution under an “old” employer’s plan with an account in a new employer’s individual account plan and then facilitates (generally, via an RCH IRA) a transfer of that distribution to the new plan. To accomplish this, RCH provides (1) a “Default IRA” program for accounts that have been mandatorily distributed under Internal Revenue Code section 401(a)(31)(B) (generally, accounts in excess of $1,000 and not in excess of $5,000) with respect to a terminating employee, and (2) a “locate, match, and transfer” utility that (to the extent possible) matches IRA accounts held under the Default IRA program with accounts held by the same employee at a new employer’s individual account plan.
The program anticipates the use of either (1) RCH’s own Default IRA, (2) a Default IRA maintained by a plan’s recordkeeper or (3) an “Eligible Mandatory Distribution Account” maintained in the “old” employer’s plan.
Under the program, when RCH matches a participant who holds a Default IRA and also holds an account in an individual account plan maintained by a new employer, RCH sends a “Consent Letter” stating that “if the individual fails to contact RCH within 30 days of receipt …, RCH will transfer the Default IRA balances to the plan sponsored by the individual’s current [i.e., ‘new’] employer.” The participant’s affirmative consent is solicited for that transfer, but if RCH does not receive a response, the transfer is made (in effect) based on the participant’s negative consent.
The PTE covers the “Transfer Fee” and a “Communications Fee” RCH charges with respect to this last transaction – the transfer to the new plan.
Conditions of the PTE
The PTE (1) only applies to transfers to a new plan account of $5,000 or less (disregarding Default IRA investment gains); and (2) only lasts for five years. The exemption is subject to a number of detailed conditions. Very briefly:
All fees must be disclosed to and approved by an independent plan fiduciary, and all RCH’s compensation must generally be reasonable.
RCH may not sell or market participant-related data.
RCH may not receive compensation from third parties (other than certain sub-transfer agency fees).
The plan sponsor must choose the investment options under the program, and RCH may not provide investment advice with respect to that choice.
RCH may not restrict third parties from developing alternative locate-and-match services.
There are detailed rules for notices that must be sent to affected participants at critical points under the program.
Transfers to new plan accounts are generally invested based on the individual’s current (new plan) investment elections or, where there is no election, in the plan’s default.
RCH must submit to an annual audit of its entire process (fees, notices, transfer timing, etc.).
RCH program fees and expenses must be disclosed in the participating plan’s SPDs.
RCH must “take[] all prudent actions necessary to reasonably ensure that the Plan’s participant and beneficiary data is current and accurate, and that the appropriate participants and beneficiaries, in fact, receive all the required notices and disclosures, until the assets are transferred under the Program to a New Plan Account.”
Sponsor fiduciary responsibility
RCH received, on November 5, 2018, an Advisory Opinion from DOL clarifying the fiduciary status of the “old” plan sponsor, the “new” plan sponsor and RCH under the RCH program.
According to DOL, plan sponsors that enter into an agreement with RCH “are acting in a fiduciary capacity, and would be subject to the general fiduciary standards and prohibited transaction provisions of ERISA in selecting and monitoring the RCH Program.” In a footnote, DOL states, by way of example, that “to the extent the RCH Program is more costly than a default IRA program without the RCH Program portability services, the adopting plan fiduciaries should consider whether the number of successful matches and account consolidation transfers achieved through use of the RCH Program merit the additional expense of being part of the program.”
The PTE spells out in some detail the sort of review of RCH’s program DOL anticipates a plan fiduciary would undertake before participating in it. In advance of participation in the RCH Program the plan fiduciary is expected to:
Review the material terms of the program, including the reasonableness and necessity of the fees and services.
Evaluate the impact participation in the program may have on the plan and participants.
Review the terms of the plan’s arrangements with its default IRA custodians and service providers, with consideration given to the possibility that those default IRA assets may ultimately be transferred to new employer plans (resulting in additional fees) through the RCH Program.
Determine that participation in the program is fully consistent with the fiduciary’s obligations under ERISA, including its duties of prudence and loyalty.
Unless the participant affirmatively consentsto the transfer of his RCH Default IRA to the new employer’s plan, RCH will be a fiduciary with respect to that transfer. But, “the plan sponsors of the former and new plans would not be acting as a fiduciary with respect to the decision to transfer the individual’s default IRA into the new employer’s plan.”
Lost or missing participants
As we understand it, RCH will accept distributions to an RCH IRA with respect to participants for which the sponsor no longer has a good address (e.g., where sponsor communications have been returned identified as undeliverable). But, as stated in the 2018 Advisory Opinion, these individuals generally “cannot participate in the portability features of the RCH Program.”
That Advisory Opinion states, however, that “RCH’s services include ongoing participant address validation searches via automated checks of National Change of Address records, two separate commercial locator databases, and RCH internal databases. These searches occur twice in the first year a participant account is entered into the RCH system and once a year thereafter. RCH will also perform manual Internet-based search activities if a valid address is not obtained from the automated checks.” According to the preamble to the PTE proposal, if through this process, RCH obtains a valid address, “RCH will … reintroduce the individual to the Program upon receipt of a valid address.”
These procedures are, in effect, specific to the RCH Program and the RCH PTE. It does not appear that DOL is in any way proposing that by using RCH a sponsor may discharge its own missing participant search obligation. But it’s an obvious question: if RCH is doing a (relatively robust) search for “missing participants” who are to receive a 401(a)(31)(B) distribution, shouldn’t that satisfy the sponsor’s search obligation?
While mandatory distributions in excess of $1,000 (and not in excess of $5,000) generally must be distributed to an IRA, balances of $1,000 and under may generally be “cashed out.” Where a sponsor does not have a good address for a participant with a $1,000-or-under balance, or the check sent to the participant remains uncashed for a long period of time, distribution to the RCH IRA Program may provide a viable alternative distribution strategy.
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We will continue to follow this issue.