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On November 7, 2018, DOL published a Notice of Proposed Exemption Involving Retirement Clearinghouse, LLC (RCH), addressing a potential prohibited transaction issue presented by RCH’s clearinghouse “locate, match, and transfer” model.
In this article we discuss the recently proposed Prohibited Transaction Exemption (PTE) for RCH’s clearinghouse, its significance for sponsors generally and for ongoing issues with respect to missing participants specifically. We begin with a discussion of the 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 with a Default IRA who 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.
RCH is requesting the PTE for the “Transfer Fee” it charges with respect to this last transaction – the transfer to the new plan.
The preamble to the PTE proposal states that “Individuals that are ‘lost’or ‘missing’do not participate in the RCH Program.” In a footnote, the PTE describes the following RCH missing participant protocols:
If RCH sends a Mandatory Distribution Letter to an individual’s last known address and it is returned to RCH as undeliverable, RCH removes the individual from the portability features of the Program. RCH thereafter performs 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’s account is entered into the RCH system and once a year thereafter. RCH will also perform manual internet based search activities in cases where a valid participant address is not obtained from the automated database checks. RCH will only reintroduce the individual to the Program upon receipt of a valid address.
These procedures are, in effect, specific to the RCH program and to the individual PTE it is requesting. 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?
RCH also 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.”
With respect to the transfer of assets to the new employer’s plan, however, DOL stated: “it is the view of the Department that 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.” [Emphasis added.]
Finally, DOL stated that, unless the participant affirmatively consents to the transfer of his RCH Default IRA to the new employer’s plan, RCH will be a fiduciary with respect to that transfer.
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 the “lost and found” legislation that has been introduced in Congress.