[Federal Register Volume 89, Number 19 (Monday, January 29, 2024)]
[Proposed Rules]
[Pages 5624-5672]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-01208]



[[Page 5623]]

Vol. 89

Monday,

No. 19

January 29, 2024

Part II





Department of Labor





-----------------------------------------------------------------------





Employee Benefits Security Administration





-----------------------------------------------------------------------





29 CFR Part 2550





Automatic Portability Transaction Regulations; Proposed Rule

  Federal Register / Vol. 89 , No. 19 / Monday, January 29, 2024 / 
Proposed Rules  

[[Page 5624]]


-----------------------------------------------------------------------

DEPARTMENT OF LABOR

Employee Benefits Security Administration

29 CFR Part 2550

RIN 1210-AC21


Automatic Portability Transaction Regulations

AGENCY: Employee Benefits Security Administration (EBSA), Labor.

ACTION: Notice of proposed rulemaking.

-----------------------------------------------------------------------

SUMMARY: This document contains a proposed rule that would implement 
the statutory prohibited transaction exemption under section 4975 of 
the Internal Revenue Code (Code) for certain automatic portability 
transactions. Section 120 of the SECURE 2.0 Act of 2022 amended Code 
section 4975 to add a statutory exemption for the receipt of fees and 
compensation by an automatic portability provider for services provided 
in connection with an automatic portability transaction. Specifically, 
Code section 4975(d)(25) provides prohibited transaction relief if the 
conditions set forth in Code section 4975(f)(12) are met. The 
Department of Labor is proposing this regulation because, with certain 
exceptions not relevant here, section 102 of Reorganization Plan No. 4 
of 1978 transfers the authority of the Secretary of the Treasury to 
issue certain regulations, rulings, opinions, and exemptions under Code 
section 4975 to the Secretary of Labor. Consistent with this transfer 
of authority, Congress authorized and directed the Department of Labor 
to issue regulations under Code section 4975 to implement provisions of 
section 120 of the SECURE 2.0 Act.

DATES: Comments on these proposed rules are due on March 29, 2024.

ADDRESSES: EBSA encourages interested persons to submit their comments 
on these proposed rules online. You may submit comments, identified by 
RIN 1210-AC21, by either of the following methods:
    Federal eRulemaking Portal: www.regulations.gov. Follow the 
instructions for submitting comments.
    Mail: Office of Regulations and Interpretations, Employee Benefits 
Security Administration, Room N-5655, U.S. Department of Labor, 200 
Constitution Avenue NW, Washington, DC 20210, Attn: Automatic 
Portability Regulations RIN 1210-AC21.
    Instructions: All submissions must include the agency name and 
Regulatory Identifier Number RIN 1210-AC21 for this rulemaking. If you 
submit comments online, do not submit paper copies. All comments 
received will be posted without change on www.regulations.gov and 
www.dol.gov/agencies/ebsa and will be made available for public 
inspection at the Public Disclosure Room, N-1513, Employee Benefits 
Security Administration, U.S. Department of Labor, 200 Constitution 
Avenue NW, Washington, DC 20210.
    Warning: Do not include any personally identifiable or confidential 
business information in your comment that you do not want publicly 
disclosed. Comments are public records that are posted online as 
received and can be retrieved by most internet search engines.
    Docket: Go to the Federal eRulemaking Portal at https://www.regulations.gov for access to the rulemaking docket, including any 
background documents and the plain-language summary of the proposed 
rule of not more than 100 words in length required by the Providing 
Accountability Through Transparency Act of 2023.

FOR FURTHER INFORMATION CONTACT: Scott Ness, Office of Regulations and 
Interpretations, Employee Benefits Security Administration, (202) 693-
8500 or Joseph Brennan, Office of Exemption Determinations, Employee 
Benefits Security Administration, (202) 693-8456. These are not toll-
free numbers.

SUPPLEMENTARY INFORMATION:

A. Background Regarding Automatic Portability Transactions

    Section 120 of the SECURE 2.0 Act of 2022 (SECURE 2.0 Act) \1\ 
amended Internal Revenue Code (Code) section 4975 to add a statutory 
prohibited transaction exemption for the receipt of fees and 
compensation by an ``automatic portability provider'' for services 
provided in connection with an ``automatic portability transaction.'' 
Specifically, Code section 4975(d)(25) provides prohibited transaction 
relief if the conditions set forth in Code section 4975(f)(12) are met. 
In the retirement plan context, portability refers to the process of 
transferring workers' retirement savings from one tax-advantaged plan 
or account to another when their covered service with an employer 
terminates (e.g., from a traditional 401(k) plan account to a 
traditional individual retirement plan--such as an individual 
retirement account or annuity described in Code section 408(a) or (b) 
(IRA)--or from a Roth 401(k) plan account to a Roth IRA. As described 
in more detail below, the term ``automatic portability transaction'' 
means a transaction in which mandatory distributions pursuant to Code 
section 401(a)(31)(B)(i) from an employer-sponsored retirement plan to 
an IRA established on behalf of an individual are subsequently 
transferred to an eligible employer-sponsored plan in which such 
individual is an active participant, after such individual has been 
given advance notice of the transfer and has not affirmatively opted 
out of such transfer. According to the most recent Department of Labor 
(Department) annual report (Form 5500) data, there are an estimated 
635,000 defined contribution plans, covering an estimated 86.6 million 
participants with account balances totaling $9.3 trillion in assets.\2\ 
With the proliferation of these accounts, there is a particular need 
for this type of automatic portability solution to help ensure 
participants remain connected to their retirement savings when they 
change jobs.\3\
---------------------------------------------------------------------------

    \1\ Public Law 117-328, Dec. 29, 2022, Division T.
    \2\ 2021 Form 5500 Data, U.S. Department of Labor.
    \3\ Although the Department believes this body of plans is the 
one primarily relevant for purposes of the application of the 
statutory exemption, the Department notes that additional defined 
contribution plans that do not file a Form 5500 or Form 5500-SF and 
certain defined benefit plans are eligible to make mandatory 
distributions. See the regulatory impact analysis sections in this 
document for a discussion of the plans and participants impacted by 
this proposed regulation.
---------------------------------------------------------------------------

1. Mandatory Distributions of Small Account Balances

    Under the Code, qualified retirement plans are permitted to include 
provisions requiring an immediate distribution to a separating 
participant without the participant's consent if the present value of 
the participant's vested accrued benefit does not exceed $5,000 \4\ 
(for distributions made after December 31, 2023, the $5,000 threshold 
is increased to $7,000).\5\ These transactions are generally referred 
to as ``mandatory distributions.''
---------------------------------------------------------------------------

    \4\ Code sections 411(a)(11) and 417(e). See Code section 
411(a)(11)(D) for circumstances where the amount of a distribution 
may be greater than $5,000 if a participant made a previous roll-in 
to a plan from an IRA. In such circumstances, the roll-in funds are 
not considered in determining the $5,000 vested accrued balance, so 
a larger amount of assets could be subject to a mandatory 
distribution under the terms of the plan.
    \5\ See SECURE 2.0 Act Sec. 304, updating dollar limit for 
mandatory distributions.
---------------------------------------------------------------------------

    Code section 401(a)(31)(B) provides that a trust will not 
constitute a qualified trust unless the plan of which the trust is a 
part provides that: (1) if a mandatory distribution of more than $1,000 
is to be made; and (2) the participant does not elect to have such 
distribution paid directly to an eligible

[[Page 5625]]

retirement plan or to receive the distribution directly, then (3) the 
plan administrator must transfer such distribution to an IRA of a 
designated trustee or issuer.\6\ These distributions are referred to as 
``automatic rollovers of mandatory distributions.'' Code section 
401(a)(31)(B)(i) requires the plan administrator to notify the 
participant in writing, either separately or as part of the notice 
required under Code section 402(f), that the participant may transfer 
the distribution to another IRA.\7\ Code section 402(f)(1)(A) requires 
plan administrators to provide a participant with a written notice 
within a reasonable period of time before making an automatic rollover 
of a mandatory distribution explaining, among other things, the 
following: (1) the Code provisions under which the participant may 
elect to have the distribution transferred directly to an eligible 
retirement plan and that if an election is not made, such automatic 
rollover of a mandatory distribution is subject to the provisions of 
Code section 401(a)(31)(B); (2) the provision requiring income tax 
withholding if the distribution is not directly transferred to an 
eligible retirement plan; and (3) the provisions under which the 
distribution will not be taxed if the participant transfers the 
distribution amount (including amounts withheld under Code section 
3405) to an eligible retirement plan within 60 days of receipt.\8\
---------------------------------------------------------------------------

    \6\ Code section 401(a)(31)(B)(i) requires the transfer be made 
to an ``individual retirement plan,'' defined by Code section 
7701(a)(37) as an individual retirement account described in Code 
section 408(a) and an individual retirement annuity described in 
Code section 408(b). See IRS Notice 2005-5, 2005-1 C.B. 337, 
regarding the applicability of Code section 401(a)(31)(B) to 
retirement plans under Code sections 401(a), 401(k), 403(a), 403(b), 
and 457(b) (https://www.irs.gov/irb/2005-03_IRB).
    \7\ ;Code section 401(a)(31)(B)(i).
    \8\ See 29 CFR 2550.404a-2; Code section 401(a)(31)(B)(i); and 
Code section 402(f).
---------------------------------------------------------------------------

    The Secretary of Labor (the Secretary) issued regulations in 2004 
providing safe harbors for such automatic rollovers of mandatory 
distributions from a plan subject to Title I of the Employee Retirement 
Income Security Act (ERISA) which provide that (1) a plan 
administrator's designation of an IRA to receive the automatic rollover 
and (2) the initial investment choice for the rolled-over funds will be 
deemed to satisfy the fiduciary responsibility provisions of ERISA 
section 404(a) if the safe harbor requirements are met.\9\ 
Specifically, plan administrators complying with the Department's 
fiduciary safe harbor regulations must invest the former participant's 
assets in an investment product designed to preserve principal and 
provide a reasonable rate of return.\10\ An IRA established pursuant to 
Code section 401(a)(31)(B) and/or in compliance with the Department's 
regulation is commonly referred to respectively as a ``Default IRA'' or 
``Safe Harbor IRA.''
---------------------------------------------------------------------------

    \9\ See 69 FR 58017 (Sep. 28, 2004).
    \10\ 29 CFR 2550.404a-2(c)(3)(i).
---------------------------------------------------------------------------

2. Automatic Portability Transactions

    An automatic portability transaction as defined in Code section 
4975(f)(12)(A)(i) builds on the portability concept and is part of a 
larger framework for facilitating the movement of assets from one tax-
favored retirement plan to another. The overall terms and details of an 
automatic portability framework would generally be memorialized in 
contracts with recordkeepers, plan sponsors, and the automatic 
portability provider. A comprehensive automatic portability framework 
includes three key components. First, there is a ``transfer-out'' plan 
that initiates a mandatory distribution. Second, there is an IRA 
established in accordance with Code Section 401(a)(31)(B) (a Default 
IRA) to receive (via a rollover) and hold the distributed funds.\11\ 
Third, there is a ``transfer-in'' plan that receives the roll-in 
distribution from the Default IRA when an IRA owner is matched with an 
account in an eligible employer-sponsored plan at a new employer.
---------------------------------------------------------------------------

    \11\ This may be, but is not necessarily, a Safe Harbor IRA 
established in accordance with the Department's regulations at 29 
CFR 2550.404a-2 because all Safe Harbor IRAs are generally Default 
IRAs, but not all Default IRAs are Safe Harbor IRAs.
---------------------------------------------------------------------------

    To roll in funds from an IRA to the transfer-in plan, the transfer-
in plan must permit such roll-ins. Additionally, an automatic 
portability provider must have access to records for the Default IRA 
and transfer-in plan sufficient to make a match. The general concept of 
``locate, match, and transfer'' involves making queries of cooperating 
recordkeepers' systems to determine if a Default IRA owner has become a 
participant in an employer-sponsored retirement plan through re-
employment (i.e., the transfer-in plan).\12\ If the individual is 
matched with an account in the transfer-in plan, the automatic 
portability transaction is designed for the automatic portability 
provider to roll the individual's IRA assets into the individual's 
account in the transfer-in plan. Automatic portability transactions may 
be particularly important and helpful to workers who have lost contact 
with their retirement plans when they change jobs, cannot be located 
because the plan does not have updated address information or other 
contact information for separated employees, or refuse to respond to 
plan communications about their retirement account. When an automatic 
portability provider transfers funds from the transfer-out plan to a 
Default IRA without a participant's active involvement, the risk of 
funds becoming lost or difficult to locate increases. Therefore, 
automatic portability transactions are intended to benefit participants 
and IRA owners that are unresponsive or considered missing.\13\
---------------------------------------------------------------------------

    \12\ The concept of ``locate, match, and transfer'' is discussed 
in more detail below.
    \13\ The Department notes that Code section 4975(f)(12) defines 
an automatic portability transaction with respect to an individual 
that has not affirmatively consented to the transfer. An individual 
who affirmatively consents may still have IRA assets rolled into a 
new plan through the same mechanisms, although it would not 
technically fall within the statutory definition.
---------------------------------------------------------------------------

3. Current DOL Individual Prohibited Transaction Exemption for 
Automatic Portability Transactions

    When an automatic portability provider transfers assets from an IRA 
to a new employer's plan without the IRA owner's affirmative consent, 
the automatic portability provider is exercising fiduciary discretion 
for purposes of the prohibited transaction provisions of the Code.\14\ 
The assessment of a fee against the IRA, in turn, implicates the 
prohibited transaction provisions in Code section 4975(c)(1). The 
Department first issued guidance regarding an automatic portability 
transaction before the enactment of the SECURE 2.0 Act. Retirement 
Clearinghouse (RCH) approached the Department in 2018 for sub-
regulatory guidance and prohibited transaction exemptive relief 
regarding its multi-part automatic portability framework (the RCH 
Program). In response, the Department issued Advisory Opinion 2018-01A 
(AO 2018-01A) \15\ and an administrative prohibited transaction 
exemption (PTE 2019-02) \16\ in connection with the RCH Program. AO 
2018-01A concerned the status of certain parties involved in the RCH 
Program as ``fiduciaries'' within the meaning of ERISA section 3(21)(A) 
and Code section 4975(e)(3).\17\ In AO 2018-01A, the Department stated 
that plan sponsors exercise discretion in their fiduciary capacity and 
would be

[[Page 5626]]

subject to the general fiduciary standards of ERISA when deciding 
whether to participate in the RCH Program. The advisory opinion further 
explained that, without the individual's affirmative consent, RCH acted 
as a fiduciary within the meaning of Code section 4975(e)(3) in 
deciding whether to transfer the assets from an individual's Default 
IRA to the individual's new employer plan.\18\ Furthermore, the 
Department indicated that an individual's failure to respond to RCH's 
communications about a default transfer of the assets in the 
individual's account to the new employer's plan is not tantamount to 
affirmative consent by the individual to the default transfer and does 
not relieve RCH from fiduciary status and related responsibilities.\19\
---------------------------------------------------------------------------

    \14\ See the discussion of AO 2018-01A, below.
    \15\ Available at: https://www.dol.gov/sites/dolgov/files/EBSA/about-ebsa/our-activities/resource-center/advisory-opinions/2018-01a.pdf.
    \16\ See 83 FR 55741 (Nov. 7, 2018) (proposed exemption) and 84 
FR 37337 (July 31, 2019) (granted exemption).
    \17\ AO 2018-01A (Nov. 18, 2018).
    \18\ Id. at 5.
    \19\ Id. at 5-6.
---------------------------------------------------------------------------

    The Department additionally stated in AO 2018-01A that, unlike the 
Department's automatic safe harbor regulations,\20\ which pertain to 
the automatic rollover of an individual's retirement plan mandatory 
distribution into an IRA, no similar statutory or regulatory provision 
provides relief from fiduciary responsibility for the ``default'' 
transfer of assets from the Default IRA to a new employer's plan.\21\ 
Therefore, it was necessary for RCH to receive a prohibited transaction 
exemption from the Department in order for RCH to receive a fee or 
other compensation when it exercised fiduciary authority to make the 
default transfer of assets from the Default IRA to a new employer's 
plan.\22\ At RCH's request, the Department issued PTE 2019-02, an 
administrative exemption that provides such prohibited transaction 
relief for RCH.\23\ Due to the novelty of the RCH Program, the 
Department limited the relief provided in PTE 2019-02 to a five-year 
term, which expires on July 31, 2024. To receive prohibited transaction 
relief beyond the five-year term, RCH would need to submit an 
additional individual administrative exemption request to the 
Department.
---------------------------------------------------------------------------

    \20\ 29 CFR 2550.404a-2 and 2550.404a-3.
    \21\ Id. at 6. The Department notes that Code section 
4975(f)(12) applies only to transfers made under Code section 
401(a)(31)(B)(i), so the fiduciary relief provided in 29 CFR 404a-3 
is not applicable to transactions covered by 4975(d)(25).
    \22\ AO 2018-01A addressed the fiduciary status of an automatic 
portability provider but did not address whether a prohibited 
transaction would occur.
    \23\ 84 FR 37337.
---------------------------------------------------------------------------

B. Overview of the SECURE 2.0 Act Statutory Exemption for Automatic 
Portability Transactions

    Section 120 of the SECURE 2.0 Act added a statutory exemption in 
Code section 4975 that allows an automatic portability provider to 
receive a fee in connection with executing an automatic portability 
transaction that largely mirrors the relief the Department granted RCH 
in PTE 2019-02. The availability of the statutory exemption to all 
automatic portability providers that meet its requirements generally 
eliminates the need for RCH, and other automatic portability providers, 
to request an administrative PTE for relief similar to the relief the 
Department granted in PTE 2019-02. Specifically, the statutory 
exemption in Code section 4975(d)(25) provides a conditional prohibited 
transaction exemption from the restrictions in Code sections 
4975(c)(1)(D) and (E) for an automatic portability provider to receive 
fees and compensation for services provided ``in connection with an 
automatic portability transaction'' if the conditions set forth in Code 
section 4975(f)(12) are met.\24\
---------------------------------------------------------------------------

    \24\ Emphasis added.
---------------------------------------------------------------------------

    Code section 4975(f)(12)(A)(i) generally defines an automatic 
portability transaction as a transfer of assets from a Default IRA \25\ 
to a transfer-in plan after the IRA owner has been given advance notice 
of the transfer and has not affirmatively opted out. The ``transfer-
in'' plan covered by the definition is any employer-sponsored 
retirement plan (other than a defined benefit plan) that is: a 
qualified trust, an annuity plan described in Code section 403(a), an 
eligible deferred compensation plan described in Code section 457(b) 
which is maintained by an eligible employer described in Code section 
457(e)(1)(A), or an annuity contract described in Code section 
403(b).\26\
---------------------------------------------------------------------------

    \25\ The statutory definition specifically references ``an 
individual retirement plan which is established on behalf of an 
individual and to which amounts were transferred under section 
401(a)(31)(B)(i).''
    \26\ These are plans described in clause (iii), (iv), (v), or 
(vi) of Code section 402(c)(8)(B).
---------------------------------------------------------------------------

    Notably, the SECURE 2.0 Act amendment to the Code does not 
specifically include any references to a transfer-out plan (i.e., the 
plan engaging in the mandatory distribution and automatic rollover). As 
discussed above, the existence of a transfer-out plan is a necessary 
precursor to an automatic portability transaction, but the transfer-out 
transaction is already governed by mandatory distribution and automatic 
rollover provisions in the Code that are discussed above, and the 
Department already has provided conditional fiduciary and prohibited 
transaction relief for such transactions under its automatic rollover 
safe harbor regulations.\27\ Similarly, the general fiduciary 
principles regarding an individual's default investments in the 
transfer-in plan and the Department's regulations on qualified default 
investment alternatives will govern the transfer-in plan sponsor's 
responsibilities once the assets are transferred from the individual 
Default IRA into the transfer-in plan.\28\
---------------------------------------------------------------------------

    \27\ 29 CFR 2550.404a-2.
    \28\ 29 CFR 2550.404c-5.
---------------------------------------------------------------------------

    As noted, Code section 4975(d)(25) provides prohibited transaction 
relief if the conditions set forth in Code section 4975(f)(12) are met. 
Specifically, Code section 4975(f)(12) and this proposed regulation 
require:
     the automatic portability provider to acknowledge its 
fiduciary status with respect to the IRA;
     that the automatic portability provider's fees do not 
exceed reasonable compensation;
     restrictions to be placed on an automatic portability 
provider's use of plan participant and IRA owner data;
     participation in the program to be available on the same 
terms for all eligible transfer-in plans;
     the automatic portability provider to conduct at least 
monthly searches for transfer-in plan accounts;
     the automatic portability provider to timely execute 
automatic portability transactions;
     the automatic portability provider's discretion to affect 
the timing or amount of the transfer pursuant to an automatic 
portability transaction to be limited; and
     the automatic portability provider to retain records 
demonstrating it is complying with the exemption conditions, conducting 
an annual audit, and maintaining a website with a list of participating 
recordkeepers and the automatic portability provider's fees.
    Section 120 of the SECURE 2.0 Act also provides that, not later 
than 12 months after the date of its enactment, the Secretary shall 
issue such guidance as may be necessary to carry out the purposes of 
the amendments made by section 120, including regulations or other 
guidance which:
    1. Require an automatic portability provider to provide a notice to 
individuals on whose behalf the default IRA is established in advance 
of the pre-transaction notice;
    2. Require an automatic portability provider to disclose to a 
responsible plan fiduciary information about the

[[Page 5627]]

provider's fees, compensation, and services as required of covered 
service providers pursuant to DOL regulations under ERISA section 408 
(i.e., 29 CFR 2550.408b-2(c));
    3. Require plans involved in the automatic portability transaction 
to fully disclose fees related to an automatic portability transaction 
in its summary plan description or summary of material modifications;
    4. Require plans involved in the automatic portability transaction 
to invest amounts received on behalf of a participant pursuant to an 
automatic portability transaction in the participant's current 
investment election under the plan or, if no election is made or 
permitted, in the plan's qualified default investment alternative under 
the Department's Qualified Default Investment Alternative (QDIA) 
regulations (i.e., 29 CFR 2550.404c-5) or another investment selected 
by a fiduciary with respect to such plan;
    5. Prohibit or restrict the receipt or payment of third-party 
compensation (other than a direct fee paid by a plan sponsor which is 
in lieu of a fee imposed on an IRA owner) by an automatic portability 
provider in connection with an automatic portability transaction;
    6. Prohibit exculpatory provisions in an automatic portability 
provider's contracts or communications with individuals disclaiming or 
limiting liability in the event that an automatic portability 
transaction results in an improper transfer;
    7. Require an automatic portability provider to take actions 
necessary to reasonably ensure that participant and beneficiary data is 
current and accurate;
    8. Limit the automatic portability provider's use of data related 
to automatic portability transactions for any purpose other than the 
execution of such transactions or locating missing participants, except 
as permitted by the Secretary;
    9. Provide for corrections procedures in the event an auditor 
determines the automatic portability provider was not in compliance 
with the statute and related regulations, including deadlines, 
supplemental audits, and corrective actions which may include a 
temporary prohibition from relying on the statutory exemption;
    10. Ensure that participants and beneficiaries receive all the 
required notices and disclosures; and
    11. Make clear that the statutory exemption applies solely to the 
automatic portability transactions described in the statutory 
exemption, and, to the extent the Secretary deems necessary or 
advisable, specify how the application of the exemption relates to or 
coordinates with other statutory provisions, regulations, and 
administrative guidance.\29\
---------------------------------------------------------------------------

    \29\ See Public Law 117-328, Dec. 29, 2022, Division T, Sec. 
120(c).
---------------------------------------------------------------------------

    Some interested stakeholders have communicated to the Department 
that they have already developed products and established procedures 
for an automatic portability service and that they do not believe any 
further guidance from the Department is necessary to effectuate the 
purpose of section 120 of the SECURE 2.0 Act. However, the Department 
believes that regulations, as compared to some other form of guidance, 
are needed to implement section 120(c) of the SECURE 2.0 Act in a 
manner that addresses and reinforces the consumer protections in the 
above list of statutory conditions and requirements. Furthermore, the 
Department believes that these proposed regulations will provide a 
broader cross-section of interested and affected entities with the 
opportunity to formally comment on the proposal, whether implementing 
regulations are necessary, and whether elements of the proposed 
requirements should be modified or eliminated to best support Congress' 
intent in passing the new statutory exemption.

C. Prospective Effect of Implementing Regulations and Interim 
Interpretive Policy

    The Department is proposing that any final rule adopted based on 
this proposal would be effective 60 days after publication in the 
Federal Register and that the requirements of the final rule would have 
prospective applicability. The Department specifically solicits 
comments on whether there should be some delayed applicability date to 
allow for automatic portability providers and plan fiduciaries to make 
any changes to automatic portability programs or related contracts or 
arrangements that may be needed or desired in light of the final rule. 
This approach is intended to make it clear the statutory exemption is 
available in accordance with the effective date of the SECURE 2.0 Act 
while acknowledging that there may be a need to transition contracts or 
arrangements to meet specific requirements of the final rule.
    As noted above, section 120 of the SECURE 2.0 Act directed the 
Secretary to issue such guidance as may be necessary to carry out the 
purposes of the amendments made by section 120 no later than 12 months 
after the date of the enactment of the Act. Compliance with the 
conditions and requirements in Code sections 4975(d)(25) and 
4975(f)(12) is an independent statutory obligation for parties seeking 
their prohibited transaction relief that is not dependent upon the 
issuance of regulations or guidance by the Department. For the period 
from publication of this proposed regulation until after the Department 
issues a final regulation or other applicable administrative guidance, 
automatic portability providers and plan fiduciaries are expected to 
comply with the requirements of Code sections 4975(f)(12) and 
4975(d)(25) using a good faith, reasonable interpretation of the law 
taking into account the list of consumer protection conditions and 
requirements in section 120(c) of the SECURE 2.0 Act.\30\ During that 
period, to the extent an automatic portability provider or plan 
fiduciary believes there is some uncertainty regarding whether the 
automatic portability program or the parties' conduct in connection 
with the program complies with the statutory provisions, the Department 
expects that the provider or fiduciary will strictly adhere to the 
requirements in Code section 4975(f)(12) and act in a manner that 
furthers the financial interests of the affected plan, plan 
participant, or IRA owner taking into account the consumer protection 
conditions and requirements listed in section 120(c) of the SECURE 2.0 
Act.
---------------------------------------------------------------------------

    \30\ The Department expects to issue a final rule before the 
first annual audit would be required pursuant to the requirement in 
Code section 4975(f)(12)(B)(xi)(II) under which an automatic 
portability provider must ``conduct an annual audit, in accordance 
with regulations promulgated by the Secretary of Labor, of automatic 
portability transactions occurring during the calendar year to 
demonstrate compliance with this paragraph and any regulations 
thereunder and identify any instances of noncompliance therewith, 
and shall submit such audit annually to the Secretary of Labor, in 
such form and manner as specified by such Secretary.'' However, 
because a final rule may be published part way through the first 
audit period, the Department specifically solicits comments on 
whether the final rule should provide an alternative pursuant to 
which the submission of the annual audit for the first year could be 
delayed and submitted together with the audit for the second year. 
See, for comparison, 29 CFR 2520.104-50--Short plan years, deferral 
of accountant's examination and report. The Department also requests 
comment on whether certain aspects of this proposal that would be 
subject to audit review should have a specific delayed effective 
date because the aspect of the proposal may take additional time for 
an automatic portability provider to fully implement.
---------------------------------------------------------------------------

D. Overview of the Proposed Regulation

    Certain provisions of ERISA Title I, such as the provisions on 
prohibited transactions, have parallel provisions enacted in Title II 
of ERISA and codified in the Code. When ERISA was passed,

[[Page 5628]]

regulatory authority over Title I resided with the Secretary of Labor 
while regulatory authority over Title II resided with the Secretary of 
the Treasury. To rationalize the administration and interpretation of 
these parallel provisions, Reorganization Plan No. 4 of 1978, 5 U.S.C. 
App., divided the interpretive and rulemaking authority between the 
Secretaries of Labor and of the Treasury, so that, in general, the 
agency with regulatory and interpretive responsibility for a given 
provision of ERISA Title I would also have regulatory and interpretive 
responsibility for the parallel provision in the Code. Among the 
sections transferred to the Department were certain of the prohibited 
transaction provisions (including exemptions) in Code section 4975. 
Title I's prohibited transaction rules, 29 U.S.C. 1106-1108, apply to 
Title I-covered plans, and the Code's corresponding prohibited 
transaction rules, 26 U.S.C. 4975, apply both to Title I-covered 
pension plans that are tax-qualified pension plans, as well as other 
specified tax-advantaged arrangements, including IRAs.
    Although the new automatic portability transaction prohibited 
transaction exemption appears only in Code section 4975 and directly 
pertains to transactions involving IRAs, the Secretary of Labor still 
retains regulatory authority over certain prohibited transaction 
provisions under Code section 4975, as provided in Reorganization Plan 
No. 4 of 1978. Consistent with that authority, section 120 of the 
SECURE 2.0 Act directs the Secretary of Labor to issue regulations and 
guidance related to the new statutory exemption for automatic 
portability transactions.
    Therefore, the proposed regulation would add a new Sec.  
2550.4975f-12 to the Department's fiduciary regulations at 29 CFR part 
2550. The proposed regulation tracks the requirements under Code 
section 4975(f)(12) that must be satisfied in order for the automatic 
portability transaction to be covered by the statutory prohibited 
transaction exemption in Code section 4975(d)(25). Paragraph (a) 
describes the general scope of the statutory exemption and regulation. 
Paragraph (b) sets forth the conditions an automatic portability 
provider must satisfy for a transaction to qualify as an ``automatic 
portability transaction'' and for the exemption to apply. Paragraph (c) 
sets forth proposed annual audit and correction procedure requirements. 
Paragraph (d) sets forth website requirements that must be met for 
automatic portability providers to satisfy the statutory exemption and 
proposed regulation. Paragraph (e) describes prohibitions on the 
automatic portability provider's use of exculpatory provisions in 
contracts or communications disclaiming or limiting their liability in 
the event an improper transfer of assets in connection with an 
automatic portability transaction occurs. Paragraph (f) sets forth the 
record retention requirement automatic portability providers must meet 
to satisfy the statutory exemption and proposed regulation. Paragraph 
(g) defines certain terms used in the proposed regulation.

1. Scope of Prohibited Transaction Relief

    The relief provided by Code section 4975(d)(25) and the proposed 
exemption is limited to Code sections 4975(c)(1)(D) and (E) for the 
receipt of fees and compensation by an automatic portability provider 
for services provided in connection with an automatic portability 
transaction and Code section 4975(c)(1)(F) for the receipt of fees by 
an automatic portability provider from a plan sponsor in lieu of fees 
imposed on an IRA owner. Neither the statutory exemption in Code 
section 4975(d)(25) nor the proposed regulation contains an exemption 
for other acts described in Code section 4975(c)(1)(D) and (E) 
(relating to the transfer to, or use by or for the benefit of, a 
disqualified person of the income or assets of a plan and to 
fiduciaries dealing with the income or assets of plans in their own 
interest or for their own account) that are not in connection with the 
automatic portability transaction. Additionally, neither the statutory 
exemption in Code section 4975(d)(25) nor the proposed regulation 
contains an exemption for acts described in Code section 4975(c)(1)(F) 
(relating to fiduciaries receiving consideration for their own personal 
account from any party dealing with a plan in connection with a 
transaction involving the income or assets of the plan) except for the 
limited relief for a fee paid by a plan sponsor, noted above. Such acts 
described in Code sections 4975(c)(1)(D), (E), and (F) are separate 
transactions not described in Code section 4975(d)(25). Further, 
neither the statutory exemption in Code section 4975(d)(25) nor this 
proposed regulation contains an exemption from other provisions of the 
Code, such as section 401, or other provisions of law which may impose 
requirements or restrictions relating to the transactions that are 
exempt under Code section 4975(d)(25). As defined in Code section 
4975(f)(12)(A)(ii) and in this proposed regulation, an automatic 
portability provider is a person, other than an individual, who 
executes the automatic portability transaction on the same terms to all 
transfer-in plans and Default IRAs that use the provider.
    The Department interprets the ``in connection with'' language from 
Code section 4975(d)(25) to include only those services and related 
fees and compensation that would not otherwise occur or be incurred if 
not for the automatic portability transaction or anticipation of a 
future automatic portability transaction. The Department requests 
comments on whether additional specificity regarding the types of 
services that are covered by Code section 4975(d)(25) should be 
included, for example, by a definition added to the regulations that 
identifies the types of services. Further, if a commenter believes more 
specificity would be helpful, the Department requests that the 
commenter include a proposed definition, list, or other identification 
of the services that should be covered.

2. Acknowledgment of Fiduciary Status

    Code section 4975(f)(12)(B)(i) and this proposed regulation 
requires an automatic portability provider to acknowledge that it is a 
fiduciary with respect to the IRA in an automatic portability 
transaction.\31\ Pursuant to the statutory text authorizing the 
Secretary to specify the time and format of such an acknowledgment, 
paragraph (b)(1) of this proposed regulation requires the automatic 
portability provider to acknowledge in writing that it is a fiduciary 
as defined in Code section 4975(e)(3) upon being engaged by a plan 
fiduciary, as well as in the required notices and disclosures, 
described below, to plan participants and IRA owners. This fiduciary 
acknowledgement is designed to ensure that the fiduciary nature of the 
relationship is clear to the automatic portability provider and 
responsible plan fiduciaries as well as to affected participants and 
IRA owners.\32\ The automatic portability provider's acknowledgment of 
its fiduciary status may include a description of the scope of the 
fiduciary status of the automatic portability provider and may explain 
that, consistent with Code section 4975(e)(3), the automatic 
portability provider is not a fiduciary under the Code's definition 
with respect to any

[[Page 5629]]

assets or administration of the plan or IRA with respect to which the 
automatic portability provider does not (1) have any discretionary 
authority, discretionary control, or discretionary responsibility (2) 
exercise any authority or control, and (3) render investment advice for 
a fee or other compensation, nor have any authority or responsibility 
to render such investment advice. The Department notes that it is 
possible that the automatic portability provider may have fiduciary 
status under other laws, e.g., the Federal securities laws. The 
acknowledgment required by the exemption does not reach such status but 
the Department notes that the acknowledgment required by the exemption 
should not be presented in a way that misinforms or misleads 
individuals regarding potential fiduciary status under such other laws.
---------------------------------------------------------------------------

    \31\ As described in Code section 4975(f)(12)(A)(i)(I).
    \32\ This is generally when an individual fails to respond to 
notices and the automatic portability provider directs the transfer 
of assets and assesses fees. See AO 2018-01 for a more detailed 
description of fiduciary status in automatic portability 
arrangements.
---------------------------------------------------------------------------

3. Fees

(a) Reasonable Compensation
    Subject to two exceptions described below, Code section 
4975(f)(12)(B)(ii)(I) and this proposed regulation permit an automatic 
portability provider to receive fees and compensation for services 
provided in connection with the automatic portability transaction, 
provided that the fees and compensation do not exceed reasonable 
compensation. The proposed regulations incorporate the existing 
standard regarding reasonable compensation for the provision of 
services found at 26 CFR 54.4975-6(e).
(b) Fee and Compensation Disclosure Requirement
    This proposed regulation mirrors the statutory text by requiring 
the automatic portability provider to disclose to a responsible plan 
fiduciary of the transfer-in plan the information that a service 
provider to the plan would be required to disclose under 29 CFR 
2550.408b-2(c). For purposes of this requirement, the disclosures would 
relate to the automatic portability provider's services as an automatic 
portability provider and not other services that may be provided. For 
purposes of this disclosure requirement, the automatic portability 
provider will be considered to be a ``covered service provider'' under 
2550.408b-2(c)(1)(iii)(A) and (B) providing services as a fiduciary and 
as a recordkeeper. Since the automatic portability provider would 
generally be precluded from receiving third-party compensation under 
other provisions of the proposal, the Department does not believe the 
provisions of 2550.408b-2(c) related to a covered service provider 
under 2550.408b-2(c)(1)(iii)(C)--``other services for indirect 
compensation''--would be relevant. The Department seeks comments on 
whether there are particular compliance issues under 2550.408b-2(c) for 
automatic portability providers that the Department should specifically 
address in a final rule.
(c) Prohibition of Fees for Automatic Portability Transactions 
Involving a Plan of the Automatic Portability Provider or Its 
Affiliates
    The statute prohibits an automatic portability provider from 
receiving any fees or compensation in connection with an automatic 
portability transaction involving a plan which is sponsored or 
maintained by the automatic portability provider. In other words, the 
automatic portability provider may execute such transactions, but it 
may not receive fees for doing so. In the Department's view, the 
statutory reference to the automatic portability provider in this 
circumstance should be read to include any affiliates of the automatic 
portability provider. Accordingly, paragraph (b)(2)(iv) of the proposed 
regulation mirrors the statutory provision by prohibiting an automatic 
portability provider from receiving any fees or compensation in 
connection with an automatic portability transaction involving a plan 
that is sponsored or maintained by the automatic portability provider 
but includes plans maintained by any of the automatic portability 
provider's affiliates.
(d) Prohibition on Receipt of Third-Party Compensation in Connection 
With Automatic Portability Transactions
    Section 120(c)(5) of the SECURE 2.0 Act provides the Secretary with 
the regulatory authority to prohibit or restrict the receipt or payment 
of third-party compensation (other than a direct fee paid by a plan 
sponsor that is in lieu of a fee imposed on an IRA owner) by an 
automatic portability provider in connection with an automatic 
portability transaction. The proposed regulation includes text that 
mirrors the statutory text allowing a direct fee to be paid by a plan 
sponsor if it is in lieu of a fee imposed on an IRA owner. The proposed 
regulation includes one exception to the general restriction on third-
party compensation. Specifically, under the proposal, an automatic 
portability provider would be able to share a portion of its fee or 
compensation with another automatic portability provider as long as the 
overall fee paid, directly or indirectly, by the plan or IRA does not 
increase as compared to the fees disclosed in the description provided 
to the plan administrator and in the initial enrollment notice provided 
to the IRA owner.
    The third-party compensation restriction in the proposed regulation 
is limited to fees and compensation in connection with the automatic 
portability transaction and would not prevent an automatic portability 
provider from receiving fees for services provided to an IRA or 
employer-sponsored retirement plan that are in addition to services 
provided in connection with the automatic portability transaction. 
However, the prohibited transaction relief provided in Code section 
4975(d)(25) applies only to fees and compensation received in 
connection with the automatic portability transaction. The automatic 
portability provider would need to rely upon other statutory or 
administrative exemptions if it receives fees for providing additional 
services that involve prohibited transactions.

4. Data Usage and Protection

    Code section 4975(f)(12)(B)(iii) prohibits an automatic portability 
provider from using data it obtains in connection with automatic 
portability transactions for any purpose other than to execute the 
automatic portability transactions or locate missing participants as 
part of its automatic portability service, except as permitted by the 
Secretary. The automatic portability provider is specifically 
prohibited by the statute from marketing or selling data relating to 
the IRA or to the plan participants. Paragraph (b)(3) of the proposed 
regulation parallels the statutory language by not permitting the use 
of data for any purpose other than the execution of automatic 
portability transactions or locating missing participants. For purposes 
of the restriction on marketing or selling IRA data, the Department 
interprets this to include specific data regarding the IRA owner. The 
Department is not proposing any exceptions to this restriction. 
However, the Department welcomes comments on whether the regulations 
should permit use of data for other purposes, and, if it should, what 
those other purposes would be, whether allowing use of data for those 
purposes would provide a benefit to IRA owners and plan participants, 
and what regulatory protections should be applied to that use of the 
data.
    In support of the obligation to limit use of data, the proposed 
regulation provides that the automatic portability provider must take 
steps that a prudent fiduciary would take to safeguard plan participant 
and IRA data in its

[[Page 5630]]

possession or under its control.\33\ The proposal further would 
require, if data were improperly accessed, that the automatic 
portability provider take appropriate remedial actions to safeguard the 
data based on the sensitivity of the accessed data and the nature and 
severity of the breach. The Department seeks comment on whether the 
regulation should include specific data security requirements, such as 
a requirement to carry insurance to cover data breaches.
---------------------------------------------------------------------------

    \33\ See generally Cybersecurity Program Best Practices at 
https://www.dol.gov/sites/dolgov/files/ebsa/key-topics/retirement-benefits/cybersecurity/best-practices.pdf; Online Security Tips at 
https://www.dol.gov/sites/dolgov/files/ebsa/key-topics/retirement-benefits/cybersecurity/online-security-tips.pdf; and Tips for Hiring 
a Service Provider with Strong Cybersecurity Practices at https://www.dol.gov/sites/dolgov/files/ebsa/key-topics/retirement-benefits/cybersecurity/tips-for-hiring-a-service-provider-with-strong-security-practices.pdf.
---------------------------------------------------------------------------

5. Open Participation

    Paragraph (b)(4) of this proposed regulation parallels Code section 
4975(f)(12)(B)(iv) by requiring as a condition of the availability of 
the exemption that the automatic portability provider offer automatic 
portability transactions on the same terms to any transfer-in plan. 
This proposed requirement does not mean that fees can never change. 
Rather, at any given time, the fees paid for automatic portability 
transactions should be the same for any transfer-in plan that engages 
the automatic portability provider.
    Based on the general regulatory authority granted to the Secretary 
in section 120(c) of the SECURE 2.0 Act, the Department is also 
proposing that open participation would require that the automatic 
portability provider not restrict or limit the ability of an employer-
sponsored retirement plan, IRA provider (including trustees under Code 
section 408(a), custodians under Code section 408(h), or issuers under 
Code section 408(b)), or recordkeeper to engage other automatic 
portability providers to execute automatic portability transactions. In 
proposing this requirement, the Department recognizes that numerous 
service providers that have existing systems for automatic rollovers of 
mandatory distributions may want to supplement their services with 
automatic portability transaction features. Plan fiduciaries or service 
providers may determine that there are cost-effective ways to integrate 
services of more than one automatic portability provider to increase 
the likelihood of successfully locating participant funds for transfer 
into the transfer-in plan.

6. Notices

(a) Notice to the Department
    The Department has an obligation under the statute to monitor and 
enforce the audit reporting requirements for automatic portability 
providers relying on the exemption, including deadlines for submitting 
the audit report to the Department. Accordingly, under the proposed 
regulation, within 90 calendar days of the date that the automatic 
portability provider begins operating an automatic portability 
transaction program that is intended to rely on prohibited transaction 
relief provided by section 4975(d)(25), the automatic portability 
provider must notify the Secretary at [email protected] that it 
is operating as an automatic portability provider in accordance with 
Code section 4975(d)(25). The automatic portability provider must 
report the legal name of each business entity relying upon the 
exemption and any name (e.g., trade or Doing Business As (DBA) name) 
under which the business entity may be operating. This notification 
needs to be updated to report a change to the legal or operating 
name(s) of the automatic portability provider that is relying upon the 
exemption. The automatic portability provider will have 90 calendar 
days to report a change to the legal or operating name. The automatic 
portability provider may also notify the Department if it is no longer 
operating in reliance upon the exemption. The notification requirement 
will allow the Department to monitor and enforce the audit report 
requirements.
(b) Model Description of Automatic Portability Program for Use in 
Summary Plan Descriptions by Transfer-Out and Transfer-In Plans
    In the Department's view, to comply with the summary plan 
description (SPD) content requirements in 29 CFR 2510.102-2 that the 
SPD ``shall be sufficiently comprehensive to apprise the plan's 
participants and beneficiaries of their rights and obligations under 
the plan,'' participating transfer-out plans and transfer-in plans 
subject to ERISA's SPD requirements must include a description of the 
automatic portability program in the plan's SPD. Further, section 
120(c)(3) of the SECURE 2.0 Act provides the Secretary with authority 
to require a transfer-in plan to fully disclose fees related to an 
automatic portability transaction in its SPD or summary of material 
modifications (SMM) to the extent an SMM is used to fulfill this SPD 
disclosure requirement.
    The Department's existing regulatory safe harbors for automatic 
rollovers by the transfer-out plan already require plan administrators 
for ERISA Title I plans to provide participants with an SPD or SMM that 
describes the plan's automatic rollover provisions. The SPD or SMM also 
must include: (1) an explanation that the mandatory distribution will 
be invested in an investment product designed to preserve principal and 
provide a reasonable rate of return and liquidity; (2) a statement 
indicating how fees and expenses attendant to the IRA will be allocated 
(i.e., the extent to which expenses will be borne by the IRA owner 
alone or shared with the distributing plan or plan sponsor); (3) the 
name, address and phone number of a plan contact (to the extent not 
otherwise provided in the SPD or SMM) for further information 
concerning the plan's automatic rollover provisions; and (4) the IRA 
provider and the fees and expenses attendant to the IRA.
    The Department proposes a requirement that the automatic 
portability provider provide the administrator of participating plans 
with a description of the automatic portability program, including fees 
and expenses, that the administrator could use in fulfilling its SPD 
obligations, as relevant. The Department requests comments on whether 
the final rule should set forth specific content requirements for an 
automatic portability provider model notice.
(c) Notices to IRA Owner
    This proposed regulation specifies two notices an automatic 
portability provider is required to send to IRA owners before an 
automatic portability transaction is executed and one notice after the 
automatic portability transaction is executed, as described below.
i. Initial Enrollment Notice
    Section 120(c)(1) of the SECURE 2.0 Act authorizes the Secretary to 
require the automatic portability provider to provide a notice to IRA 
owners in advance of the pre-transaction notice specified in Code 
section 4975(f)(12)(B)(v). Consistent with this authority, this 
proposed regulation includes a requirement that an automatic 
portability provider provide an ``initial enrollment notice'' to the 
IRA owner no later than 15 calendar days after the IRA is enrolled in 
an arrangement that includes an automatic portability transaction 
component. The Department assumes that the date of enrollment will 
generally be the date that an IRA is established in connection with a 
mandatory distribution. However, for IRAs that were established

[[Page 5631]]

prior to the existence of the new statutory exemption, or established 
and then later added into an automatic portability arrangement, the 
enrollment date may be a later date (e.g., when the IRA provider begins 
acting as an automatic portability provider or engages an automatic 
portability provider to begin including the IRA in a locate-and-match 
service).
    The Department requests comments regarding the 15-calendar-day 
timeframe for sending the initial enrollment notice, particularly if 
the automatic portability provider is not the provider of the IRA. In 
this regard, the Department requests comments about the process by 
which IRAs that are not established with or provided by the automatic 
portability provider would engage an automatic portability provider and 
how the automatic portability provider would ensure that such a notice 
would be provided.
    The Department proposes that the initial enrollment notice would 
include a variety of information regarding the nature of the automatic 
portability transaction and additional aspects of the IRA arrangement 
that are required to be included in the pre-transaction notice, 
discussed below. The Department anticipates that this notice 
requirement could be satisfied by including the information specified 
in proposed paragraph (b)(5)(iv) in the notice required under Code 
section 401(a)(31)(B) upon the establishment of a Default IRA.
ii. Pre-Transaction Notice
    Paragraph (b)(5)(iv) of the proposed regulation incorporates the 
statutory provisions of Code section 4975(f)(12)(B)(v) requiring the 
automatic portability provider to provide a pre-transaction notice to 
the IRA owner at least 60 days before an automatic portability 
transaction occurs with information describing the automatic 
portability transaction, fees to be received in connection with the 
transaction, the right to elect not to participate in an automatic 
portability transaction, distribution options, deadlines for making 
elections, a telephone number for the automatic portability provider, 
and the right to and procedures for designating a beneficiary.
    The proposed regulation provides additional clarification regarding 
the timing of the pre-transaction notice by requiring that the notice 
be sent no earlier than 90 days in advance of the automatic portability 
transaction. This is intended to ensure that the notice is sent 
sufficiently close to the actual execution of the automatic portability 
transaction so that the assets of the IRA do not remain there for an 
unreasonable period waiting to be rolled-in to the transfer-in plan.
    The Department seeks comments on the proposed pre-transaction 
notice and whether additional information should be required. The 
Department is particularly interested in comments regarding whether 
specific information should be provided to the IRA owner explaining the 
significance of transferring assets into an employer-sponsored plan as 
opposed to retaining those assets in an IRA, as well as any plain 
language examples to help the IRA owner better understand the various 
aspects of an automatic portability arrangement. Relatedly, the 
Department requests comment on whether model disclosures or model 
language for the pre-transaction notice would be helpful and encourages 
commenters who support a model disclosure or model language, model 
charts, or other formats submit suggestions for the model language, 
chart or format they believe would help ensure readability and 
accessibility for the target audience. The Department also requests 
comment on whether a final rule should specify a minimum amount of time 
that the IRA owner has to make an election to opt out of the automatic 
portability transaction, e.g., no sooner than 10 days before the 
anticipated execution of the automatic portability transaction 
identified in the pre-transaction notice.
iii. Post-Transaction Notice
    This post-transaction notice, which would occur after a transfer-in 
plan receives an individual's IRA funds, is the last notice that the 
automatic portability provider would be required to provide to the IRA 
owner or plan participant. Paragraph (b)(5)(v) of this proposed 
regulation incorporates the statutory requirements in 
4975(f)(12)(B)(vi). The statute requires that no later than three 
business days after the completion of an automatic portability 
transaction, the automatic portability provider shall provide notice to 
the IRA owner of the actions taken by the automatic portability 
provider with respect to the IRA. The statute also requires the notice 
to include all relevant information regarding the location and amount 
of any transferred assets, a statement of fees charged against the IRA 
or transfer-in plan account in connection with the transfer, and a 
contact phone number for the automatic portability provider.
    The proposed regulation provides some minor clarifying language 
intended to explain the Department's view regarding the information 
needed to satisfy the statutory language. For instance, the proposed 
regulation adds that (1) a description of the actions taken by the 
automatic portability provider specifically includes that the 
individual was matched with an account in a new employer plan, (2) 
relevant information regarding the amount of transferred assets 
includes the name of the employer and name of the plan where the assets 
were transferred, and (3) the telephone number required by the 
statutory text is a customer service telephone number.
    The Department requests comment on whether model disclosures or 
model language for the post-transaction notice would be helpful and 
encourages commenters to submit language or formats they believe would 
help ensure readability and accessibility for the target audience.
(d) Consolidation of Automatic Portability Provider Notices With Other 
Disclosures
    The Department understands that an automatic portability provider 
may also be the designated provider of Default IRAs for a transfer-out 
plan and may be providing notices required by the Code and/or the 
Department's Safe Harbor Regulation. To the extent that the automatic 
portability provider has been engaged to provide notices to 
participants in connection with mandatory distributions on behalf of 
employer-sponsored plans, the notices and disclosures to individuals 
required by the statutory exemption and this proposed regulation would 
not have to be provided separately. However, the automatic portability 
provider should take care to ensure that the information required by 
the notice provisions to individuals in this proposed regulation is 
clearly displayed to reduce possible confusion with other provided 
information.
(e) Accessibility of Disclosures to Participants and IRA Owners
    Paragraph (b)(5)(vi) of this proposed regulation parallels the 
statutory text of Code section 4975(f)(12)(B)(vii) by requiring all 
required notices to participants and IRA owners to be written in a 
manner calculated to be understood by the average person and not 
include inaccurate or misleading statements. The proposed regulation 
includes provisions intended to clarify and explain this requirement. 
In the Department's view, the idea of an ``average person'' in the 
context of understanding the notices under the exemption should be read 
as the average person receiving the notices rather than an abstract 
concept of an average person at large. Accordingly, the proposed

[[Page 5632]]

regulation speaks in terms of the average intended recipient of the 
notices. The proposal also specifies that the disclosures must be 
accurate, not misleading,\34\ and sufficiently comprehensive to apprise 
the individual of their rights and obligations under the automatic 
portability program, must not be formatted to have the effect of 
misleading, misinforming, or failing to inform the recipient, and be 
written in a culturally and linguistically appropriate manner (see 
discussion below). In fulfilling these requirements, the proposed 
regulation requires the automatic portability provider to exercise 
considered judgment and discretion by taking into account such factors 
as the level of comprehension and education of the typical intended 
recipient and the complexity of the terms of the program. Consideration 
of these factors will usually require the limitation or elimination of 
technical jargon and of long, complex sentences, the use of clarifying 
examples and illustrations, the use of clear cross references, and a 
table of contents. These proposed requirements are modeled on the 
Department's regulation governing the style and format of SPDs that 
plan administrators are required to provide plan participants and 
beneficiaries.\35\
---------------------------------------------------------------------------

    \34\ The Department would consider it misleading, for example, 
for the automatic portability provider to include in notices to 
individuals any exculpatory clauses or indemnification provisions 
that are not permitted under this proposed regulation or by 
applicable law.
    \35\ 29 CFR 2520.102-2.
---------------------------------------------------------------------------

(f) Culturally and Linguistically Appropriate Standards for Required 
Notices and Disclosures to Participants and IRA Owners
    The proposed regulation would require that notices and disclosures 
to participants and IRA owners be provided in a culturally and 
linguistically appropriate manner in certain situations. The proposal 
essentially adopts the ACA standard for group health benefit 
notices.\36\ Specifically, if the address of a recipient of a required 
notice or disclosure is in a county where 10 percent or more of the 
population is literate only in the same non-English language, the 
notice or disclosure must include a prominent statement in the relevant 
non-English language about the availability of language services. The 
automatic portability provider would also be required to provide a 
verbal customer assistance process in the non-English language and 
provide written notices in the non-English language upon request.
---------------------------------------------------------------------------

    \36\ See, e.g., 29 CFR 2590.715-2715 and 2590.715-2719(e).
---------------------------------------------------------------------------

(g) Ensuring Participants and IRA Owners Receive Notices
    Section 120(c)(10) of the SECURE 2.0 Act authorizes the Secretary 
to issue regulations to ensure that the participants and IRA owners, 
``in fact, receive all required notices and disclosures.'' Furthermore, 
Section 120(c)(7) of the SECURE 2.0 Act grants the Secretary regulatory 
authority to require the automatic portability provider ``to take 
actions necessary to reasonably ensure that participant and beneficiary 
data is current and accurate.'' To this end, paragraph (b)(5)(vii) of 
the proposed regulation would require the automatic portability 
provider to adopt and implement prudent policies and procedures to 
ensure that it obtains individual participant and IRA owner data 
necessary to effectively administer the automatic portability program 
and that the participant and IRA owner data in its possession or 
control is current and accurate. The proposed regulation also specifies 
that notices and disclosures to participants and IRA owners must be 
made using methods that satisfy the disclosure requirements in 29 CFR 
2520.104b-1(b). The regulation at 29 CFR 2520.104b-1(b) provides a 
general standard that covered materials shall be furnished using 
``measures reasonably calculated to ensure actual receipt of the 
material by plan participants, beneficiaries and other specified 
individuals.'' The Department requests comments on how an automatic 
portability provider would handle undeliverable mail and whether 
specific additional regulatory protections should be established for 
individuals with respect to whom the automatic portability provider has 
received returned mail. The Department also invites comments on whether 
the regulation should specifically address electronic disclosure of 
notices and disclosures under the exemption, including how to deal with 
undeliverable electronic notices.

7. Frequency of Searches

    The proposed regulation parallels the Code section 
4975(f)(12)(B)(viii) requirement that the automatic portability 
provider query on at least a monthly basis whether any individual with 
an IRA has an account in a transfer-in plan. The Department believes 
that verification of the information used in connection with performing 
searches is important to carrying out the purposes of the statutory 
exemption. Accordingly, under the proposal, the automatic portability 
provider must perform ongoing participant address validation searches 
via automated checks of (1) National Change of Address records, (2) two 
separate commercial locator databases, and (3) any internal databases 
maintained by the automatic portability provider. If a valid address is 
not obtained from the automated checks, the automatic portability 
provider must also perform a manual internet-based search. The proposal 
would require these verification steps to be performed at least twice 
in the first year an account is entered into the automatic portability 
provider system and once a year thereafter. The Department invites 
comments on whether additional or different verification steps should 
be required and on whether a final regulation should specifically list 
other information to be used in the searches that may aid in validating 
a match, for example, beneficiary information. In the Department's 
view, the statutory exemption's description of the search requirement 
envisions the automatic portability provider taking reasonable steps to 
verify the accuracy of the information used for conducting the required 
searches.
    The Department requests comment on whether the final regulations 
should permit the query to be performed by a partnering recordkeeper in 
addition to the automatic portability provider and how the automatic 
portability provider would share information with recordkeepers for 
purposes of running the query. If the Department permits this under the 
final regulations, the Department anticipates that the ultimate 
obligation to ensure the required searches are performed would remain 
with the automatic portability provider. The Department also requests 
comment on whether there should be specific parameters or obligations 
for partnering recordkeepers if they are permitted to run the queries. 
Finally, if any commenter believes partnering recordkeepers should be 
permitted to run queries, the Department requests any additional 
information that would support the need and rationale for permitting 
this under a final regulation.

8. Monitoring Transfers

    The Department believes proper monitoring of automatic portability 
transactions by the transfer-in plan is also critical to ensuring the 
successful execution of the transactions, and, accordingly, the 
proposal includes a monitoring requirement. The Department believes 
general prudence obligations would require such monitoring but is 
including this

[[Page 5633]]

requirement in the proposed regulation pursuant to the general 
regulatory authority provided to the Department in section 120(c) of 
the SECURE 2.0 Act and the authority transferred to the Secretary under 
section 102 of Reorganization Plan No. 4 of 1978. Paragraph (b)(7) of 
the proposed regulation requires that the automatic portability 
provider ensure that each transfer-in plan for whom the automatic 
portability provider performs automatic portability transactions 
designates a plan official responsible for monitoring transfers into 
the plan and confirming that amounts received on behalf of a 
participant are invested properly. Under the proposal, amounts received 
would be deemed to be invested properly if made according to the 
participant's current investment election under the plan or, if no 
election is made or permitted, in the plan's qualified default 
investment alternative under 29 CFR 2550.404c-5 or in another 
investment selected by a fiduciary with respect to such plan.

9. Timeliness of Execution

    Code section 4975(f)(12)(B)(ix) requires timely execution of 
transfers by requiring the automatic portability provider to transfer 
the liquidated account balance of the IRA as soon as practicable. 
Paragraph (b)(8) of the proposed regulation incorporates the statutory 
text and includes provisions intended to clarify the statutory 
requirement. First, the proposal clarifies the timeliness of execution 
is measured from the date after the final deadline passes for the 
affected individual to affirmatively elect not to participate in the 
transaction, as specified in the pre-transaction notice. The proposed 
regulation also provides that the automatic portability provider must 
follow timeframes formally established in policies and procedures, 
discussed in more detail below. The proposal does not include a 
specific timeframe for what would be considered ``as soon as 
practicable'' but requests comments on whether the final rule should 
include such a specific timeframe or other clarification of the 
standard.

10. Limitation on Exercise of Discretion and Policies and Procedures

    Code section 4975(f)(12)(B)(x) provides that the automatic 
portability provider will neither have nor exercise discretion to 
affect the timing or amount of the transfer pursuant to an automatic 
portability transaction other than to deduct the appropriate fees. 
Paragraph (b)(9) of the proposed regulation incorporates the statutory 
limitation on discretion and expands upon the statutory text by 
specifying that an automatic portability provider will be deemed to 
satisfy the limited discretion requirement if it establishes, 
maintains, and follows policies and procedures regarding the process 
for executing automatic portability transactions. The policies and 
procedures must set specific standards and timeframes that are equally 
applied to all automatic portability transactions. The Department is 
proposing the policies and procedures to operationalize the limited 
discretion standard in accordance with the general regulatory authority 
granted to the Secretary under section 120(c) of the SECURE 2.0 Act and 
the authority transferred to the Secretary under section 102 of 
Reorganization Plan No. 4 of 1978. The policies and procedures are 
intended to ensure that the automatic portability provider is acting in 
accordance with its obligations under the exemption and these 
regulations and consistently with the intent of the statutory 
exemption. The Department also believes the policies and procedures 
will ensure that there is appropriate operational documentation by the 
automatic portability provider to support the audit, described below.
    The policies and procedures must, at a minimum, specifically and 
prudently address: (1) the process to ensure that transfer-in plans 
designate a plan official that will be responsible for monitoring 
transfers into the plan due to automatic portability transactions; (2) 
the process and timing for liquidating the assets of the Default IRA to 
cash and closing the IRA; (3) the process for verifying and validating 
that the correct fees are withdrawn from the Default IRA; (4) the 
process and timing for transmitting assets to the transfer-in plan; (5) 
verifying the assets were received by the transfer-in plan; and (6) 
sending all notices to plan participants or individuals on whose behalf 
a Default IRA is established as required in this proposed regulation.

11. Audit and Corrections

(a) Audit and Audit Report
    Code section 4975(f)(12)(B)(xi) includes a requirement for an 
annual audit to be conducted in accordance with regulations promulgated 
by the Secretary. The statute requires that an audit be conducted that 
demonstrates compliance with Code section 4975(f)(12) and any 
regulations thereunder and that identifies any instances of 
noncompliance with the statute or such regulations. The statute 
requires the automatic portability provider to submit a copy of the 
auditor's report to the Secretary in such form and manner as specified 
by the Secretary.
(b) Auditor and Auditor's Report
    After consideration, the Department is proposing that the audit be 
an independently conducted audit to best ensure that the automatic 
portability provider is executing automatic portability transactions in 
a manner that is consistent with ERISA and that promotes the retirement 
security of workers. An auditor will be considered independent if: (1) 
the auditor is a person or an entity that the automatic portability 
provider does not own or control, and (2) the auditor does not derive 
more than two percent of its annual revenue from services provided 
directly or indirectly to the automatic portability provider or any of 
its affiliates. In addition, the auditor must have the appropriate 
technical training and proficiency necessary to carry out the audit. 
The Department invites comments regarding the two percent threshold. 
The Department believes the two percent threshold supports a 
presumption of independence but requests comment with supporting 
rationale if affected entities believe a higher threshold should be 
permitted. Additionally, the Department requests comment on what 
additional protections commenters would propose to support one or more 
higher thresholds.
    Paragraph (c) of this proposed regulation would also require the 
independent auditor to review the automatic portability provider's 
policies and procedures as well as representative samples of the 
required disclosures and related automatic portability transactions 
sufficient for the auditor to make the required audit determinations 
and findings. The findings must be memorialized in a written audit 
report, which would include the following: (1) the number of completed 
automatic portability transactions during the audit period; (2) whether 
the required notices met the timing and content requirements of these 
regulations; (3) whether the required notices were written and 
delivered in a manner reasonably designed to ensure that affected 
individuals would both receive and understand the notices; (4) whether 
any required notices were returned as undeliverable and what steps were 
taken by the automatic portability provider to address undeliverable 
notices; (5) whether the appropriate transfer-in plan accounts received 
all the assets due as a result of the automatic portability 
transactions; (6) a summary of all fees charged by the automatic 
portability provider (and any

[[Page 5634]]

affiliates) for services in connection with automatic portability 
transactions, including whether those fees increased since the last 
report; (7) whether the fees and compensation received by the automatic 
portability provider (including its affiliates) are consistent with the 
fees authorized by the appropriate fiduciaries and did not exceed 
reasonable compensation; (8) whether all requirements of section 
4975(f)(12) and these proposed regulations were satisfied with respect 
to: (a) the policies and procedures and (b) the transactions and 
disclosures that were reviewed; (9) a summary of compliance issues 
reported to or discovered by the auditor, the auditor's 
recommendations, and the extent to which the automatic portability 
provider has addressed or is addressing the issues pursuant to the 
correction procedures; (10) any other recommendations from the auditor 
to improve the policies and procedures and overall execution of 
automatic portability transactions; and (11) a description of the 
auditor's audit methodology. In order to assist the auditor in the 
review, the automatic portability provider is required to grant the 
auditor access to its automatic portability operations and records 
(including, as necessary, the operations and records of its affiliates) 
sufficient to allow the auditor to make the determinations and findings 
noted above.
    Section 120(d) of the SECURE 2.0 Act requires the Secretary to 
provide periodic reports to Congress that include a variety of 
information related to automatic portability transactions and 
portability arrangements more generally. The Department envisions that 
most of the information required for this report to Congress will come 
from information included in the audit reports filed by automatic 
portability providers. Therefore, the Department is proposing that the 
written audit report would also include: (1) the number of automatic 
rollovers of mandatory distributions from qualified plans into Default 
IRAs that are included in the automatic portability program; \37\ (2) 
the number of completed automatic portability transactions; and (3) the 
number of Default IRAs separately in each of the following categories: 
(a) which have been transferred to designated beneficiaries, (b) for 
which the automatic portability provider is searching for next of kin 
due to a deceased IRA owner without a designated beneficiary, and (c) 
that were reduced to a zero balance while in the automatic portability 
provider's custody.
---------------------------------------------------------------------------

    \37\ Sec. 120(d)(1)(A)(i) uses the term ``automatic cash outs'' 
but the Department believes, based on the context, that it is 
referring to automatic rollovers of mandatory distributions as that 
term is used throughout this preamble.
---------------------------------------------------------------------------

    If the automatic portability provider does not have direct access 
to any information required to be included in the audit report, the 
automatic portability provider would be required, as a condition of its 
services, to obtain appropriate information from partnering 
recordkeepers and participating plans in their possession or control, 
on request from the automatic portability provider, so it can be 
provided to the independent auditor and incorporated into the audit 
report.\38\ The Department seeks comments on the availability of any 
information not otherwise directly accessible by the automatic 
portability provider and if there are any barriers to obtaining this 
information from participating recordkeepers or employer-sponsored 
plans. The Department also seeks comment on whether there are other 
readily available sources for such information that would be accessible 
to the Department.
---------------------------------------------------------------------------

    \38\ The automatic portability provider may not have direct 
access to all the information identified in section 120(d) of the 
SECURE 2.0 Act if, for instance, the automatic portability provider 
is not the provider or custodian of all IRAs for which it will 
execute automatic portability transactions.
---------------------------------------------------------------------------

i. Timing of Audit Report & Certification
    This proposed regulation would require the independent auditor to 
complete the audit within 180 calendar days following the annual period 
to which the audit relates. The automatic portability provider must 
then submit a copy of the written audit report to the Department at 
[email protected] within 30 calendar days of completion. 
The automatic portability provider's submission to the Department must 
also include a certification, under penalty of perjury, that the 
automatic portability provider reviewed the audit report and that, to 
the best of its knowledge at the time, it has addressed, corrected, or 
remedied any noncompliance or inadequacy, or has an appropriate written 
plan to address any such issues identified in the audit report.
(c) Corrections
    Section 120(c)(9) specifically grants the Secretary authority to 
provide for correction procedures in the event the auditor determines 
the automatic portability provider was not in compliance with the 
statute and related regulations. To effectuate the intent of this 
provision, the Department is proposing three components for 
corrections.
    First, the Department is providing an opportunity for an automatic 
portability provider to make certain self-corrections. Under paragraph 
(c)(9)(i), the Department would not consider a non-exempt prohibited 
transaction to have occurred due to a violation of the requirements of 
Code section 4975(f)(12) and these regulations with respect to a 
transaction, provided that either the violation does not result in 
investment losses to the Default IRA or the automatic portability 
provider made the IRA whole for any resulting losses. In order to self-
correct in those situations, the automatic portability provider would 
be required to correct the violation and document the correction in 
writing within 30 calendar days of correction. The correction would 
only be permitted if it occurs no later than 90 calendar days after the 
automatic portability provider learned of the violation or reasonably 
should have learned of the violation. Finally, all instances of 
noncompliance and accompanying corrections would be required to be 
reported in writing to the auditor and the auditor would have to agree 
that the transaction did not result in investment losses or that the 
IRA was made whole. The Department solicits comments on whether 
specific criteria should be included in the final rule on measuring 
investment losses and make whole requirements.
    The second component for corrections involves additional 
recommendations from the auditor. If the auditor determines that the 
automatic portability provider was not in compliance with any provision 
of Code section 4975(f)(12) or these regulations during the audit 
period, the auditor must identify the instances of noncompliance in the 
audit report along with its recommended corrections. An automatic 
portability provider would not be treated as having failed to comply 
with any provision of Code section 4975(f)(12) or these regulations, 
provided it corrects any instance of noncompliance identified by the 
auditor as soon as reasonably practicable according to the auditor's 
recommendations.
    The Department believes that the first two components for 
corrections will provide an automatic portability provider with 
additional incentive to take the audit process seriously, timely 
identify and correct violations of Code section 4975(f)(12) and these 
proposed regulations, and use the audit process to correct deficiencies 
in the automatic portability provider's operations to avoid potential 
future violations,

[[Page 5635]]

penalties, losses to IRA owners/plan participants, and lawsuits.
    The third and final component for corrections would involve the 
Secretary requiring an automatic portability provider to submit to 
supplemental audits and corrective actions if significant compliance 
issues are uncovered. The Department is proposing the following 
scenarios involving the automatic portability provider or an affiliate 
under which the Secretary may impose additional corrective actions: (1) 
engaging in a systematic pattern or practice of violating any provision 
of section 4975(f)(12) or an implementing regulation; (2) intentionally 
violating any provision of section 4975(f)(12) or an implementing 
regulation; (3) providing materially misleading information to the 
Secretary, Secretary of the Treasury, or the auditor in connection with 
automatic portability transactions; (4) a foreign or domestic criminal 
conviction involving or arising out of the conduct of the automatic 
portability program or any automatic portability transaction; or (5) a 
foreign (or foreign equivalent) \39\ or domestic criminal conviction 
for any felony involving the following crimes: larceny, theft, robbery, 
extortion, forgery, counterfeiting, fraudulent concealment, 
embezzlement, fraudulent conversion, misappropriation of funds or 
securities, or conspiracy to commit any such crimes or a crime in which 
any of the foregoing crimes is an element.
---------------------------------------------------------------------------

    \39\ The Department does not expect that foreign crimes will 
arise frequently in connection with automatic portability providers, 
but if they do, impacted entities may contact the Department for 
guidance. Additionally, the Department requests comment regarding 
whether any additional process should be provided for foreign crimes 
before the Department imposes supplemental audits or corrective 
actions, particularly those foreign crimes that raise issues 
regarding their equivalence to a domestic crime.
---------------------------------------------------------------------------

12. Automatic Portability Provider website

    The proposed regulation in paragraph (d) parallels the statutory 
language in Code section 4975(f)(12)(B)(xii) requiring the automatic 
portability provider to: (1) maintain a website which contains a list 
of recordkeepers with respect to which the automatic portability 
provider carries out automatic portability transactions and (2) list 
all fees paid to the automatic portability provider. Under the proposed 
regulation the list would have to include the fees and the identity of 
the party or account that is paying the particular fee. The proposal 
also requires that the website include the number of plans and 
participants covered by each recordkeeper. The Department solicits 
comments on whether other documents or materials should be required to 
be posted on the website, for example, a copy of the independent 
auditor's audit report redacted as needed to protect confidential 
business information, if any, in the audit report.
    Because the Department anticipates that automatic portability 
providers may include a range of other services and information, 
customer support features, and functionalities in addition to automatic 
portability transactions, the proposal would also require the website 
to display automatic portability transaction-related information in a 
way that differentiates that information from other information or 
elements of the website (e.g., separately identifying the automatic 
portability transaction fees and services from fees and services in 
connection with establishing and custody of a Default IRA).
    The Department intends that these website disclosures and 
additional parameters will make it easier for plan sponsors to 
independently assess the overall cost of an automatic portability 
arrangement in connection with signing up for an automatic portability 
transaction service covered by the statutory exemption and this 
regulation.

13. Limitations on Exculpatory Provisions

    Section 120(c)(6) of the SECURE 2.0 Act specifically provides the 
Secretary with the authority to place limitations on exculpatory 
provisions due to an improper transfer of Default IRA assets. 
Therefore, the Department is proposing that the automatic portability 
provider may not include exculpatory provisions in its contracts 
disclaiming or limiting the automatic portability provider's liability 
in the event that the automatic portability transaction results in an 
improper roll-in to the transfer-in plan. However, this requirement 
would not prohibit disclaimers for liability caused by an error, 
misrepresentation, or misconduct of a party independent of the 
automatic portability provider and its affiliates, or damages arising 
from acts outside the control of the automatic portability provider. 
Section 120(c)(6) of the SECURE 2.0 Act does not specifically address 
other exculpatory provisions. The Department requests comments on 
whether the prohibition on exculpatory provisions should be broader and 
include violations of the prohibited transaction provisions in Code 
section 4975 generally and ERISA in connection with any conduct of the 
automatic portability provider or an affiliate that is subject to Title 
I.

14. Record Retention

    This proposed regulation incorporates the statutory language in 
Code section 4975(f)(12)(B)(xi)(I) regarding record retention by 
requiring that an automatic portability provider maintain, for not less 
than six years, records sufficient to demonstrate compliance with the 
requirements of the statute and this proposed regulation and make them 
available to authorized employees of the Department and the Department 
of the Treasury within 30 calendar days of a written request. This 
proposal also includes clarifying language regarding the record 
retention requirement and its impact on the prohibited transaction 
relief provided by Code section 4975(d)(25), which clarifying language 
the Department has frequently included in administrative prohibited 
transaction exemptions. First, the proposal provides that no prohibited 
transaction will be considered to have occurred if, solely because of 
circumstances beyond the control of the automatic portability provider, 
the records are lost or destroyed before the six-year period ends 
(e.g., due to a natural disaster). Second, an automatic portability 
provider's failure to maintain the records necessary to determine 
whether the conditions of Code section 4975(d)(25) and this regulation 
have been met will result in the loss of the relief provided under this 
exemption only for the transaction or transactions for which such 
records are missing or have not been maintained. Such failure does not 
affect the relief for other transactions if the automatic portability 
provider maintains records for such other transactions in compliance 
with the record retention requirements.

15. Definitions

    The Department included three definitions in proposed paragraph 
(g). The proposed definition of ``affiliate'' is consistent with the 
Department's definition of affiliate in many other regulations.\40\ 
Likewise, the definition of ``control'' is intended to be consistent 
with the Department's use of that term in other regulations.\41\ The 
definition of ``individual retirement plan'' refers to an individual 
retirement account or annuity described in Code section

[[Page 5636]]

408(a) or 408(b). The Department requests comment on whether any other 
definitions may be necessary to provide additional clarity to the 
proposed regulation.\42\
---------------------------------------------------------------------------

    \40\ A person or entity is an ``affiliate'' if, directly or 
indirectly (through one or more intermediaries) it controls, is 
controlled by, or is under common control with such person or 
entity; or is an officer, director, or employee of, or partner in, 
such person or entity. Unless otherwise specified, an ``affiliate'' 
refers to an affiliate of the automatic portability provider.
    \41\ The term ``control'' means the power to exercise a 
controlling influence over the management or policies of an entity 
or person other than an individual.
    \42\ As one example, should the Department define ``active 
participant'' or is this term generally understood?
---------------------------------------------------------------------------

E. Request for Public Comments

    The Department invites comments from interested persons on all 
facets of the proposed rule. Commenters are free to express their views 
not only on the specific provisions of the proposal as set forth in 
this document, but on any issues germane to the subject matter of the 
proposal. Comments should be submitted in accordance with the 
instructions at the beginning of this document.
    Without limiting the generality of the above request for comments, 
the Department requests comments on whether the rule should include 
provisions that specially address issues related to IRA beneficiaries. 
The statutory provisions envision an automatic portability transaction 
as a transfer of assets ``made from an individual retirement plan which 
is established on behalf of an individual and to which amounts were 
transferred under section 401(a)(31)(B)(i)'' to an eligible employer-
sponsored retirement plan in which ``such individual is an active 
participant.'' The statutory provisions do not expressly reference 
moving funds for a beneficiary from a default IRA to an employer-
sponsored plan in which the beneficiary participates. The statutory 
provisions similarly require notices to ``the individual on whose 
behalf the individual retirement plan . . . is established.'' 
Nonetheless, the Department notes the recordkeeping provisions in the 
statute expressly reference the automatic portability provider taking 
steps to ensure it has accurate beneficiary information and the 
statutory provisions on the required Report to Congress call for 
separate identification of IRAs transferred to designated beneficiaries 
and IRAs for which a next of kin is being identified after the death of 
the IRA owner without a designated beneficiary. Accordingly, the 
Department is interested in comments on whether the final regulation 
should address specific beneficiary issues, and, if the commenter 
believes it should, the Department asks that the commenter identify the 
issue or issues and include recommendations on how the issue or issues 
should be addressed in the regulation.
    The Department also specifically requests comments on exemptive 
relief for Default IRAs involving rollovers of mandatory distributions 
with a value of $1,000 or less. The proposal does not expressly include 
such mandatory distributions in light of the SECURE 2.0 Act amendment 
of Code section 4975 defining the term ``automatic portability 
transaction'' to mean a transaction in which mandatory distributions 
pursuant to Code section 401(a)(31)(B)(i) from an employer-sponsored 
retirement plan to an IRA established on behalf of an individual are 
subsequently transferred to an eligible employer-sponsored plan in 
which such individual is an active participant, after such individual 
has been given advance notice of the transfer and has not affirmatively 
opted out of such transfer. As noted elsewhere in this document, Code 
section 401(a)(31)(B)(i) refers to distributions of nonforfeitable 
accrued benefits the present value of which is in excess of $1,000 but 
less than or equal to $7,000. The Department confronted a similar issue 
in implementing section 657(c)(2)(A) of the Economic Growth and Tax 
Relief Reconciliation Act of 2001 (EGTRRA), which directed the 
Department to issue regulations providing safe harbors under which (1) 
a plan administrator's designation of an institution to receive the 
automatic rollover, and (2) the initial investment choice for the 
rolled-over funds would be deemed to satisfy the fiduciary 
responsibility provisions of section 404(a) of ERISA. Section 657 of 
EGTRRA also referenced Code section 401(a)(31)(B) automatic rollovers. 
However, in its final rule in 2004, the Department, in response to 
public comments, included mandatory distribution amounts of $1,000 or 
less noting that, although not described in Code section 401(a)(31)(B), 
tax-qualified retirement plans are permitted to distribute to a 
separating participant without the participant's consent provided the 
present value of the participant's vested accrued benefit did not 
exceed the maximum value at that time of $5,000.\43\ The Department 
said that, after taking into account the purpose and provisions of the 
safe harbor regulation, it was persuaded that application of the safe 
harbor to rollovers of mandatory distributions of $1,000 or less was 
appropriate because the availability of the safe harbor for such 
distributions might increase the likelihood that such amounts will be 
rolled over to individual retirement plans and thereby may promote the 
preservation of retirement assets without compromising the interests of 
the participants on whose behalf such rollovers are made.\44\ In 
addition, some plans may find it advisable to provide for automatic 
rollovers of all sizes of small accounts to avoid the issues that arise 
when distribution checks remain uncashed.\45\ Thus, in light of the 
fact that the regulatory exemption in Code section 4975 established by 
the SECURE 2.0 Act specifically references 401(a)(31)(B), the 
Department is interested in public comments on whether it should use 
its general exemption authority under ERISA section 408(a) to provide 
parallel exemptive relief for mandatory distributions of $1,000 or less 
for reasons similar to those noted above in connection with the 
Department's automatic rollover safe harbor in 29 CFR 2550.404a-2.
---------------------------------------------------------------------------

    \43\ See 29 CFR 2550.404a-2(d); Final Rule on Fiduciary 
Responsibility Under the Employee Retirement Income Security Act of 
1974 Automatic Rollover Safe Harbor, 69 FR 58018 (Sept. 28, 2004).
    \44\ Id. at 58019.
    \45\ See ``The Benefits of Mandatory Distributions,'' A White 
Paper by Fred Reish and Bruce Ashton (2013)(available at https://fredreish.com/wp-content/uploads/2013/03/The-Benefits-of-Mandatory-Distributions-A-White-Paper-February-2013_NEW.pdf).
---------------------------------------------------------------------------

F. Regulatory Impact Analysis

    The Department has examined the effects of this proposed rule as 
required by Executive Order 12866,\46\ Executive Order 13563,\47\ the 
Congressional Review Act,\48\ the Paperwork Reduction Act of 1995,\49\ 
the Regulatory Flexibility Act,\50\ section 202 of the Unfunded 
Mandates Reform Act of 1995,\51\ and Executive Order 13132.\52\
---------------------------------------------------------------------------

    \46\ Regulatory Planning and Review, 58 FR 51735 (Oct. 4, 1993).
    \47\ Improving Regulation and Regulatory Review, 76 FR 3821 
(Jan. 21, 2011).
    \48\ 5 U.S.C. 804(2) (1996).
    \49\ 44 U.S.C. 3506(c)(2)(A) (1995).
    \50\ 5 U.S.C. 601 et seq. (1980).
    \51\ 2 U.S.C. 1501 et seq. (1995).
    \52\ Federalism, 64 FR 43255 (Aug. 10, 1999).
---------------------------------------------------------------------------

1. Executive Order 12866 (Regulatory Planning and Review), Executive 
Order 14094 (Modernizing Regulatory Review), and 13563 (Improving 
Regulation and Regulatory Review)

    Under E.O. 12866 (as amended by Executive Order 14094), the Office 
of Management and Budget (OMB)'s Office of Information and Regulatory 
Affairs determines whether a regulatory action is significant and, 
therefore, subject to the requirements of the E.O. and review by OMB. 
58 FR 51735. As amended by Executive Order 14094, section 3(f) of 
Executive Order 12866 defines a ``significant regulatory action'' as a 
regulatory action that is likely to result

[[Page 5637]]

in a rule that may: (1) have an annual effect on the economy of $200 
million or more; or adversely affect in a material way the economy, a 
sector of the economy, productivity, competition, jobs, the 
environment, public health or safety, or state, local, territorial, or 
tribal governments or communities; (2) create a serious inconsistency 
or otherwise interfere with an action taken or planned by another 
agency; (3) materially alter the budgetary impact of entitlements, 
grants, user fees or loan programs or the rights and obligations of 
recipients thereof; or (4) raise legal or policy issues for which 
centralized review would meaningfully further the President's 
priorities or the principles set forth in the Executive order. OMB has 
determined that this revision is a significant regulatory action under 
section 3(f)(1) of E.O. 12866.
    Executive Order 13563 directs agencies to propose or adopt a 
regulation only upon a reasoned determination that its benefits justify 
its costs; the regulation is tailored to impose the least burden on 
society, consistent with achieving the regulatory objectives; and in 
choosing among alternative regulatory approaches, the agency has 
selected those approaches that maximize net benefits. E.O. 13563 
recognizes that some benefits are difficult to quantify and provides 
that, where appropriate and permitted by law, agencies may consider and 
discuss qualitative values that are difficult or impossible to 
quantify, including equity, human dignity, fairness, and distributive 
impacts.

2. Need for Regulation

    When American workers change jobs, they often encounter frictions 
that result in reduced retirement savings in aggregate. This regulation 
will alleviate some of those frictions, resulting in more retirement 
savings, which will improve Americans' preparation for retirement. This 
is particularly beneficial given the wider context that many workers 
have insufficient retirement savings. Only 57 percent of households 
headed by 55-64 year olds held any retirement savings accounts in 2022, 
and the median amount in those accounts was $185,000.\53\ The Federal 
Reserve reports that only one-third of Americans view their retirement 
savings plan as sufficient to meet their needs in retirement.\54\ This 
is consistent with projections by VanDerhei (2019) showing that about 
41 percent of households ages 35 to 64 will run short of money in 
retirement.\55\ Similarly, Brown et al. (2018) find that nearly 77 
percent of Americans are behind in saving for retirement given their 
age and income.\56\
---------------------------------------------------------------------------

    \53\ 2022 Survey of Consumer Finance. ``Retirement Account by 
Age of Reference Person,'' The Fed--Table: Survey of Consumer 
Finances, 1989--2022 (federalreserve.gov).
    \54\ Federal Reserve. ``Survey of Household Economics and 
Decisionmaking.'' 2022.
    \55\ Jack VanDerhei, ``Retirement Savings Shortfalls: Evidence 
from EBRI's 2019 Retirement Security Projection Model.'' Employee 
Benefit Research Institute (March 7, 2019).
    \56\ Jennifer Brown, Joelle Saad-Lessler, and Diane Oakley. 
``Retirement in America: Out of Reach for Working Americans?'' 
National Institute on Retirement Security. 2018.
---------------------------------------------------------------------------

    Previous generations of American workers who had a retirement plan 
usually had a defined benefit (DB) pension plan that promised fixed 
payments to them upon retirement. An employee's retirement benefit 
under a DB plan often is based on a percentage of their final year's 
compensation multiplied by their total years of employment with the 
sponsoring employer.\57\ Workers who changed jobs and moved to another 
plan, however, received less benefits from DB plans, as these plans 
often had a five-year cliff vesting policy, so a worker who stayed at a 
job for fewer than five years received no retirement benefits from that 
job. Even when a worker accrued benefits under a former employer's DB 
plan, the effects of inflation often meant that their final year's 
salary earned from their former employer tended to be lower than their 
final year's salary earned from a subsequent employer before 
retirement. Since the employee's final year's salary is a key factor in 
the benefit formula, they would receive lower lifelong pension benefits 
as a result of switching jobs even if they worked the same number of 
years at the same salaries.
---------------------------------------------------------------------------

    \57\ U.S. Bureau of Labor Statistics, Employee Benefits, 
``Retirement plan provisions for private industry workers in the 
United States,'' Table 2, reference year 2022, (April, 2023). 
Available at: https://www.bls.gov/ebs/publications/retirement-plan-provisions-for-private-industry-workers-2022.htm.
---------------------------------------------------------------------------

    In recent decades defined contribution (DC) plans have supplanted 
DB plans as the most prevalent type of pension plan provided to 
workers.\58\ DC plans, such as 401(k) plans, base their benefit on 
employer and employee contributions to an individual's account and the 
investment earnings on their account balance. Currently, 49 percent of 
private industry workers (59 percent of full-time private industry 
workers) are participating in a DC plan.\59\ For workers that change 
jobs frequently, DC plans have certain portability advantages over 
traditional DB plans. Public policies such as this new automatic 
portability statutory exemption and this proposed regulation can 
further benefit participants by facilitating portability among DC plans 
and IRAs.
---------------------------------------------------------------------------

    \58\ Employee Benefits Security Administration, Private Pension 
Plan Bulletin Historical Tables and Graphs 1975-2021, (September 
2023), Table E4, (September 2023), https://www.dol.gov/sites/dolgov/files/ebsa/researchers/statistics/retirement-bulletins/private-pension-plan-bulletin-historical-tables-and-graphs.pdf.
    \59\ U.S. Bureau of Labor Statistics, National Compensation 
Survey, Series: NBU29000000000000026313 & NBU29000000000002526313, 
(March, 2023), Available at: https://data.bls.gov/cgi-bin/srgate.
---------------------------------------------------------------------------

    In the current retirement system where employer-sponsored DC plans 
are the primary vehicle available for employees to save for retirement, 
an employee separating from service with an employer may be suddenly 
confronted with an important financial decision regarding how to handle 
retirement assets they have accrued in their employer's DC plan. Making 
it simpler for employees to consolidate their retirement accounts and 
maintain their tax-favored status can improve retirement security for 
American workers.
    Currently, employees who change jobs generally have the following 
four options for handling their retirement assets:
    1. Leave the assets in their former employer's plan. The separating 
employee can do this if the value of their accrued benefit under the 
plan meets any threshold imposed by the plan, which can be at most 
$7,000 beginning in 2024. (A participant might choose this option 
because they find the former plan's services, investments, and fees to 
be attractive or because of simple inattention.)
    2. Roll over their savings into a retirement plan sponsored by 
their new employer.
    3. Roll over their assets into an IRA.
    4. Cash out the balance.
    The first three of these options, where the assets are in a plan or 
an IRA, retain their tax-preferred status. A cashout, on the other 
hand, results in the loss of tax-preferred status for those assets. It 
is no longer earning investment returns that are tax-deferred. The 
funds are distributed directly to the employee and are subject to 
regular income taxes. Additionally, a 10 percent penalty tax applies if 
the employee is under age 55 throughout the year in which they 
terminate service with the employer and if the employee does not 
qualify for an exception.
    When a plan participant separates from service with an employer 
with an account balance in the former employer's DC plan, the former 
employer has the option to immediately

[[Page 5638]]

cash out account balances of $5,000 or less without the participant's 
consent (if the plan has a provision allowing the immediate 
distribution).\60\ These distributions are a form of cashout and are 
often referred to as ``mandatory distributions.'' If, however, the 
participant's account balance is between $1,001 and $5,000, and the 
participant does not elect to have the account balance paid to an 
eligible retirement plan or receive the distribution directly in cash, 
then the plan administrator of the former employer's plan must transfer 
such account balance to a so-called ``Default IRA'' if this is required 
by the plan's provisions. These distributions are commonly referred to 
as ``force-outs'' or ``automatic rollovers of mandatory 
distributions.'' \61\ As part of the SECURE 2.0 Act, Congress raised 
the $5,000 threshold to $7,000 (effective for distributions occurring 
after December 31, 2023).\62\
---------------------------------------------------------------------------

    \60\ Code sections 411(a)(11) and 417(e).
    \61\ Code section 401(a)(31)(B)(i).
    \62\ See SECURE 2.0 Act, Sec. 304.
---------------------------------------------------------------------------

    Default IRAs, while intended to preserve retirement assets in 
conservatively managed accounts, typically yield only minimal returns 
for investors while often imposing considerable fees.\63\ A 2014 study 
by the Government Accountability Office (GAO) found that, ``fees 
outpaced returns in most of the [forced-out] IRAs analyzed'' and that 
account balances ``tended to decrease over time.'' \64\ GAO also found 
the average return to be less than two percent for money market funds, 
which are typical investments for Default IRAs. In contrast, many 
accounts rolled into a worker's new employer's plan likely will be 
invested in the plan's default investment, usually target date funds, 
which typically outpace the return on money market funds. Observing 
data on small balance rollover IRAs in general suggests that most 
Default IRA owners will stay invested in money market funds for a 
substantial length of time; recent data suggest roughly 40 percent of 
these accounts remain in principal-preserving investments for at least 
10 years.\65\
---------------------------------------------------------------------------

    \63\ Government Accountability Office (GAO). ``401(k) Plans: 
Greater Protections Needed for Forced Transfers and Inactive 
Accounts.'' (2014).
    \64\ Id.
    \65\ Lucas Goodman, Anita Mukherjee, and Shanthi Ramnath (2023): 
``Set it and forget it? Financing retirement in an age of 
defaults'', Journal of Financial Economics, vol 148, p.47-68. 
Investment Company Institute. ``The IRA Investor Profile: 
Traditional IRA Investors' Activity, 2007-2016.'' (September 2018), 
Appendix: Figure A.2, Page 68.
---------------------------------------------------------------------------

    With job turnover, a single individual may end up with multiple 
Default IRAs, further complicating the management of their retirement 
account assets, and in many cases, exposing participants to duplicative 
fees that might otherwise have been avoided if their assets were 
consolidated into a single account. Also, these Default IRAs are 
established by employers on behalf of non-responsive participants; 
therefore, they are more susceptible to being abandoned or forgotten by 
participants.
    Cashouts affect participants by removing their assets from tax-
favored retirement accounts. A 2023 study by Wang, Zhai, and Lynch 
found that over 40 percent of separating employees report cashing out 
at least some of their retirement account balance, consistent with 
reporting from numerous recordkeepers suggesting a cashout rate of 
approximately 40 percent among separating participants with account 
balances below $5,000.\66\ VanDerhei (2019) analyzes individuals age 35 
to 64, projects forward their main sources of retirement resources, 
estimates how much they will fall short, aggregates that across all 
individuals, and calculates a present value, estimating an aggregate 
retirement savings shortfall in excess of $3 trillion. In light of this 
shortfall, reducing cashouts and retaining assets in the retirement 
system is an important retirement policy objective, particularly for 
those workers with small balance accounts who may be struggling to 
accumulate significant retirement assets.\67\
---------------------------------------------------------------------------

    \66\ Yanwen Wang, Muxin Zhai, and John G. Lynch, Jr. ``Cashing 
Out Retirement Savings at Job Separation.'' (2023). Vanguard. ``How 
America Saves.'' 2023. Alight. ``Universe Benchmarks Report: How 
Workers Are Saving and Investing in Defined Contribution Plans.'' 
(2023). Alight. ``Distributions from Defined Contribution Plans: 
What Do Workers Do with their Retirement Savings After They Leave 
Their Employers? A Deep Dive into Post-Termination Behavior, 2008-
2017.'' (2019). Lucus Goodman, Jacob Mortenson, Kathleen Mackie, and 
Heidi R. Schramm, ``Leakage from Retirement Savings Accounts in the 
United States,'' (2021) National Tax Journal, 74(3), 689-719.
    \67\ VanDerhei, ``Retirement Savings Shortfalls,'' 2019.
---------------------------------------------------------------------------

    Taking a cashout or taking no action at all may seem like the 
simplest and most expedient courses of action for a small-balance 
account participant upon job separation but can result in sub-optimal 
outcomes. A 2013 GAO study found that the rollover process was complex, 
inefficient, and burdensome for participants.\68\ These findings were 
reinforced by a 2019 GAO report, which suggested that frictions in the 
rollover process likely contributed to participants cashing out their 
accounts prematurely.\69\ Both studies advised that improving the 
processes for account consolidation after job separation is imperative 
to reducing the leakage of assets from the retirement system.
---------------------------------------------------------------------------

    \68\ Government Accountability Office. ``401(k) Plans: Labor and 
IRS Could Improve the Rollover Process for Participants.'' Report to 
Congressional Requesters. (2013).
    \69\ Government Accountability Office. ``Retirement Savings: 
Additional Data Analysis Could Provide Insight into Early 
Withdrawals.'' Report to the Chairman, Special Committee on Aging, 
U.S. Senate. (2019).
---------------------------------------------------------------------------

    Plan account portability is thus integral to the retention and 
accumulation of retirement assets for workers. Measures to improve 
account portability would serve to reduce participant losses due to 
cashouts (and the associated taxes and penalties for early 
withdrawals), lost accounts, duplicative fees arising from multiple 
accounts, and boost average investment return.
    The SECURE 2.0 Act includes a new statutory prohibited transaction 
exemption that seeks to improve retirement plan portability by 
permitting an automatic portability provider to perform automatic 
portability transactions for participants with Default IRA accounts 
established as a result of a mandatory distribution from a former 
employer's plan if the individual does not respond to their former 
plan's administrator's notices.\70\ If an automatic portability 
provider meets the conditions of the statutory exemption, it can 
transfer assets from a worker's Default IRA to their active account in 
their new employer's DC plan. The proposed rule would implement the new 
statutory exemption.
---------------------------------------------------------------------------

    \70\ Internal Revenue Code section 4975(d)(25).
---------------------------------------------------------------------------

3. Baseline and Post Statute and Regulation Scenarios

    Prior to the passage of SECURE 2.0 Act, RCH operated in the 
automatic portability marketplace using PTE 2019-02 which is the 
``baseline'' scenario for this analysis. As discussed previously, the 
PTE was issued for a five-year term. The need to renew the PTE, and the 
uncertainty associated with its continual renewal, creates uncertainty 
for the marketplace. The baseline includes the assumptions of future 
renewals of PTE 2019-02 for RCH and the mandatory distribution 
threshold to be at the pre-statute level of $5,000. SECURE 2.0 Act 
raised the mandatory distribution threshold for a plan administrator to 
transfer assets into a Default IRA from $5,000 to $7,000 and creates a 
statutory exemption that eliminated the uncertainty in the marketplace 
about the continued existence of PTE 2019-02, which should encourage 
the marketplace to expand its reach in the Defined Contribution 
universe.\71\ The analysis looks at the

[[Page 5639]]

combined impacts of the SECURE 2.0 Act and the proposed regulations and 
does not distinguish between the two.
---------------------------------------------------------------------------

    \71\ Brian Croce, ``SECURE 2.0 Enshrines Auto Portability Into 
Law,'' Pensions and Investments, (January 27, 2023) at https://
www.pionline.com/retirement-plans/secure-20-enshrines-auto-
portability-
law#:~:text=The%20SECURE%202.0%20provision%20stipulates,sell%20data%2
0relating%20to%20the.
---------------------------------------------------------------------------

    The baseline assumes that the recordkeepers currently performing 
automatic portability transactions continue to be the only 
recordkeepers providing automatic portability transactions in the 
future, therefore the percent of plans and accounts covered by 
automatic portability remains unchanged at 65 percent. However, the 
percent of plans and accounts covered by automatic portability is 
expected to increase in the post-rule and regulation scenario, 
increasing from 65 percent to 90 percent by year 10.\72\ This is 
actually a simplification, the average of a number that likely would 
have grown slightly in the absence of the Secure 2.0 Act. Before 
passage of the Act, in October 2022, there were only three 
recordkeepers who had joined the automatic portability consortium. of 
2022, the Secure 2.0 Act was signed in late December 2022, and very 
soon shortly thereafter other large recordkeepers joined. While much of 
this growth in consortium members is likely related to the prospect and 
enactment of legislation, there might have been some growth even 
without the legislation. The inclusion of automatic portability in the 
Secure 2.0 Act increases awareness of the program and that publicity 
may promote growth.
---------------------------------------------------------------------------

    \72\ In other words, for an affected participant who changes 
jobs in year 10, there is a 90 percent chance that their former plan 
has a recordkeeper that belongs to PSN and also a 90 percent chance 
that their new plan has a recordkeeper that belongs to PSN. This 
means that 81 percent of the workers who switch from one DC plan to 
another in year 10, have a small balance account, and do not take 
any affirmative action, would experience an automatic portability 
transaction.
---------------------------------------------------------------------------

    This assumption is based on 2016 testimony by RCH and EBRI before 
the ERISA Advisory Council wherein they stated that the ability to 
locate and match accounts to conduct automatic portability transfers is 
``highly dependent on market adoption.'' \73\ As the network grows, 
there is a greater likelihood of being able to match a separating 
participant with their new employer's plan. As a result, the benefits 
of belonging to the network increase, encouraging more recordkeepers to 
join. It is anticipated that as a result of the legislation and the 
reduced uncertainty, more recordkeepers will join the consortium, and 
this dramatic growth is reflected in the post-rule estimates. Section 9 
``Uncertainty'' provides an alternative estimate reflecting growth in 
the number of recordkeepers joining the network in the baseline 
scenario. The Department requests comment on the portion of the 
expansion in recordkeepers joining the network that would be 
attributable to the proposal.
---------------------------------------------------------------------------

    \73\ Retirement Clearinghouse, LLC, Employee Benefit Research 
Institute, and contributor Boston Research Technologies. ``Auto 
Portability Research & Simulation: Automating Plan-to-Plan Transfers 
for Small Accounts.'' Consolidated Testimony in front of the ERISA 
Advisory Council, June 8, 2016.
---------------------------------------------------------------------------

4. Affected Entities

4.1. Automatic Portability Providers
    Retirement Clearinghouse (RCH), originally founded as 
RolloverSystems in 2001, was the first company to approach the 
Department for sub-regulatory guidance and prohibited transaction 
relief to offer an automatic portability program to plans. RCH asserted 
that its services would facilitate automatic rollovers into Default 
IRAs from accounts in plans of individuals' former employers that are 
eligible for mandatory distributions under Code section 401(a)(31)(B), 
automatic rollovers into Default IRAs of account balances from 
terminated DC plans, and automatic roll-in of funds held in Default 
IRAs to an individual account plan maintained by the IRA owner's new 
employer when the Default IRA owner changes jobs and has an account in 
their new employer's DC plan. In 2019, the Department issued PTE 2019-
02, an individual prohibited transaction exemption permitting RCH to 
receive certain fees in connection with the transfer of an individual's 
Default IRA to the individual's account in a new employer-sponsored 
plan, without the individual's affirmative consent.\74\
---------------------------------------------------------------------------

    \74\ See 83 FR 55741 (Nov. 7, 2018) (proposed exemption) and 84 
FR 37337 (July 31, 2019) (granted exemption).
---------------------------------------------------------------------------

    Since then, RCH's footprint in the automatic portability space has 
grown with its formation of the Portability Services Network (PSN). 
This network currently consists of founding owning members RCH and six 
recordkeepers: Alight, Empower, Fidelity, Principal, TIAA, and 
Vanguard, and it can incorporate an unlimited number of additional 
member recordkeepers. While PSN operates as a separate entity from RCH 
that is controlled by RCH's founding owning members, PSN solely relies 
on the technological infrastructure and operations established by 
RCH.\75\ PSN's website currently states that it does not charge a fee 
to recordkeepers or plan sponsors for its automatic portability 
services; instead, it charges participants a one-time fee when their 
account balances are transferred into a new employer's plan. Currently, 
the maximum transfer fee is $30, and the fee could be lower for smaller 
accounts.\76\
---------------------------------------------------------------------------

    \75\ Portability Services Network, Our Structure, (2023), 
https://psn1.com/learning-center/about-psn/structure-of-psn.
    \76\ Portability Services Network, Our Fees, (2023), https://
psn1.com/learning-center/about-psn/what-are-psns-
fees#:~:text=Key%20aspects%20of%20PSN's%20fee,be%20processed%20at%20n
o%20charge.
---------------------------------------------------------------------------

    The automatic portability provider market is new and complex. 
Therefore, there is significant uncertainty regarding how many entities 
will offer automatic portability services in the future and how the 
automatic portability marketplace will evolve. Barriers to entry exist 
in the business model, because entities must have sufficient access to 
plan and IRA participant data and information systems technology that 
would allow it to match a worker's default IRA with their plan account 
and transfer the employee's Default IRA to their new employer's plan. 
The larger the amount of data available to the automatic portability 
provider, the more successful it will be in matching participants' 
Default IRAs with their active accounts in a new employer's plan.
    Based on the best available data, the Department estimates that PSN 
currently covers more than 60 percent of account holders in large DC 
plans \77\ and that its market share is likely to increase further due 
to the new statutory prohibited transaction exemption. Due to the 
aforementioned barriers to entry for potential automatic portability 
providers, the Department is unaware of any entities other than PSN 
that are currently planning to become an automatic portability provider 
in reliance on Code section 4975(d)(25).\78\ Therefore, for purposes of 
this analysis, the Department assumes that PSN will be the only entity 
providing automatic portability provider services pursuant to the 
statutory exemption. The Department assumes this will be the case even 
though RCH was granted PTE 2019-02, because the individual exemption 
has a limited five-year term that expires on July 31, 2024, while the

[[Page 5640]]

statutory exemption does not, and RCH would have to request additional 
relief from the Department to continue relying on PTE 2019-02 after its 
five-year term expires. If, counter to the Department's assumption, it 
turns out that there is more than one automatic portability provider, 
the Department anticipates that the number of automatic portability 
providers would be very small because of the barriers to entry. They 
might specialize by geography or by types of plan; for example, one 
automatic portability provider might specialize in plans for government 
employees. It seems likely that their networks would overlap so both 
automatic portability providers could be successful in making many 
matches. The Department welcomes comments regarding how many automatic 
portability providers there would be, as well as data and other 
information that will allow the Department to further assess how the 
automatic portability marketplace will develop.
---------------------------------------------------------------------------

    \77\ Plans classified as large constitute nearly 90 percent of 
account holders in plans required to file the Form 5500 and must 
submit the Schedule C of the Form 5500, which covers service 
providers, such as recordkeepers. Plans considered small do not 
report this information. Calculation based on tabulations of the 
2021 EBSA Private Pension Plan Bulletin Research File.
    \78\ The Department is aware of one additional entity that had 
expressed interest in becoming an automatic portability provider; 
however, the Department understands this entity is no longer moving 
ahead with plans to become an automatic portability provider.
---------------------------------------------------------------------------

4.2. Recordkeepers
    As discussed above, the Department assumes that PSN will be the 
only automatic portability provider in the market. PSN is structured 
with seven ``owner members,'' who have board control. It allows for 
open recordkeeper membership without board control. In September of 
2023, PSN stated that the owner members, which include Alight, Empower, 
Fidelity, Principal, RCH, TIAA, and Vanguard, were the only members at 
that time.\79\ There is significant uncertainty regarding how many 
recordkeepers will join PSN. The Department believes that automatic 
portability transactions will be a desirable feature for plan sponsors 
and participants, which may drive growth in recordkeeper participation. 
Recordkeepers do not incur a direct cost to join PSN. The Department 
requests comment on how many recordkeepers would choose to join PSN.
---------------------------------------------------------------------------

    \79\ Portability Services Network, PSN Participating Owner 
Members and Members, (2023), https://psn1.com/auto-portability/regulatory-information/participating-recordkeepers.
---------------------------------------------------------------------------

    While this analysis assumes that PSN will be the only automatic 
portability provider, the Department acknowledges that another 
automatic portability provider may enter the market. Entry of 
additional automatic portability providers may impact the number of 
affected recordkeepers and the manner in which those recordkeepers are 
affected by this proposed regulation.
    According to the Department's analysis of 2021 Form 5500 data, 
there were 1,951 recordkeepers providing services to private sector DC 
retirement plans.\80\ As described in more detail in subsection 3.1 
above, the six recordkeepers that are founding owner members of PSN 
administer accounts for over 60 percent of account holders in large DC 
plans that file Form 5500. The Department estimates that by the end of 
the ten-year estimation period for this analysis, roughly 90 percent of 
the DC account holders in plans filing Form 5500 would be associated 
with participating recordkeepers. As an illustration, this level of 
recordkeeper participation could be achieved if the next 12 largest 
recordkeepers, in terms of account holders serviced, fully participated 
in the program. Because the market is currently dominated by large 
recordkeepers, the Department anticipates that additional entry into 
the market will be initially dominated by other large recordkeepers. 
However, because of the low cost to participate in the PSN, it is 
possible that most recordkeepers will eventually participate in it. The 
Department solicits comments on its assumptions and estimates regarding 
recordkeeper participation.
---------------------------------------------------------------------------

    \80\ The analysis only included plans with nonzero plan assets 
and nonzero participants. Calculations based on the 2021 Form 5500.
---------------------------------------------------------------------------

4.3. Plans, Plan Participants, and the Number of Automatic Portability 
Transactions
    This section derives an estimate of the number of automatic 
portability transactions. It does so by (1) identifying plans, 
participants, and assets covered by PSN-participating recordkeepers, 
(2) estimating the number of accounts below the mandatory distribution 
threshold, and (3) estimating employment separations and post-
separation behavior. It estimates these figures under the baseline 
scenario and under implementation of the statute and regulation.
4.3.1. Plans, Participants and Assets
    The proposed regulation has the potential to affect participants 
with account balances in any employer-sponsored retirement plan that 
is: (1) a qualified trust; (2) an annuity plan described in Code 
section 403(a); (3) an eligible deferred compensation plan described in 
Code section 457(b) which is maintained by an eligible employer 
described in Code section 457(e)(1)(A); or (4) an annuity contract 
described in Code section 403(b).\81\ Approximately 635,000 DC plans 
reported participants with account balances on their 2021 Form 5500. 
These plans cover 86.6 million participants with total account balances 
of $9.3 trillion.
---------------------------------------------------------------------------

    \81\ While this rulemaking technically may apply to separated, 
vested DB participants as well, the Department believes that it is 
rare that they would be affected by the rule and therefore does not 
include them in its estimates. For further discussion, please see 
section 9. Uncertainty. The number of participants is left static 
throughout the ten-year time period of analysis. While this could 
impact the overall estimate of the benefits and costs, it does not 
impact the relative difference between benefits and costs.
---------------------------------------------------------------------------

    To understand the number of plans, participants and assets that 
could be impacted one would need to know if the plan's recordkeeper is 
part of the PSN network and if their account balance is below the 
mandatory distribution threshold ($5,000 baseline or $7,000 post 
statute and regulation) when they separate from employment. To identify 
plans with PSN-participating recordkeepers the Department queried Form 
5500 Schedule C data, which has information on a plan's service 
providers. The data has limitations. in particular, only large plans 
are required to submit the Schedule C, which means the majority of 
plans do not have to file the Schedule C. However, the group of 
retirement plans required to submit the Schedule C covers nearly 90 
percent of participants with account balances and 90 percent of assets, 
which are the main variables of interest.
    The query of Schedule C data showed that the six recordkeepers that 
are founding owner members of PSN provided services to over 34,600 
large plans (40 percent of large plans) with 47 million account holders 
(61 percent of account holders in large plans). These plans held $5.5 
trillion in assets (66 percent of large plan assets) in 2021.\82\
---------------------------------------------------------------------------

    \82\ Tabulations presented are based on the 2021 EBSA Private 
Pension Plan Bulletin Research File.
---------------------------------------------------------------------------

    Some plans with participants that may be impacted by the proposed 
rule are not required to file the Form 5500, for example state and 
local governmental plans. Account holders who participate in state and 
local governmental plans that are not covered by ERISA may also be 
affected by the proposed rule if their plan sponsor contracts with an 
automatic portability provider to provide automatic portability 
services. According to BLS employment data, there are almost 20 million 
currently employed state and local government workers in the United 
States.\83\ The March 2021 National Compensation Survey: Employee 
Benefits in the United States indicates that 18 percent of state and 
local

[[Page 5641]]

government workers participate in a defined contribution plan.\84\ 
Without more granular data, it is difficult for the Department to 
determine a reasonably specific proportion of these workers that could 
be affected by the proposed rule. However, the Department estimates 
that up to 3.5 million state and local government workers participate 
in a DC plan that may also incorporate a mandatory distribution 
provision for small account balances.\85\
---------------------------------------------------------------------------

    \83\ BLS Series Report(s) from the Current Employment Statistics 
program: CES9092000001 & CES9093000001, Dec 2022 data element, data 
accessed 10/2/2023 from: https://data.bls.gov/cgi-bin/srgate. 
5,087,000 state employees and 14,370,000 local government employees.
    \84\ BLS, ``National Compensation Survey: Employee Benefits in 
the United States'', (September 2021), Employee Benefits in the 
United States, March 2021 (bls.gov).
    \85\ Calculated as: 18% x (5,087,000 state employees + 
14,370,000 local government employees) = 3,502,260.
---------------------------------------------------------------------------

4.3.2. Accounts With Balances Less Than the Mandatory Distribution 
Amount
    The proposed regulation directly affects participants with account 
balances less than $7,000 in a plan at the time of separation from 
employment, previously only $5,000.\86\ To estimate the number of 
affected participants, the Department considered the separation rate 
for participants within this group and the proportion of DC plan 
accounts with balances under $7,000.
---------------------------------------------------------------------------

    \86\ There are some accounts that could have balances above the 
$7,000 threshold that are still subject to a mandatory distribution. 
See Code section 411(a)(11)(D) for circumstances where the amount of 
a distribution may be greater than $5,000 if a participant made a 
previous roll-in to a plan from an individual retirement plan. In 
such circumstances, the roll-in funds are not considered in 
determining the $5,000 vested accrued balance, so a larger amount of 
assets could be subject to a mandatory distribution under the terms 
of the plan.
---------------------------------------------------------------------------

    While the Department lacks data specifically on DC accounts with 
less than $7,000, there are related data that are useful in the 
construction of an estimate. The Employee Benefit Research Institute 
(EBRI) reported that in 2020, 40 percent of 401(k) plan accounts with 
balances had less than $10,000 in their accounts and 28 percent had 
less than $5,000 in their account.\87\ The Department used this data to 
estimate that approximately 33 percent of DC plan accounts will have 
balances below the new mandatory distribution threshold of $7,000. 
Additionally, the Department estimates that 28 percent of DC plan 
accounts would have balances below the current mandatory distribution 
threshold of $5,000 that represent the baseline. The Department 
requests comment on these assumptions and this estimate.
---------------------------------------------------------------------------

    \87\ Sarah Holden, Steven Bass, and Craig Copeland. ``401(k) 
Plan Asset Allocation, Account Balances and Loan Activity in 2020,'' 
EBRI Issue Brief #576. November 29, 2022. Retirement Clearinghouse, 
LLC, Employee Benefit Research Institute, and contributor Boston 
Research Technologies. ``Auto Portability Research & Simulation: 
Automating Plan-to-Plan Transfers for Small Accounts.'' Consolidated 
Testimony in front of the ERISA Advisory Council, June 8, 2016.
---------------------------------------------------------------------------

4.3.3. Affected Accounts
    Table 1 shows the estimates of the number of accounts, how the 
affected accounts are identified, and how the affected accounts are 
impacted in the baseline scenario and post-rule scenario for the first 
year in the estimation period. This section explains the assumptions 
and calculations used to obtain the estimates in the table. A similar 
table could be constructed for each year, with the difference for each 
year being the percent of accounts covered by the automatic portability 
network. A key takeaway from the table is the increase in accounts in 
plans with the automatic portability feature from the baseline to the 
post-rule scenario. The increase in these accounts is the source of 
much of the benefits of the rule. Bolded numbers at the bottom of a 
table are numbers that flow into a subsequent table.

                       Table 1--Affected Accounts
------------------------------------------------------------------------
                                             Baseline        Post-rule
------------------------------------------------------------------------
Defined Contribution Plan Account             86,573,634      86,573,634
 Holders................................
x Job Separation Rate Associated with                20%             20%
 Modest Account Balances................
                                         -------------------------------
= Annual Account Churn..................      17,314,727      17,314,727
x Proportion with Balance of $7,000 or               33%             33%
 less...................................
                                         -------------------------------
= Affected Accounts.....................       5,713,860       5,713,860
x Proportion of Separating Account                   85%            100%
 Holders Subject to Mandatory
 Distribution...........................
                                         -------------------------------
= Accounts Subject to Mandatory                4,848,124       5,713,860
 Distribution \1\.......................
Accounts Not Subject to Mandatory                865,736               0
 Distribution \1\.......................
------------------------------------------------------------------------
\1\ These values flow into Table 3.

    A 2023 report by Vanguard suggests that accounts with balances 
below $10,000, which is the most similar balance category that aligns 
with the mandatory distribution limit and therefore used as a proxy for 
this group, are primarily held by participants with household incomes 
of less than $50,000.\88\ The Federal Reserve Economic Well-Being of 
U.S. Households Survey of Household Economics and Decisionmaking (SHED) 
survey provides data on voluntary and involuntary employment 
separations by income range. Based on SHED data from 2018-2022, the 
Department assumes a separation rate of 20 percent for workers with 
annual household incomes of less than $50,000.\89\ The Department uses 
this factor as the separation rate for small balance plans in its 
estimations.
---------------------------------------------------------------------------

    \88\ Vanguard. ``How America Saves.'' 2023.
    \89\ Federal Reserve. ``Economic Well-Being of U.S. Households 
in 2022.'' (2023). https://www.federalreserve.gov/publications/files/2022-report-economic-well-being-us-households-202305.pdf.
---------------------------------------------------------------------------

    The Department is interested in the post-separation behavior of 
both the employer/plan sponsor and account owner. A survey conducted by 
the Callan Institute in 2022 found that 65 percent of DC plan sponsors 
sought to retain assets of both retirees and terminated participants, 
with 85 percent seeking to retain assets of retirees and 65 percent 
seeking to retain assets of other terminated participants.\90\ This 
study also suggests that plan sponsors seek to retain separating 
employees' plan assets due to cost efficiencies, although half of the 
responding plan sponsors did not have a strategy in place for asset 
retention. The Department seeks comment from entities such as plan 
sponsors and recordkeepers with information on plan policies and

[[Page 5642]]

participant behavior after job separation related to small balance 
accounts.
---------------------------------------------------------------------------

    \90\ Callan Institute. ``2023 Defined Contribution Trends.'' 
https://www.callan.com/research/2023-defined-contribution-trends-survey/.
---------------------------------------------------------------------------

    Two recordkeepers servicing 8 million accounts, Alight and 
Vanguard, published separate experience studies regarding post-
separation actions in 2023.\91\ These reports have informed the 
Department's understanding of the disposition of small balance 
accounts. As presented in table 2, the two studies report similar rates 
of cashouts. However, the proportion of accounts rolling over and 
remaining with the prior employer's plan varied significantly. These 
differences may be attributable to differing economic conditions, 
differing levels of financial literacy, or by plan design elements 
unique to the recordkeeper.
---------------------------------------------------------------------------

    \91\ Vanguard. ``How America Saves.'' 2023; Alight. ``Universe 
Benchmarks Report.'' 2023.

                                              Table 2--Post-Separation Behavior for Small Balance Accounts
                                                                     [$1,000-$4,999]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                          Remain in plan
                 Year published                                Recordkeeper                  Accounts       Cashout (%)         (%)        Rollover (%)
--------------------------------------------------------------------------------------------------------------------------------------------------------
2023...........................................  Vanguard...............................       5,000,000              34              51              15
2023...........................................  Alight.................................       3,000,000              39              28              33
---------------------------------------------------------------------------------------------------------
Behavior Assumptions without Automatic Portability Feature *............................................              36              42              22
Behavior Assumptions with Automatic Portability Feature (Based on RCH Pilot)............................              27              42              31
--------------------------------------------------------------------------------------------------------------------------------------------------------
* Weighted average of values from Vanguard and Alight reports. Automatic portability is estimated to decrease cashouts by 25% across eligible accounts,
  which increases rollovers by approximately 40%.

    The Department developed its estimates related to post-separation 
actions using both studies to create weighted averages based on the 
number of accounts in each study. Therefore, the Department estimates 
that 36 percent of separations will result in a cashout in the absence 
of the enhanced automatic portability plan feature provided in this 
proposal and statutory exemption. The Department acknowledges that the 
experience of these two service providers may not be representative of 
the experience for all plan recordkeepers and requests comments or 
additional data concerning this assumption.
    This proposal would affect plan participants differently depending 
on the size of their account balance. As discussed above, under current 
law, a separating employee with a DC plan account balance of $7,000 or 
less can be ``cashed out'' of the plan by their employer without their 
consent. A separating employee with DC plan savings between $1,001 and 
$7,000 can only be ``forced out'' of their plan into a Default IRA 
through an automatic rollover if they do not provide directions to the 
employer after receiving a notice from the plan's administrator.\92\
---------------------------------------------------------------------------

    \92\ See Code section 401(a)(31)(B) as amended by the SECURE 2.0 
Act. Previously, this ``force out'' applied to a separating employee 
with DC plan savings between $1,001 and $5,000.
---------------------------------------------------------------------------

    Alternatively, this proposal would allow for ``automatic 
portability transactions.'' These are transactions in which assets held 
in a Default IRA established on behalf of an individual from a 
mandatory distribution from an employer-sponsored retirement savings 
plan are subsequently transferred to an eligible employer-sponsored 
plan in which such individual is an active participant, after such 
individual has been given advance notice of the transfer and has not 
affirmatively opted out of such transfer. As shown above in table 2, 
the Department estimates that the statutory exemption would reduce the 
propensity to cash out for separating participants with small accounts 
by 25 percent. The basis for this estimate is a pilot study of 
automatic portability conducted by RCH which reduced cashout rates for 
small balance account holders by approximately 50 percent.\93\ The 
specific way the pilot study was implemented, however, suggests that 
this finding is larger than we would observe under the statutory 
exemption. The pilot study had a selected sample of participants who 
had been matched to a current, active account. Participants received a 
letter encouraging them to call and speak with someone who would 
provide advice or guidance about their options and offer to help them 
implement a rollover.
---------------------------------------------------------------------------

    \93\ Boston Research Technologies. ``Eliminating Friction and 
Leaks in America's Defined Contribution System.'' 2013.
---------------------------------------------------------------------------

    Table 3 shows how the affected accounts are sorted in the 
Department's estimation process for year one. For both the baseline and 
the post-rule scenario, the first step is to group the accounts based 
on whether or not the account belongs to a plan with the automatic 
portability feature and accounts subject to a mandatory distribution 
requirement. There are 865,736 accounts that are not subject to 
mandatory distribution in the baseline because their balances are 
between $5,001 and $7,000. These accounts are subject to mandatory 
distribution in the post-rule scenario. The assumptions from table 2 
are then applied to these groups to estimate the share of small 
accounts post-separation being cashed out, remaining in the plan, and 
those rolled over.\94\
---------------------------------------------------------------------------

    \94\ These estimates are calculated as follows: 36% baseline 
cashout rate x 25% decline from automatic portability = 9 percentage 
points. The estimated post-rule cashout rate is the baseline cashout 
rate, 36%, minus 9%, which equals 22%. The estimated post-rule 
rollover rate is the baseline rollover rate of 22%, plus the 9% 
increase from automatic portability, which equals 31%.

[[Page 5643]]



                                                        Table 3--Year One Disposition of Accounts
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                 Baseline \1\                                     Post-rule
                                                          ----------------------------------------------------------------------------------------------
                                                                                 Accounts not
                 Disposition of accounts                    Accounts subject      subject to                         Accounts subject
                                                              to mandatory        mandatory            Total           to mandatory          Total
                                                              distribution     distribution \1\                        distribution
--------------------------------------------------------------------------------------------------------------------------------------------------------
Accounts with Balances Below $7,000......................          4,848,124            865,736          5,713,860          5,713,860          5,713,860
Cashout:
    Number of Accounts...................................          1,461,709            311,665          1,773,374          1,722,728          1,722,728
Remain in Plan:
    Number of Accounts...................................          2,036,212            363,609          2,399,821          2,399,821          2,399,821
Rollover:
    Number of Accounts...................................          1,350,202            190,462          1,540,664          1,591,310          1,591,310
x Estimated Percent of Rollovers Going into Default IRAs.                60%                 0%  .................                60%                60%
                                                          ----------------------------------------------------------------------------------------------
Total Default IRAs.......................................            810,122                  0            810,122            954,786            954,786
x Year One Account Coverage by AP Network \2\............                65%                65%                65%                65%                65%
                                                          ----------------------------------------------------------------------------------------------
Automatic Portability Feature............................            526,579                  0            526,579            620,611            620,611
No Automatic Portability Feature \3\.....................            283,543                  0            283,543            334,175            334,175
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ In the baseline, accounts with assets between $5,001 and $7,000 are not subject to mandatory distribution. In the post-rule scenario, all accounts
  with assets below $7,000 are subject to mandatory distribution.
\2\ Coverage by the AP network is expected to expand in the post rule scenario while the baseline is assumed to remain constant. The post rule scenario
  is modeled using the following coverage assumptions: A = 65%, 72%, 78%, 82%, 84%, 86%, 88%, 89%, 90%, 90%{time} ; where element i = years 1
  through 10.
\3\ 35 percent of accounts are not assumed to be covered by the AP network in year one. The percent of accounts not covered by the AP network in
  subsequent years may be calculated as 1-Ai.

    Finally, the Department estimates the number of default IRA 
accounts expected to be generated from the roll over activity in year 
one. Research finds that approximately 60 percent of all small account 
balance IRA rollovers (default IRAs) are the result of automatic 
rollovers of mandatory distributions.\95\ The estimates of accounts 
rolling over for the first year described in table 3 are applied to the 
60 percent factor to generate the estimated number of affected accounts 
expected to roll over into a default IRA. This is the group where the 
automatic portability transactions will occur. These calculations 
continue into table 4, where the number of Default IRAs is shown over 
each of the first ten years, followed by the number of Default IRAs 
with automatic portability features, as well as the number that 
ultimately result in an automatic portability transaction each year.
---------------------------------------------------------------------------

    \95\ Approximately 60% is an estimate of the share of IRAs below 
the current mandatory distribution threshold of $5,000, established 
from a rollover, that remain fully invested in money market funds 
after one year of opening. See Figure 6.8. Investment Company 
Institute. ``The IRA Investor Profile: Traditional IRA Investors' 
Activity, 2007-2016.'' (2018). Goodman, Mukherjee, and Ramnath, 
``Set It and Forget It,'' 2023.

[[Page 5644]]



                                                       Table 4--Ten Year Counts of Default IRA and Automatic Portability (AP) Transactions
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                Estimation period                     Year 1       Year 2       Year 3       Year 4       Year 5       Year 6       Year 7       Year 8       Year 9      Year 10       Total
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Baseline (RCH/PSN Operates, $5,000 Distribution Limit)..........................................................................................................................................
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Coverage/Match Factor............................          65%          65%          65%          65%          65%          65%          65%          65%          65%          65%
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Default IRAs.....................................      810,122      810,122      810,122      810,122      810,122      810,122      810,122      810,122      810,122      810,122    8,101,220
Accounts with AP.................................      526,579      526,579      526,579      526,579      526,579      526,579      526,579      526,579      526,579      526,579    5,265,790
AP Transfers.....................................      337,484      337,484      337,484      337,484      337,484      337,484      337,484      337,484      337,484      337,484    3,374,840
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Post-Rule (RCH/PSN Grows, $7,000 Distribution Limit)............................................................................................................................................
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Coverage/Match Factor............................          65%          72%          78%          82%          84%          86%          88%          89%          90%          90%
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Default IRAs.....................................      954,786      976,384      994,897    1,007,239    1,013,410    1,019,581    1,025,752    1,028,837    1,031,923    1,031,923   10,084,732
Accounts with AP.................................      620,611      702,996      776,020      825,936      851,264      876,840      902,662      915,665      928,731      928,731    8,329,456
AP Transfers.....................................      397,749      519,606      630,585      699,159      724,418      766,494      809,360      817,864      839,779      824,156    7,029,170
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Differences between the Baseline and Post-Rule:
    Default IRAs.................................      144,664      166,262      184,775      197,117      203,288      209,459      215,630      218,715      221,801      221,801    1,983,512
    Accounts with AP.............................       94,032      176,417      249,441      299,357      324,685      350,261      376,083      389,086      402,152      402,152    3,063,666
    AP Transfers.................................       60,265      182,122      293,101      361,675      386,934      429,010      471,876      480,380      502,295      486,672    3,654,330
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
* The Department estimates that approximately 1.4% of all accounts that are matched for an automatic portability transaction will not be transferred due to account holder opt-out. The coverage/
  match rates can not be applied directly to the estimates in the table to obtain other estimates in the table. The drop in Automatic Portability transfers from year 9 to year 10 is a function
  of the coverage/match rates being the same in both years in the estimation model.


[[Page 5645]]

5. Benefits

    This section describes the benefits of the proposed regulation in 
comparison to the baseline before the statutory exemption for automatic 
portability transactions was enacted by SECURE 2.0 Act. As previously 
stated, RCH/PSN already relies on relief the Department provided in PTE 
2019-02, an administrative individual exemption, to provide automatic 
portability provider services. In general, the benefits of the proposed 
regulation are derived from the removal of the uncertainty associated 
with the need to rely on an individual exemption. Moreover, RCH/PSN 
will benefit from this proposed regulation because they would not have 
to request additional relief from the Department when the five-year 
term of PTE 2019-02 expires.
    The establishment of a statutory exemption encourages the growth of 
the market for automatic portability providers. As previously stated, 
the Department assumes that RCH currently represents roughly 65 percent 
of the accounts in the system and that they have a success rate of 65 
percent in matching accounts in that system. This results in roughly 
337,000 automatic portability transfers estimated to occur each year in 
the baseline. This is compared to the expansion that results from the 
rule where the Department estimates the number of automatic portability 
transfers to grow to approximately 825,000 at the end of the estimation 
window. This estimate represents automatic portability coverage for 
approximately 90 percent of the accounts in the DC system. This is 
anticipated to result in $2.8 billion of undiscounted benefits arising 
through:
     An increase in potentially affected accounts due to the 
increase in the mandatory distribution threshold from $5,000 to $7,000;
     Projected account balance appreciation and higher returns;
     Reduction of duplicative fees; and
     Consolidation of abandoned accounts.
    Retaining assets in retirement accounts and avoiding cashouts is an 
objective of the statute and proposed rules. Table 5a shows the value 
of assets retained in the retirement accounts through a reduction of 
the amount of assets cashed out. The impact of the rule is the 
difference in the value of accounts that cashout post-rule relative to 
the baseline. This amount is not classified as a benefit. Table 5b 
shows each component of the quantified benefit stream measured as 
improvements between the baseline scenario and the post proposed rule 
scenario. The increase overtime in affected accounts is incorporated 
into the values displayed.

[[Page 5646]]



                                                                              Table 5A--Value of Affected Accounts
                                                                                         [$ in millions]
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                       Year                             1            2            3            4            5            6            7            8            9            10         Total
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Retirement Assets Retained via Cashout Avoidance:
    Rule.........................................       $5,334       $5,202       $5,086       $5,007       $4,967       $4,926       $4,886       $4,865       $4,844       $4,844      $49,962
    -Baseline....................................        5,461        5,461        5,461        5,461        5,461        5,461        5,461        5,461        5,461        5,461       54,609
                                                  ----------------------------------------------------------------------------------------------------------------------------------------------
        = Assets Retained........................          127          259          375          454          494          534          575          596          617          617        4,647
Present Value of Assets Retained by Discount
 Rate:
    3 Percent....................................          123          244          343          403          426          448          468          470          473          459        3,856
    7 Percent....................................          118          226          306          346          352          356          358          347          335          313        3,059
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------


                                                                              Table 5B--Value of Affected Accounts
                                                                                         [$ in millions]
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                       Year                             1            2            3            4            5            6            7            8            9            10         Total
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Value of Reallocation of Assets:
    Rule.........................................      $29,218      $27,792      $26,380      $24,954      $23,554      $22,267      $21,058      $19,905      $18,839      $17,842     $231,808
    -Baseline....................................       29,249       27,570       26,013       24,569       23,229       21,987       20,835       19,767       18,776       17,857      229,851
                                                  ----------------------------------------------------------------------------------------------------------------------------------------------
        = Benefits...............................          -31          222          367          385          325          280          223          139           63          -15        1,957
Value of Duplicated Account Fees:
    Rule.........................................           17           39           65           94          125          157          191          225          261          295        1,469
    -Baseline....................................           14           28           43           57           71           85           99          113          128          142          780
                                                  ----------------------------------------------------------------------------------------------------------------------------------------------
        = Benefits...............................            3           10           22           38           54           72           92          112          133          153          689
Value of Abandoned Accounts Consolidated:
    Rule.........................................           12           16           19           21           22           23           24           25           25           25          211
    -Baseline....................................           10           10           10           10           10           10           10           10           10           10          101
                                                  ----------------------------------------------------------------------------------------------------------------------------------------------
        = Benefits...............................            2            5            9           11           12           13           14           14           15           15          110
Annual Total:
    Rule.........................................       29,247       27,846       26,464       25,069       23,701       22,447       21,273       20,155       19,125       18,162      233,488
    -Baseline....................................       29,273       27,609       26,066       24,636       23,310       22,082       20,944       19,890       18,913       18,009      230,732
                                                  ----------------------------------------------------------------------------------------------------------------------------------------------
        = Benefits...............................          -26          237          398          433          390          365          329          265          211          153        2,756
Present Value of Benefits by Discount Rate:
    3 Percent....................................          -26          224          364          385          337          306          267          209          162          114        2,342
    7 Percent....................................          -25          207          325          331          278          243          205          154          115           78        1,911
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------


[[Page 5647]]

    Lastly, it should enhance the ability of American workers to 
achieve their retirement savings goals by consolidating retirement 
funds into fewer accounts and investing assets consistent with their 
retirement needs. These benefits are described in more detail in the 
following subsections.
5.1. Benefits for Plan Participants
    The Department expects that DC plan participants with small account 
balances that are subject to the Code's mandatory distribution rules 
would benefit from increased access to automatic portability 
transactions in several ways. First, their retirement account balances 
would be consolidated in their new employer's plan, which would reduce 
participants' exposure to duplicative fees. Second, the incidence of 
missing participants and abandoned accounts would decrease as a result 
of the automatic portability providers matching a Default IRA with an 
individual's account in their new employer's plan. Third, moving assets 
from a Default IRA to a DC plan would likely provide greater investment 
returns, on average, as the assets are reallocated from being invested 
in money market funds to target date funds and other, more diversified 
investments.
5.1.1. Account Consolidation
    One potential outcome of a highly mobile labor force (one in which 
employees change jobs frequently) is the proliferation of retirement 
accounts. Data from the Federal Reserve indicates that approximately 20 
percent of employees with a DC plan account and household incomes below 
$50,000 changed jobs in the past year.\96\ As participants change jobs, 
mandatory distributions into a Default IRAs can result in individuals 
owning several retirement accounts.\97\ Once potential outcome of 
multiple accounts is individuals paying management or recordkeeping 
fees for several accounts. GAO reported a median annual record-keeping 
flat fee of $42 per account. Although modest, this fee can contribute 
to an erosion of accumulated retirement assets, especially if applied 
to multiple, small-balance accounts.\98\ Thus, each account 
consolidation provides a benefit to participants equal to the value of 
any associated fees or expenses arising from maintaining an additional 
retirement account that would be eliminated through consolidation net 
of the transfer fee discussed in section 6.4 of the Costs section 
below. Accordingly, the Department estimates that over the 10-year 
estimation window, account consolidations will total approximately 3.7 
million additional accounts when compared to the baseline, yielding 
approximately $689 million in undiscounted benefits for participants 
accruing from the reduction of duplicative fees for multiple accounts 
over the 10-year estimation period.\99\
---------------------------------------------------------------------------

    \96\ Federal Reserve. ``Economic Well-Being of U.S. Households 
in 2022.'' (2023). https://www.federalreserve.gov/publications/files/2022-report-economic-well-being-us-households-202305.pdf.
    \97\ Employee Benefit Research Institute. ``EBRI IRA Database: 
IRA Balances, Contributions, Rollovers, Withdrawals, and Asset 
Allocation, 2017 Update.'' (2020).
    \98\ Government Accountability Office. ``401(k) Plans: Greater 
Protections Needed for Forced Transfers and Inactive Accounts.'' 
(2014).
    \99\ The estimate is calculated as follows: 3,654,330 account 
consolidations x $42 = $153,481,860 in benefits. $153,481,860 x 
average of 4.5 years receiving benefit per account = $689,003,322 in 
total benefits. At a discount rate of 3 percent, this results in 
$552,051,586 in total benefits. At a discount rate of 7 percent, 
this results in $417,450,008 in total benefits.
---------------------------------------------------------------------------

5.1.2. Missing Participants and Abandoned Accounts
    Another consequence of the proliferation of small-balance accounts 
is the potential for a high volume of retirement assets that are 
``abandoned'' by participants. Over time, DC plan account holders that 
have separated from their employers may become disconnected from their 
retirement assets as a result of mandatory distributions into Default 
IRAs. Abandonment of these accounts may be attributable to any number 
of reasons but are often the result of participants that are missing 
(cannot be found by the plan provider), unresponsive (failing to 
respond to communications from the plan provider), or unaware that an 
account has been established on their behalf. Goodman, Mukherjee, and 
Ramnath (2023) found that 0.4 percent of retirement-aged IRA owners 
abandoned their IRAs, amounting to $66 million (in 2016 dollars).\100\ 
Because this figure only relates to retirees, it represents only a 
fraction of the assets that exist in abandoned IRAs for the larger pool 
of IRA owners of all ages; a portion of these IRA owners would have 
been impacted by mandatory distributions. The Department estimates that 
1.0 percent of Default IRA owners will abandon their IRAs, which is 
consistent with Goodman, Mukherjee, and Ramnath (2023).\101\ It seems 
likely that IRA owners who experienced force-outs may have higher 
abandonment rates than other IRA owners. Owners who experienced force-
outs allowed themselves to be defaulted into an IRA instead of taking 
action to perform a rollover or obtain a cashout, indicating they may 
have a tendency to be unaware or passive, characteristics that may 
increase the likelihood of abandonment. From FY 2017 through FY 2023, 
EBSA benefit advisors have located 4,732 participants through a joint 
initiative with the Pension Benefit Guaranty Corporation (PBGC) to 
connect individuals with retirement benefits valued at $227.6 million.
---------------------------------------------------------------------------

    \100\ In this study, account abandonment is proxied by a failure 
to claim the account over ten years after a legal requirement to do 
so; specifically, the required minimum distribution requirement. 
Goodman, Mukherjee, and Ramnath, ``Set It and Forget It,'' 2023.
    \101\ Id.
---------------------------------------------------------------------------

    Given the threshold for mandatory distributions increases to $7,000 
in 2024 while the adoption of auto-enrollment policies by plan sponsors 
continues to expand, there will be an increased number of potential 
Default IRAs, and, as a result, the number of accounts that might be 
abandoned or have missing participants will also increase.\102\ 
However, over time the Department estimates a minimum of approximately 
37,000 accounts will be saved from abandonment with the statutory 
exemption over the 10-year estimation period (1.0 percent of the 
approximately 3.6 million accounts that will be consolidated through 
automatic portability transactions when compared to the baseline). The 
Department further estimates the consolidation of abandoned accounts 
would provide approximately $109.6 million in undiscounted benefits for 
participants over the 10-year estimation window when compared to the 
baseline.\103\ The Department requests comment on these estimates.
---------------------------------------------------------------------------

    \102\ Id.
    \103\ The estimate is calculated as follows: 3,654,330 account 
consolidations from automatic portability transactions x 1% of 
retirement accounts that are abandoned = 36,544 abandoned accounts 
consolidated. 36,544 accounts x $3,000 average account balance for 
Default IRAs = $109,632,000. At a discount rate of 3 percent, this 
results in $90,685,800 in total benefits. At a discount rate of 7 
percent, this results in $71,592,717 in total benefits.
---------------------------------------------------------------------------

5.1.3. Improve Asset Allocation
    Upon job separation, some employees with small-balance accounts 
between $1,001 and $7,000 (in 2024) \104\ can be forced out of their 
previous employer's plan by a mandatory distribution of

[[Page 5648]]

their accumulated retirement assets that is automatically rolled over 
to a Default IRA.\105\ The Department has issued regulations providing 
a safe harbor that requires the employee's former employer to invest 
amounts held in a Default IRA in an investment product that preserves 
principal and provides a reasonable rate of return.\106\ In practice, 
many plans seek to implement the safe harbor by investing in money 
markets funds; however, the tradeoff for relative safety is potential 
returns. A 2014 GAO study reported that the average return for money 
market funds in the preceding 10 years was 1.5 percent, considerably 
lower than the average 6.3 percent return for target date funds common 
among 401(k) plans.\107\ Moreover, few participants take action to 
reallocate these default investments away from money market funds.\108\
---------------------------------------------------------------------------

    \104\ See Code section 411(a)(11)(D) for circumstances where the 
amount of a distribution may be greater than $5,000 ($7,000 
beginning in 2024) if a participant made a previous roll-in to a 
plan from an individual retirement plan. In such circumstances, the 
roll-in funds are not considered in determining the $5,000 vested 
accrued balance, so a larger amount of assets could be subject to a 
mandatory distribution under the terms of the plan.''
    \105\ Code section 401(a)(31)(B); see SECURE 2.0 Act, Sec. 304, 
Updating Dollar Limit for Mandatory Distributions.
    \106\ 29 CFR 2550.404a-2(c)(3)(i).
    \107\ Government Accountability Office (GAO). ``401(k) Plans: 
Greater Protections Needed for Forced Transfers and Inactive 
Accounts.'' (2014).
    \108\ Goodman, Mukherjee, and Ramnath, ``Set It and Forget It,'' 
2023. Investment Company Institute. ``The IRA Investor Profile.'' 
2018. 80% is an estimate of the share of IRAs below the current 
mandatory distribution threshold of $5,000, established from a 
rollover, that remain fully invested in money market funds after one 
year of opening. See Figure A.2 in the Appendix.
---------------------------------------------------------------------------

    The difference in the average rate of return between these two 
typical investment strategies could have a substantial impact on the 
value of retirement assets for investors with small-balance accounts, 
which are susceptible to capital erosion from fees and inflation. GAO 
projected investment outcomes over 30 years and found that an initial 
balance of $1,000 was estimated to be valued at over $2,700 under the 
average returns for target-date funds (6.3 percent) but $0 under the 
average returns for money market funds (1.5 percent), largely as a 
result of account fees outweighing minimal returns.\109\ This suggests 
that assets transferred into Default IRA accounts, which are typically 
invested in low-risk money market funds, could be better preserved and 
invested elsewhere.\110\ Consolidating these assets in a DC plan could 
improve the asset allocation of, and potentially better preserve, 
retirement assets for many retirement investors.
---------------------------------------------------------------------------

    \109\ Government Accountability Office (GAO). ``401(k) Plans: 
Greater Protections Needed for Forced Transfers and Inactive 
Accounts.'' (2014).
    \110\ Id.
---------------------------------------------------------------------------

    As presented in table 4 of the Affected Entities section, the 
Department estimates that just over 10 million Default IRAs will be 
created in the ten-year estimation period, compared to 8.1 million in 
the baseline, a change of approximately 2.0 million accounts. Of these 
10 million Default IRAs, 8.3 million are assumed to be in the automatic 
portability network under the rule (compared with 5.3 million at the 
baseline). The results are that 7.1 million accounts will be moved into 
a new employer's DC plan via automatic portability, compared with 3.4 
million in the baseline, an improvement of 3.7 million between the two 
scenarios. This results in an asset allocation with a more favorable 
return for account owners.
    Similar to the GAO analysis, the Department utilized updated data 
covering the 15 most recent years to estimate the returns to money 
market funds characteristic of Default IRAs and for target-date funds 
(TDFs) typical of DC plans, further supporting an analysis of how the 
change in asset allocation might potentially alter investment outcomes 
as a result of automatic portability transactions. Returns to money 
market funds from 2008 to 2022 averaged 0.7 percent, while returns to 
TDFs averaged 8.1 percent over the same period.
    The Department estimates that this reallocation of assets from 
Default IRAs to DC plans would result in approximately $2.0 billion in 
additional benefits when compared to the baseline value.\111\
---------------------------------------------------------------------------

    \111\ Returns from DC plans are estimated using an asset 
distribution characteristic of typical default investments for TDFs, 
80% stocks (S&P 500 annual returns) and 20% bonds (Baa Corporate 
returns). Returns for Default IRAs are estimated using an asset 
distribution characteristic of typical default investments for 
Default IRAs, 98% Treasury Bills and 2% Treasury Bonds. NYU Stern 
School of Business. Historical Returns on Stock, Bonds, and T-Bills: 
1928-2022. Accessed: https://pages.stern.nyu.edu/~adamodar/
New_Home_Page/data.html. At a discount rate of 3 percent, this 
results in $1,699,169,773 in benefits. At a discount rate of 7 
percent, this results in $1,422,157,975 in benefits.
---------------------------------------------------------------------------

5.1.4. Reduced Participant Benefits Because More Participants Are 
Subject to Mandatory Distributions
    The increase in the mandatory distribution threshold from $5,000 to 
$7,000 means that some separating participants will have fewer choices 
about how to deal with their account. This reduces the net benefits for 
those plan participants. Prior to the passage of the SECURE 2.0 Act, 
many separating participants in this account balance range would have 
left their account in their former employer's plan, but some of those 
participants would now be subject to a mandatory distribution into a 
Default IRA. If the account assets end up in a Default IRA, the 
Department expects that the participant would generally be worse off 
than in their former employer's plan because the assets would be 
subject to little or no growth given that they typically would be 
invested in money market funds and subject to relatively high fees. 
Other separating participants in the $5,000 to $7,000 range may end up 
being rolled into a new employer's plan; they would be better or worse 
off depending on how the services, products, and fees in the new 
employer's plan compared to the former employer's plan and depending on 
how long the assets lingered in the Default IRA before being rolled 
over into the new employer's plan. Overall, the affected participants 
would be worse off on average.
5.2. Benefits for Plans, Automatic Portability Providers, and Other 
Service Providers
    The estimated benefits for participants that are described in the 
preceding subsection result from the predictability the proposed rule 
provides to the marketplace. This predictability is intended to 
encourage the growth and efficiency of the automatic portability 
market. RCH/PSN will no longer need an administrative individual 
exemption or to apply to the Department for additional relief when the 
term PTE 2019-02 expires in 2024. For the same reason, the proposed 
rule removes barriers to entry for potential future automatic 
portability providers. The proposed rule will bring increased certainty 
to the robust network of entities involved in automatic portability 
arrangements, consisting of the automatic portability provider(s), 
recordkeepers, plans and plan sponsors, and plan participants and 
Default IRA owners, which will increase the reach, efficiency, and 
long-term viability of automatic portability transactions.
5.3. Benefits for Financial Institutions
    Financial institutions would benefit from more assets being kept in 
consolidated, retirement savings accounts and being invested rather 
than being cashed out because the financial institutions would earn 
more fees. Cashouts from small balance accounts are typically taken as 
cash and spent. The loss of retirement assets associated with cashing 
out small balance accounts and Default IRAs will be considerably 
curtailed with the adoption of automatic portability programs by plans 
sponsors and recordkeepers. At job separation, a small balance account 
holder (who has an account with $5,000 or less, or beginning in 2024, 
an account with $7,000 or less) can be forced out of their former 
employer's retirement plan.

[[Page 5649]]

While a rollover may result in procedural or paperwork burdens for the 
participant, a cashout is often the most straightforward option. 
Automatic portability programs, however, have the potential to reduce 
such burdens for participants, resulting in a higher volume of 
rollovers and fewer cashouts. Because cashouts are negatively 
correlated with the size of account balances (i.e., small account 
balances are more likely to be cashed out), the likelihood of cashouts 
at future job separations is expected to decrease as more assets remain 
in an individual's DC plan account, compounding the benefits of 
automatic portability transactions over time.

                                          Table 6--Accounting Statement
----------------------------------------------------------------------------------------------------------------
 
----------------------------------------------------------------------------------------------------------------
Benefits:
    Non-Quantified:
         Increased mandatory distribution threshold leads to cost savings for plans but reduced benefits
         for separating participants.
         Increased ease of retirement planning due to account consolidation.
----------------------------------------------------------------------------------------------------------------
                                                     Estimate       Year dollar    Discount rate  Period covered
                                                       (primary)                             (%)
----------------------------------------------------------------------------------------------------------------
Annualized Monetized ($ Millions/Year)..........         $191.12            2023               7       2024-2033
                                                          234.19            2023               3       2024-2033
Costs:
    Annualized Monetized ($ Millions/Year)......           $1.21            2023               7       2024-2033
                                                            1.42            2023               3       2024-2033
----------------------------------------------------------------------------------------------------------------
Transfers:
    Non-Quantified:
         Requiring automatic portability providers to offer the same terms to any plan will ensure
         sponsors not be restricted from engaging with more than one provider. This reduces barriers to entry,
         which is a transfer to providers entering the market, and encourages lower fees, which is a transfer to
         participants.
         Increasing the mandatory distribution threshold will reduce participant choice in how they
         handle their accounts. Conversely, this will give sponsors increased latitude in how they handle
         accounts. No longer having to administer small accounts is a transfer from participants to sponsors.
         Decreasing the number of Default IRA accounts will affect financial institutions that service
         these accounts. This will represent a transfer to institutions that service employer plans.
----------------------------------------------------------------------------------------------------------------
Annualized Monetized ($ Millions/Year)..........           52.00            2023               7       2024-2033
                                                           65.55            2023               3       2024-2033
----------------------------------------------------------------------------------------------------------------

6. Costs

    This analysis estimates the changes to cost burdens associated with 
the provision of automatic portability services under the proposed rule 
when compared to a baseline where the automatic portability provider 
operates under PTE 2019-02. The costs presented can be generally 
grouped into two categories: start-up and ongoing. The start-up costs 
are associated with updating processes or documents to bring existing 
practices into compliance with the proposed rule where there is a 
difference between operations under the PTE when compared to the 
proposed rule. The ongoing costs generally represent costs incurred due 
to both the increase in the threshold from $5,000 to $7,000 which is 
expected to create more default IRA accounts which is the group that 
automatic portability transactions occur within, and the growth of the 
automatic portability system which is assumed to result from the 
proposed rule. Over the first 10 years, the Department estimates an 
undiscounted cost of approximately $16,206,196, annualized to 
$1,620,620.\112\ The undiscounted stream of estimated costs is 
presented in table 7 below.
---------------------------------------------------------------------------

    \112\ Using a 3 percent discount rate results in a cost savings 
of approximately $14,160,023, annualized to $1,416,002. Using a 7 
percent discount rate results in a cost savings of approximately 
$12,073,029, annualized to $1,207,303.

                                                      Table 7--Estimated Costs Associated With Rule
                                                                    [$ in thousands]
--------------------------------------------------------------------------------------------------------------------------------------------------------
              Year                   1          2          3          4          5          6          7          8          9          10       Total
--------------------------------------------------------------------------------------------------------------------------------------------------------
Materials and Postage..........         $2         $3         $9        $14        $16        $19        $21        $22        $24        $23       $154
Labor Costs....................      6,206         88        572        895      1,041      1,226      1,415      1,483      1,580      1,547     16,052
                                ------------------------------------------------------------------------------------------------------------------------
    Total All Cost.............      6,208         90        581        909      1,057      1,245      1,436      1,505      1,604      1,570     16,206
Present Value of Total Cost:
    3 Percent..................      6,027         85        532        808        912      1,042      1,168      1,188      1,229      1,168     14,160
    7 Percent..................      5,802         79        474        693        754        829        894        876        872        798     12,073
--------------------------------------------------------------------------------------------------------------------------------------------------------

6.1. Preliminary Assumptions and Cost Estimate Inputs
    For purposes of this analysis, the Department assumes that the 
percent of retirement investors receiving electronic disclosures would 
be similar to the percent of plan participants receiving electronic 
disclosures under the Department's 2002 and 2020 electronic disclosure 
safe harbors.\113\ Accordingly, the Department estimates that 96.1 
percent of the disclosures sent to plan participants would be sent 
electronically, and the remaining 3.9 percent would be sent by 
mail.\114\ For disclosures sent by mail, the Department estimates that 
entities will

[[Page 5650]]

incur a cost of $0.66 \115\ for postage and $0.05 per page for material 
and printing costs.
---------------------------------------------------------------------------

    \113\ 67 FR 17264, 85 FR 31884.
    \114\ The Department estimates 96.1 percent of retirement 
investors receive disclosures electronically. This is the sum of the 
estimated share of retirement investors receiving electronic 
disclosures under the 2002 electronic disclosure safe harbor (58.3 
percent) and the estimated share of retirement investors receiving 
electronic disclosures under the 2020 electronic disclosure safe 
harbor (37.8 percent).
    \115\ United States Postal Service. ``First-Class Mail.'' 
(2023). https://www.usps.com/ship/first-class-mail.htm.
---------------------------------------------------------------------------

    Additionally, the Department assumes that several types of 
personnel would perform the tasks associated with information 
collection requests at an hourly wage rate of $63.45 for clerical 
personnel, $128.11 for a top executive, $116.86 for an auditor, $132.93 
for a plan fiduciary, $155.61 for a web designer, $159.34 for a legal 
professional, and $190.63 for a financial manager.\116\
---------------------------------------------------------------------------

    \116\ Internal DOL calculation based on 2023 labor cost data. 
For a description of the Department's methodology for calculating 
wage rates, see https://www.dol.gov/sites/dolgov/files/EBSA/laws-and-regulations/rules-and-regulations/technical-appendices/labor-cost-inputs-used-in-ebsa-opr-ria-and-pra-burden-calculations-june-2019.pdf.
---------------------------------------------------------------------------

6.2. Acknowledgement of Fiduciary Status
    Pursuant to the statutory text authorizing the Secretary to specify 
the time and format of such an acknowledgment, Sec.  2550.4975f-
12(b)(1) of this proposed regulation requires the automatic portability 
provider to acknowledge in writing that it is a fiduciary as defined in 
Code section 4975(e)(3) upon being engaged by a plan fiduciary, as well 
as in the required notices and disclosures to plan participants and IRA 
owners that are described below.
    The automatic portability provider's acknowledgment of its 
fiduciary status may include a description of the scope of the 
fiduciary status of the automatic portability provider and may explain 
that the automatic portability provider is not a fiduciary, consistent 
with Code section 4975(e)(3), with respect to any assets or 
administration of the plan or IRA with respect to which the automatic 
portability provider does not (1) have any discretionary authority, 
discretionary control or discretionary responsibility, (2) exercise any 
authority or control, and (3) render investment advice for a fee or 
other compensation, nor have any authority or responsibility to render 
such investment advice.
    Although PTE 2019-02 discussed RCH's fiduciary status, it did not 
explicitly require a fiduciary acknowledgement as a condition of the 
exemption. Therefore, the proposed regulation has the potential to 
incrementally increase the costs to RCH/PSN. The Department assumes the 
time it would take to draft the fiduciary acknowledgment would be 
minimal and anticipates that a single standard acknowledgement would be 
included in contracts with plan sponsors. If language is not already 
included in contracts, the Department estimates that RCH/PSN would send 
a one-page supplemental acknowledgement to each plan sponsor with an 
estimated cost of $159 in legal costs to develop the supplemental 
acknowledgement and $391,275 in clerical costs \117\ to provide the 
notices to the estimated 185,000 plans RCH/PSN currently services at an 
incremental cost of $2.12 per plan. Contracts executed after the date 
of a final rule would likely incorporate the acknowledgement for a de 
minimis additional cost.
---------------------------------------------------------------------------

    \117\ The hour burden is estimated as: 185,000 plan fiduciaries 
x 2/60 hours = 6,167 hours. The equivalent cost is estimated as: 
185,000 plan fiduciaries x 2/60 hours x $63.45 = 391,275.
---------------------------------------------------------------------------

    The Department also anticipates the acknowledgement in each of the 
three notices to plans participants/IRA owners (initial enrollment, 
pre-transaction, and post-transaction notices) would use a standardized 
and identical acknowledgment. The Department requests information about 
other costs associated with the requirement to disclose fiduciary 
status.
6.3. Data Usage and Protection
    The statutory exemption specifically prohibits the automatic 
portability provider from marketing or selling data relating to the IRA 
or to the plan participants. Section 2550.4975f-12(b)(3) of the 
proposed regulation parallels the statutory language by not permitting 
the use of data for any purpose other than the execution of automatic 
portability transactions or locating missing participants. The 
Department is not proposing any exceptions to this restriction. A 
similar restriction was placed on RCH in PTE 2019-02, so the Department 
does not expect an additional cost to RCH/PSN due to the proposal.
    The Department, however, did not include an express data protection 
condition in PTE 2019-02 similar to that included in the proposed 
regulation. Therefore, compared to existing requirements on RCH/PSN, 
the Department expects that the proposed regulation could add costs. 
However, the Department also expects that these costs would fall under 
normal operating expenses borne by businesses when dealing with the 
types of sensitive data necessarily required to execute automatic 
portability transactions. The Department requests comment on this 
assumption.
6.4. Cost of Transactions Fees
    As previously discussed, there is a transaction fee stated to be 
roughly between $15 and $30 per transferred account, depending on the 
account balance. This fee is applied only when a transfer occurs and is 
deducted from the funds in the account being transferred. The 
Department estimates there to be an additional 60,265 transactions in 
year one, and an average of 399,341 transactions annually in years two 
through ten. The Department uses the mid-point of the fee range stated, 
$22.50, as the expected average fee. Therefore, the Department 
estimates the aggregate transaction fees to be approximately $1.4 
million in year one, and period two through ten to have aggregate fees 
on average of nearly $9 million per year.\118\
---------------------------------------------------------------------------

    \118\ 60,265 additional transactions x $22.50 transaction fee = 
$1,355,963 in year 1. In years 2-10, an average of 399,341 
additional transactions x $22.50 per transaction = $8,985,163.
---------------------------------------------------------------------------

6.5. Notices and Disclosures
6.5.1. Notice to the Secretary of Labor
    Under the proposed regulation, within 90 calendar days of the date 
that the automatic portability provider begins operating an automatic 
portability transaction program that is intended to rely on prohibited 
transaction relief provided by Code section 4975(d)(25), the automatic 
portability provider must notify the Secretary at [email protected] that it is operating as an automatic portability 
provider in accordance with Code section 4975(d)(25). The automatic 
portability provider must report the legal name of each business entity 
relying upon the exemption and any name (e.g., trade or DBA name) the 
business entity may be operating under. This notification needs to be 
updated to report a change to the legal or operating name(s) of the 
automatic portability provider that is relying upon the exemption.
    Because PTE 2019-02 was issued to a single entity, there was no 
such requirement in the exemption. However, the Department believes 
based on the small number of expected automatic portability providers 
entering the market, that the possible cost burden associated with 
submitting the simple notice via email to the Department to be roughly 
$16, which is estimated as 15 minutes of a clerical worker's time with 
an hourly wage rate of $63.45. While this notification would need to be 
updated to report a change to the legal or operating name(s) of the 
automatic portability provider that is relying upon the exemption, the 
Department expects that such a change would be rare and thus does not 
estimate an associated cost.

[[Page 5651]]

6.5.2. Fee and Compensation Disclosure
    The proposed regulations incorporate the existing standard 
regarding reasonable compensation for the provision of services found 
at 26 CFR 54.4975-6(e). This proposed regulation mirrors the text of 
the statutory exemption by requiring the automatic portability provider 
to disclose the information that a service provider to the plan would 
be required to disclose under 29 CFR 2550.408b-2(c) to a responsible 
plan fiduciary of the transfer-in plan. For purposes of this 
requirement, the disclosures would relate to the automatic portability 
provider's services performed as an automatic portability provider but 
not to other services that may be provided.
    The proposed regulation includes text that mirrors the statutory 
text allowing a direct fee to be paid by a plan sponsor if it is in 
lieu of a fee imposed on an IRA owner. The proposed regulation includes 
one exception to the general restriction on third-party compensation. 
Specifically, under the proposal, an automatic portability provider 
would be able to share a portion of its fee or compensation with 
another automatic portability provider as long as the overall fee paid, 
directly or indirectly, by the plan or IRA does not increase as 
compared to the fees disclosed to plan fiduciaries, plan participants, 
and IRA owners.
    PTE 2019-02 requires RCH to fully disclose fees to a plan fiduciary 
and receive written approval from the plan fiduciary. Therefore, the 
Department expects that no change in cost will occur as a result of 
this requirement in the proposed regulation.
6.5.3. Initial Enrollment Notice
    The Department proposes that the initial enrollment notice would 
include a variety of information regarding the nature of the automatic 
portability transaction and additional aspects of the IRA arrangement 
(the same information to be included in the pre-transaction notice), 
discussed below. The Department anticipates that this notice 
requirement could be satisfied by including the information in the 
notice otherwise required under Code section 401(a)(31)(B) upon the 
establishment of a Default IRA.
    PTE 2019-02 requires a ``Mandatory Distribution Letter'' be sent to 
participants before establishing a Default IRA. PTE 2019-02 also 
requires a ``Welcome Letter'' to be sent to the same individual no 
later than three business days after the Default IRA receives the 
distributed assets. Together, these two letters must include all the 
information required in the initial enrollment notice in the proposed 
regulation. The Department estimates the revision and combination of 
these documents to satisfy the proposed rule will take an hour of an 
attorney's time at a wage rate of $159.34 resulting in a total cost of 
$159.34 to RCH/PSN. Because RCH/PSN is permitted to consolidate the two 
notices required under PTE 2019-02 into a single notice, a burden 
savings of 22,182 hours in the first year and 20,194 hours in 
subsequent years of a clerical worker's time with an equivalent cost 
savings of approximately $1.3 million each year would result.\119\
---------------------------------------------------------------------------

    \119\ The Department assumes RCH will combine these notices as a 
cost savings measure, resulting in 6,117,708 fewer notices needing 
to be prepared and sent over the 10-year period. The cost savings is 
calculated as -6,117,708 notices x 2/60 hours to prepare each notice 
on average x $63.45 wage rate for clerical staff = -$12,938,952.42, 
annualized to $1,293,895.24.
---------------------------------------------------------------------------

    The mailing and material costs are also expected to be reduced due 
to the combination of two notices into one. As previously noted, the 
Department assumes that 3.9 percent of recipients enumerated in the 
previous paragraph will receive mailed notices, and that the remainder 
will receive notices electronically, resulting in roughly 665,458 fewer 
notices in the first year and on average 605,806 fewer in subsequent 
years being mailed. since the initial enrollment notice provides an 
opportunity for RCH/PSN to consolidate two notices into one. This 
reduction of notices being sent has an associated estimated cost 
savings of nearly $23,600 in the first year and $21,500, on average, in 
subsequent years.\120\
---------------------------------------------------------------------------

    \120\ The materials and mailing burden is calculated as: Year 
one--665,458 fewer notices required x 3.9% mailed = 25,953 fewer 
notices. Each notice is estimated as 5 pages and mailed first class 
at a cost of $0.66 per notice. The cost is (5 pages x $0.05 per 
page) = $0.25 per notice + $0.66 for postage, resulting in a cost of 
$0.91 per notice. $0.91 x -25,953 fewer notices = a savings of 
S23,617.10. Subsequent years average: 605,806 fewer notices required 
x 3.9% mailed = 23,626 fewer notices. Each notice is estimated as 5 
pages and mailed first class at a cost of $0.66 per notice. The cost 
is (5 pages x $0.05 per page) = $0.25 per notice + $0.66 for 
postage, resulting in a cost of $0.91 per notice. $0.91 x 23,626 
fewer notices = a savings of $21,500.04.
---------------------------------------------------------------------------

6.5.4. Pre-Transaction Notice
    Section 2550.4975f-12(b)(5)(iv) of the proposed regulation 
incorporates the statutory provisions of Code section 
4975(f)(12)(B)(v). The proposed regulation provides additional 
clarification regarding the timing of the pre-transaction notice by 
requiring that the notice be sent no earlier than 90 days in advance of 
the automatic portability transaction.
    PTE 2019-02 included a pre-transaction notice, referred to as a 
``Consent Letter.'' The letter is required to be sent before moving 
Default IRA assets into a transfer-in plan after the locate and match 
service makes a match. The content of the Consent Letter is 
substantially the same as the pre-transaction notice required by the 
statute and incorporated into the proposed regulation. The Department 
believes there will be a minimal transition cost to RCH/PSN 
attributable to bringing the ``Consent Letter'' into compliance to 
serve as the pre-transaction notice. This is estimated to take one hour 
of a legal professional's time at a wage rate and total cost of 
$159.34.
    The Department estimates that there will be a 61,121 increase in 
pre-transaction notices in the first year and that there will be, on 
average, 384,265 additional notices in subsequent years. This increase 
will result in roughly 2,037 hours in year one and, on average, 12,809 
hours in subsequent years of clerical workers' time at 2 minutes per 
notice on average, at a rate of $63.45 for a total net cost of roughly 
$129,271 in year one and, on average, $812,720 in subsequent years. The 
notices are expected to consist of no more than two pages. The mailing 
and materials cost associated with the pre-transaction notices are 
estimated as 2,384 notices being sent in the first year at an estimated 
cost of $1,812 and, on average, 14,986 notices sent in subsequent years 
with an estimated average cost of $11,390.\121\
---------------------------------------------------------------------------

    \121\ The materials and mailing burden is calculated as: Year 
one 61,121 notices x 3.9% mailed = 2,384 notices. Each notice is 
estimated as 2 pages and mailed first class at a cost of $0.66 per 
notice. The cost is (2 pages x $0.05 per page) = $0.10 per notice + 
$0.66 for postage, resulting in a cost of $0.76 per notice. $0.76 x 
2,384 notices = S1,811.63. Subsequent years average: 384,265 x 3.9% 
mailed = 14,986 notices. Each notice is estimated as 2 pages and 
mailed first class at a cost of $0.66 per notice. The cost is 2 
pages x $0.05 per page) = $0.10 per notice + $0.66 for postage, 
resulting in a cost of $0.76 per notice. $0.76 x 14,986 notices = 
$11,389.60.
---------------------------------------------------------------------------

6.5.5. Post-Transaction Notice
    This post-transaction notice, which would occur after a transfer-in 
plan receives an individual's IRA funds, is the last notice that the 
automatic portability provider would be required to provide to the IRA 
owner or plan participant. Section 2550.4975f-12(b)(5)(v) of this 
proposed regulation incorporates the statutory requirements. The 
statute requires that no later than three business days after the 
completion of an automatic portability transaction, the automatic 
portability provider shall

[[Page 5652]]

provide notice to the IRA owner of the actions taken by the automatic 
portability provider with respect to the IRA. The statute also requires 
the notice to include all relevant information regarding the location 
and amount of any transferred assets, a statement of fees charged 
against the IRA or transfer-in plan account in connection with the 
transfer, and a customer service contact phone number for the automatic 
portability provider.
    PTE 2019-02 did not require a post-transaction notice. Therefore, 
as compared to the statutory requirements, this new requirement has the 
potential to add cost to PSN/RCH as an automatic portability provider. 
The Department estimates the development of a model notice will take a 
legal professional two hours at an hourly wage rate of $159.34 for a 
total cost of $319 in the first year.
    The Department estimates that in the first year 397,749 notices 
will be sent to account owners and, on average, 736,825 notices to IRA 
owners subsequent years within the projection window creating an hour 
burden of 13,258 and 24,561 respectively, assuming 2 minutes per 
notice, on average, of clerical workers' time. The post-transaction 
notice is expected to be no longer than two pages. Therefore, the 
Department estimates an equivalent cost of approximately $0.8 million 
in the first year and an average of $1.6 million in each subsequent 
year within the projection window.\122\
---------------------------------------------------------------------------

    \122\ Values calculated as follows: Year 1--397,749 notices x 2/
60 clerical hours = 13,258 burden hours. $63.45 clerical worker wage 
x 13,258 burden hours = $841,239. Subsequent years: 736,825 notices 
x 2/60 clerical hours = 24,561 burden hours. $63.45 clerical worker 
wage x 25,572 burden hours = $1,558,384.
---------------------------------------------------------------------------

    As discussed at the beginning of this section, the Department 
estimates that 3.9 percent of the notices would be sent by mail. The 
Department estimates that an automatic portability provider would incur 
a cost of $0.76 to send each disclosure, which is comprised of $0.66 
for postage and $0.10 for the paper and printing costs of two pages. 
Therefore, the materials and postage costs are estimated as 15,512 
notices at $0.76 per notice totaling $11,789 in the first year and an 
average of 28,736 notices at $0.76 per notice totaling $21,839, on 
average, in years 2 through 10.
6.5.6. Culturally and Linguistically Appropriate Notices
    The proposed regulation would require that notices and disclosures 
to participants and IRA owners be provided in a culturally and 
linguistically appropriate manner if their address is in a county where 
10 percent or more of the population is literate only in the same non-
English language. To determine whether a county meets this threshold, 
the Department relies on American Community Survey (ACS) data published 
by the United States Census Bureau. In the 2016-2020 ACS data, 230 
counties or county equivalents met or exceeded the 10 percent threshold 
(rounded to the nearest percent).\123\
---------------------------------------------------------------------------

    \123\ The relevant ACS data set used is the U.S. Census, 2016-
2020 American Community Survey 5-Year Estimates, Table B16001, 
Language Spoken at Home by Ability to Speak English for the 
Population 5 Years and Over, available at https://data.census.gov/cedsci/table?tid=ACSDT5Y2020.B16001.
---------------------------------------------------------------------------

    In these counties, the automatic portability provider must include 
in the English versions of all required notices and disclosure, a 
statement prominently displayed in any applicable non-English language, 
which clearly indicates how to access the language services provided by 
the automatic portability provider. The Department estimates that 
satisfying this requirement would result in a de minimis cost. The 
automatic portability provider would also be required to provide oral 
language services (such as a telephone customer assistance hotline) 
that include answering questions in any applicable non-English language 
and providing assistance with automatic portability transactions in any 
applicable non-English language.
    Additionally, the automatic portability provider would be required 
to provide, upon request, a notice or disclosure in any applicable, 
non-English language. In the 2016-2020 ACS, the Department identified 
eight languages that met the 10 percent threshold in at least one 
county. The eight languages were Spanish, Chinese, Navajo, Tagalog, 
Samoan, Carolinian, and Chamorro. For the purposes of this analysis, 
the Department estimates that an automatic portability provider will 
need to translate the notices into eight languages. Document 
translation costs vary depending on the length of the document, the 
complexity of the document, and the complexity of the language.\124\ 
One source estimates that the average translation cost per page ranges 
between $20 and $130.\125\ Due to the potential complexity of the 
documents, the Department assumes the cost will be towards the higher-
end of the range and therefore, on average, it will cost $100 per page 
to translate the notices in this proposal. The Department requests 
comment on this cost assumption. The translation costs for the initial 
enrollment notice, pre-transaction notice, and the post-transaction 
notice are summarized in the table below.
---------------------------------------------------------------------------

    \124\ American Translators Association, How Much Does a 
Translation Cost? (May 2023), https://www.atanet.org/client-assistance/how-much-does-translation-cost/.
    \125\ Lettier, Mariel, Translation Rates in 2023--A Complete 
Guide, Rush Translate, (2023), https://rushtranslate.com/blog/
translation-rates#:~:text=for%201000%20words.-
,What%20is%20the%20average%20rate%20for%20translation%20per%20page%3F
,certified%20translation%20and%20charges%20%2424.95.

                                           Table 8--Translation Costs
----------------------------------------------------------------------------------------------------------------
                                                     Languages         Pages       Cost per page       Cost
----------------------------------------------------------------------------------------------------------------
Initial Enrollment Notice.......................               8               5            $100          $4,000
Pre-Transaction Notice..........................               8               2             100           1,600
Post Transaction Notice.........................               8               2             100           1,600
                                                 ---------------------------------------------------------------
    Total.......................................  ..............               9  ..............           7,200
----------------------------------------------------------------------------------------------------------------

    A similar analysis conducted by the Department estimated that the 
average requests for translations of written documents averages 0.098 
requests per 1,000 health benefit plan members.\126\ For the purposes 
of this analysis, the Department assumes that recipients of the notices 
in this proposal would request translations at the same rate. The 
estimated number of translated notices requested is summarized in the 
table below. The Department requests comment on how frequently 
translations would be requested for such notices.
---------------------------------------------------------------------------

    \126\ 81 FR 92316.

[[Page 5653]]



                  Table 9--Translated Notices Requested
------------------------------------------------------------------------
                                                            Years 2-10
                                              Year 1         (average)
------------------------------------------------------------------------
Initial Enrollment Notice:
    Total Initial Enrollment Notice.....         954,786       1,014,438
    x Percent Requesting Translated              0.0098%         0.0098%
     Notice.............................
    = Translated Notices Distributed....              94             100
Pre-Transaction Notice:
    Total Pre-Transaction Notice........         403,397         747,287
    x Percent Requesting Translated              0.0098%         0.0098%
     Notice.............................
    = Translated Notices Distributed....              40              74
Post-Transaction Notice:
    Total Post-Transaction Notice.......         397,749         736,825
    x Percent Requesting Translated              0.0098%         0.0098%
     Notice.............................
    = Translated Notices Distributed....              39              73
                                         -------------------------------
Total Translated Notices Distributed....             173             246
------------------------------------------------------------------------
Note: Components may not sum to parts due to rounding.

    The Department assumes that it would take a clerical professional 
two minutes to prepare and send each disclosure. The Department assumes 
that all of the translated notices would be sent by mail. The 
Department requests comment on this assumption. Additionally, the 
Department estimates that an automatic portability provider would incur 
a cost of $0.76 to send each disclosure, including $0.66 for postage 
and $0.05 for the printing costs of each page. The hour burden, 
equivalent cost, postage, and material costs are summarized in the 
table below.

       Table 10--Burden To Prepare and Send Translated Disclosures
------------------------------------------------------------------------
                                                            Years 2-10
                                              Year 1         (average)
------------------------------------------------------------------------
Prepare and Send Notice (automatic
 portability provider):
    Number of Notices...................             173             246
    x Annual Hour Burden per Transaction            2/60            2/60
     (Hours)............................
    = Total Hours.......................             5.8             8.2
    x Labor Cost (Clerical Professional)          $63.45          $63.45
    = Equivalent Cost...................            $366            $528
------------------------------------------------------------------------
Material and Postage Cost (automatic
 portability provider):
Initial Enrollment Notices:
    Number of Notices Sent by Mail......              94             100
    x Postage and Material Cost per                $0.91           $0.91
     Notice (5 Pages)...................
    = Postage and Material Cost.........             $86             $91
Pre-Transaction Notices:
    Number of Notices Sent by Mail......              40              74
    x Postage and Material Cost per                $0.76           $0.76
     Notice (2 Pages)...................
    = Postage and Material Cost.........             $30             $56
Post-Transaction Notices:
    Number of Notices Sent by Mail......              39              73
    x Postage and Material Cost per                $0.76           $0.76
     Notice (2 Pages)...................
    = Postage and Material Cost.........             $30             $55
                                         -------------------------------
Total Hour Burden.......................               6               8
Total Equivalent Cost...................            $366            $528
Total Postage and Material Cost.........            $146            $202
------------------------------------------------------------------------
Note: Components may not sum to parts due to rounding.

6.5.7. Summary Plan Description
    The Department proposes a requirement that the automatic 
portability provider provide the administrator of participating plans 
with a model description of the automatic portability program, 
including fees and expenses, that the administrator could use in 
fulfilling its SPD obligations, as applicable.
    PTE 2019-02 included an SPD condition but was silent on which party 
had the obligation to ensure compliance. However, given the fact that 
RCH was the entity in control of the fees, the Department expects that 
the SPD condition of PTE 2019-02 would have been fulfilled in a manner 
similar to that in the proposed regulation. Therefore, the Department 
estimates no additional incremental burden to RCH/PSN as a result of 
the proposed regulation.
6.6. Searches
    The proposed regulation parallels the Code section 
4975(f)(12)(B)(viii) requirement that the automatic portability 
provider query on at least a monthly basis whether any individual with 
an IRA has an account in a transfer-in plan. Under the proposal, the 
automatic portability provider must perform ongoing participant address 
validation searches via automated checks of National Change of Address

[[Page 5654]]

records, two separate commercial locator databases, any internal 
databases maintained by the automatic portability provider, and a 
manual internet-based search if a valid address is not obtained from 
the automated checks. The proposal would require these verification 
steps to be performed at least twice in the first year an account is 
entered into the automatic portability provider system and once a year 
thereafter.
    PTE 2019-02 included an identical requirement regarding monthly 
searches. The Department assumes that this process is automated via 
technology and has de minimis marginal cost with respect to number or 
records being searched; therefore, this aspect of the proposal is not 
expected to add additional cost to RCH/PSN. PTE 2019-02 also included a 
general requirement to take ``all prudent actions necessary to 
reasonably ensure that the Plan's participant and beneficiary data is 
current and accurate.'' Although RCH represented to the Department that 
it would perform address validation searches in line with the 
requirement in the proposed regulation, the condition in PTE 2019-02 
did not specify the frequency of those searches nor the additional 
parameters in the proposal regarding participant address validation 
searches. The Department believes, due to the representation from RCH 
in connection with the individual exemption, that the proposed 
regulation will therefore not add additional cost. However, the 
Department requests comment on whether the current framework for 
executing automatic portability transactions of RCH/PSN is expected to 
include a process for ongoing address validation searches for Default 
IRAs that are included in the arrangement (i.e., those which are 
eligible to be moved into a transfer-in plan through the execution of 
an automatic portability transaction).
6.7. Monitoring Transfers
    Section 2550.4975f-12(b)(7) of the proposed regulation requires 
that the automatic portability provider ensure that each transfer-in 
plan for whom the automatic portability provider performs automatic 
portability transactions designates a plan official responsible for 
monitoring transfers into the plan and confirming that amounts received 
on behalf of a participant are invested properly.
    Although the Department believes that monitoring transfers is a 
necessary component of an automatic portability arrangement, PTE 2019-
02 did not include a condition explicitly mandating that a plan 
official monitor transfers into the plan. As compared to PTE 2019-02, 
the Department does not believe the proposed requirement regarding 
monitoring transfers will likely add cost because that should be a 
normal act of routine plan administration when assets are rolled into a 
plan.
6.8. Policies and Procedures
    Section 2550.4975f-12(b)(9) incorporates the statutory limitation 
on discretion and expands upon the statutory text by specifying that an 
automatic portability provider will be deemed to satisfy the limited 
discretion requirement if it establishes, maintains, and follows 
policies and procedures regarding the process for executing automatic 
portability transactions.
    PTE 2019-02 included a condition on the limitation of discretion 
but did not include a policies and procedures component that would 
result in the condition being satisfied. The Department believes that 
it would be standard business practice for RCH/PSN to have policies and 
procedures in place to govern the various conditions of PTE 2019-02 to 
ensure that all automatic portability transactions are executed 
consistently and in a manner that can be independently audited. 
Although an automatic portability provider is not required to establish 
the policies and procedures to satisfy the limited discretion aspect of 
the statute and proposed regulation, the Department anticipates that 
RCH/PSN will choose to take advantage of the ``deemed satisfied'' 
aspect of the proposed regulation. The Department assumes that a legal 
professional with a wage rate of $159.34 will spend 10 hours reviewing 
the existing policies and procedures to ensure compliance with the 
requirements in the proposed rule, resulting in an equivalent cost of 
$1,593.40.\127\ In subsequent years, 2 hours is assumed for a legal 
professional to review and update the procedures at an estimated cost 
of $319 per annum.\128\
---------------------------------------------------------------------------

    \127\ The hour burden is estimated as: 1 automatic portability 
provider x (10 hours) = 10 hours. The equivalent cost is estimated 
as: 1 automatic portability provider x (10 hours) x $159.34 = 
$1,593.40, rounded to $1,593.
    \128\ The hour burden is estimated as: 1 automatic portability 
provider x (30/60 hours) = 30/60 hours. The equivalent cost is 
estimated as: 1 automatic portability provider x (2 hours) x $159.34 
= $318.69, rounded to $319.
---------------------------------------------------------------------------

6.9. Audit
    Code section 4975(f)(12)(B)(xi) includes an annual audit 
requirement to be conducted in accordance with regulations promulgated 
by the Secretary. The statute requires that an audit be conducted that 
demonstrates compliance with Code section 4975(f)(12) and any 
regulations thereunder and that identifies any instances of 
noncompliance with the statute or such regulations. The statute 
requires the automatic portability provider to submit a copy of the 
auditor's report to the Secretary in such form and manner as specified 
by the Secretary.
    PTE 2019-02 required an annual audit conducted by an independent 
auditor. The auditor is required to review a representative sample of 
transactions and related undertakings, sufficient for the auditor to 
make a variety of determinations regarding compliance with PTE 2019-02. 
Those findings must then be included in a report that is sent to the 
Office of Exemption Determinations at the Department, the cost of which 
is discussed below.
    The timing for submission of the audit report in the proposed 
regulation follows the timing from PTE 2019-02. However, as compared to 
PTE 2019-02, the proposed regulation has a minor difference as a result 
of the proposed correction provisions. Rather than have the auditor 
submit the report directly to the Department as was the case under PTE 
2019-02, the proposed regulation requires that the audit report shall 
be provided first to the automatic portability provider, who will 
thereafter submit the report to the Department after reviewing the 
audit report and certifying that it has done so.
    The parameters of the audit in the proposed regulation, while 
intended to align with the PTE 2019-02 audit, provide more detail 
regarding the form and content of the audit, in consideration of the 
statutory requirements and other areas where the Department has 
proposed requirements for the purposes of regulatory clarity. The audit 
requirement of the proposed regulation also accounts for the 
corrections that may occur in accordance with this proposal. PTE 2019-
02 did not specifically include correction parameters. The cost 
associated with the proposed correction mechanisms is described in the 
next section.
    The Department anticipates the audit parameters of the proposed 
regulation will add cost to RCH/PSN as compared to what they might 
otherwise have incurred under PTE 2019-02. First, the proposed 
regulation requires the audit report to include the total number of 
completed automatic portability transactions during the audit period. 
Second, the proposed regulation requires the audit report to address 
specifically whether, in the reviewed

[[Page 5655]]

sample, the appropriate accounts in the transfer-in plan received all 
the assets due as a result of the automatic portability transaction.
    Due to the increase in required actions for the audit, the 
Department estimates the proposed regulation will increase the cost of 
performing the audit by roughly 20 percent. The Department estimates 
audit costs in the absence of the proposed rule to be close to $25,000 
per year. Therefore, the Department estimates that the proposed rule 
will increase audit costs by approximately $5,000 per year. The 
Department seeks comment on this estimate.
    There are several actions the automatic portability provider will 
need to take in support of the audit requirements, which are outlined 
below. To ensure the accuracy of certain information that the Secretary 
is required to provide to Congress periodically, the proposed 
regulation requires the audit report to include information that was 
not specifically contemplated under PTE 2019-02, and which may not be 
directly in the automatic portability provider's possession. If the 
information is not in the possession of the automatic portability 
provider, the proposed regulation requires the automatic portability 
provider to require contractually that the information to be provided 
in connection with its services as an automatic portability provider. 
If this obligation is not already included in RCH/PSN's contracts with 
recordkeepers and plans, RCH/PSN may need to update those agreements. 
The Department estimates updating the standardized contracts would take 
a lawyer one hour at a wage rate and total cost of $159.34. Assuming 
that all 185,000 plans currently covered by the automatic portability 
provider would have their contracts updated with the standard contract, 
the Department estimates that a plan fiduciary will spend 15 minutes to 
execute the updated contract. This results in a burden of 46,250 hours 
of plan fiduciaries' time, at a wage rate of $134.93, resulting in a 
total cost of $6,240,513.\129\ Combining these two components of this 
portion of the proposed rule results in an equivalent cost of 
$6,240,672.
---------------------------------------------------------------------------

    \129\ The cost to update the contracts is calculated as: 185,000 
participating plans x (15/60) hours x $134.93 plan fiduciary wage 
rate = $6,240,512.50. Accounting for the $159.34 cost for a lawyer 
to update the contract results in a total of $6,240,671.84, which is 
rounded in the text.
---------------------------------------------------------------------------

    Although anticipated under PTE 2019-02, there was not an explicit 
condition for the automatic portability provider to include a 
certification filed with the written audit report, under penalty of 
perjury, that the automatic portability provider has reviewed the audit 
report. Nor was there a condition requiring the automatic portability 
provider to certify that it has addressed, corrected, or remedied any 
noncompliance or inadequacy in its compliance or has an appropriate 
written plan to address any such issues identified in the audit report. 
Because the Department believes RCH/PSN would necessarily be reviewing 
the audit under PTE 2019-02, it has not attributed a cost to that 
specific aspect of the proposed regulation. However, with respect to 
the certifications, the Department estimates that it will take a legal 
professional 3 hours to draft the certifications and a senior executive 
30 minutes to execute the certification, for an added cost of $542 in 
the first year and $64 in subsequent years.\130\
---------------------------------------------------------------------------

    \130\ The cost to draft the certification is a one-time cost 
calculated as: 3 hours x $159.34 lawyer wage rate = $478.02, rounded 
to $478. A senior executive would need to execute the certification 
annually. The certification cost is calculated as (30/60) hours x 
$128.11 sr. executive wage rate = $64.06, rounded to $64. Therefore, 
the first year cost is $478.02 + $64.06 = 542.08.
---------------------------------------------------------------------------

    Finally, there would be additional resources expended in collecting 
and providing the additional records and for the plan to submit the 
audit report to the Department in place of the auditor. The Department 
estimates a clerical worker with a wage rate of $63.45 would spend an 
additional 5 hours collecting and providing documentation and records 
for the audit and approximately 15 minutes sending the report once 
finalized. The resulting cost burden for these actions is $333.\131\
---------------------------------------------------------------------------

    \131\ The cost to support and transmit the audit by a clerical 
worker is estimated as: (5 hours x $63.45 wage = $317.25) + ((15/60) 
hours x $63.45 wage rate = $15.86) = $333.11.
---------------------------------------------------------------------------

6.10. Corrections
    To effectuate the intent of this provision, the Department is 
proposing three components for corrections in the event the auditor 
determines the automatic portability provider was not in compliance 
with the statute and related regulations: an opportunity for an 
automatic portability provider to make certain self-corrections; 
additional recommendations from the auditor; and the Secretary 
requiring an automatic portability provider to submit to supplemental 
audits and corrective actions if significant compliance issues are 
uncovered.
    Although PTE 2019-02 did not include any correction provisions, the 
Department believes the availability of self-correction will generally 
provide a benefit to RCH/PSN as opposed to a cost. However, in 
connection with the proposed regulation's correction provisions, the 
automatic portability provider must establish policies for the 
corrections permitted by the proposal. The Department expects that RCH/
PSN will need to develop policies related to corrections that may not 
already be included in other pre-existing policies and procedures 
governing their program. The Department assumes the policies would be 
developed by an in-house attorney with a wage rate of $159.34 and would 
take roughly 20 hours resulting in a one-time cost of $3,187.
    Additionally, the proposed regulation also includes provisions 
relating to the auditor's review of the automatic portability 
provider's compliance that were not specifically included in PTE 2019-
02. If the auditor identifies any instances of noncompliance, then RCH/
PSN would be required by the proposal to correct those issues as soon 
as reasonably practicable. The Department believes there may be some 
added cost associated with remediating compliance issues. The 
Department lacks the information necessary to identify the extent of 
noncompliance issues that might be uncovered. However, in order to 
correct issues, the Department assumes that both a Senior Executive and 
a lawyer would likely be involved. The Department estimates each would 
spend 10 hours considering and developing remedies to audit findings. 
The cost for the lawyer is estimated as 10 hours at a wage rate of 
$159.34 resulting in a cost of $1,593. The cost for the Senior 
Executive is similarly estimated as 10 hours at a wage rate of $128.11 
resulting in a cost of $1,281.10. Lastly, a summary of the corrective 
actions taken is to be sent to the auditor. The Department assumes that 
a clerical worker with a wage rate of $63.45 will spend two hours 
organizing and communicating the summary to the auditors, at a cost of 
$127. The total annual cost to address audit findings and communicate 
the summary of actions taken is estimated as the sum of these three 
costs, $3,001.
    The ability of the Department to impose additional supplemental 
audits and corrective actions could also add cost. For instance, if the 
Department were to impose a supplemental audit, the expected cost to 
RCH/PSN would likely be the same as the cost of the required annual 
audit. The Department estimates that no more than one supplemental 
audit would be imposed in any particular year, but also expects the 
imposition to be rare. To account for the possibility, the Department 
assumes one supplemental audit would occur in

[[Page 5656]]

the fifth year of the estimation window at a cost of $30,000, which is 
the estimated cost of the annual audit.
    If the Department were to impose a temporary prohibition on relying 
upon the statutory exemption, the cost to RCH/PSN associated with that 
would generally be a function of the number of automatic portability 
transactions multiplied by the revenue per transaction for the period 
in which they could not use the exemption. Due to the novelty of the 
arrangement, the Department currently lacks data to estimate the 
magnitude of this cost.
6.11. Website
    The proposed regulation in paragraph (d) parallels the statutory 
language in Code section 4975(f)(B)(xii) requiring the automatic 
portability provider to: (1) maintain a website which contains a list 
of recordkeepers with respect to which the automatic portability 
provider carries out automatic portability transactions; (2) list all 
fees paid to the automatic portability provider; and (3) indicate the 
number of plans and participants covered by each recordkeeper. Under 
the proposed regulation, the list would have to include the fees and 
the identity of the party or account that is paying the particular fee. 
The proposal would also require the website to display automatic 
portability transaction-related information in a way that 
differentiates that information from other information or elements of 
the website (e.g., separately identifying the automatic portability 
transaction fees and services from fees and services in connection with 
establishing and maintaining custody of a Default IRA).
    PTE 2019-02 required a website that includes a list of all 
participating recordkeepers but did not require the additional detail 
regarding a list of all fees paid to the automatic portability 
provider, or the number of plans and participants covered by each 
recordkeeper. The Department anticipates that this information will be 
readily available to RCH/PSN and that they will update their website to 
include all the information in a format that meets the requirements in 
the proposed rule.
    The Department estimates that a Senior Executive would spend one 
hour providing a web designer the requirements for the disclosures in 
the first year, resulting in an equivalent cost of $128.\132\ 
Additionally, the Department estimates that it would take a web 
designer five hours to update and test the website in the first year, 
resulting in an equivalent cost of $778.\133\ The Department estimates 
that it would take a web developer one hour in subsequent years to make 
any necessary revisions or updates to the disclosures, resulting in an 
equivalent cost of $156.\134\
---------------------------------------------------------------------------

    \132\ The hour burden is estimated as: 1 automatic portability 
provider x (1 hour) = 1 hour. The equivalent cost is estimated as: 1 
automatic portability provider x (1 hour) x $128.11 = $128.11, 
rounded to $128.
    \133\ The hour burden is estimated as: 1 automatic portability 
provider x (5 hours) = 5 hours. The equivalent cost is estimated as: 
1 automatic portability provider x (5 hours) x $155.61 = $778.05, 
rounded to $778.
    \134\ The hour burden is estimated as: 1 automatic portability 
provider x (1 hour) = 1 hour. The equivalent cost is estimated as: 1 
automatic portability provider x (1 hour) x $155.61 = $155.61, 
rounded to $156.
---------------------------------------------------------------------------

6.12. Limitations on Exculpatory Provisions
    The limitation on exculpatory provisions in the proposed regulation 
is substantially identical to the limitation in PTE 2019-02. Therefore, 
the Department anticipates no additional cost to RCH/PSN.
6.13. Record Retention
    This proposed regulation incorporates the statutory language in 
Code section 4975(f)(12)(xi)(I) regarding record retention by requiring 
an automatic portability provider to maintain, for not less than six 
years, records sufficient to demonstrate compliance with the 
requirements of the statute and this proposed regulation and make them 
available to authorized employees of the Department and the Department 
of the Treasury within 30 calendar days of a written request.
    PTE 2019-02 had a broader recordkeeping provision with respect to 
who could request records as compared to the statutory provision. The 
Department believes this could result in cost savings to RCH/PSN 
because plan fiduciaries and IRA owners can no longer request the 
records. However, the Department does not believe this will change the 
cost of retaining the records. The Department does not know how many 
plan fiduciaries or IRA owners would request records, but expects it 
would be infrequent, resulting in a de minimis cost reduction to RCH/
PSN.

7. Transfers

7.1. Transfers Resulting From Open Participation
    Section 2550.4975f-12(g) of this proposed regulation parallels Code 
section 4975(f)(12)(B)(iv) by requiring, as a condition of the 
availability of the exemption, that the automatic portability provider 
offer automatic portability transactions on the same terms to any 
transfer-in plan. The Department is also proposing that open 
participation would require that the automatic portability provider not 
restrict or limit the ability of an employer-sponsored retirement plan, 
IRA custodian or IRA provider, or recordkeeper to engage other 
automatic portability providers to execute automatic portability 
transactions. PTE 2019-02 required RCH to offer the program in a 
functionally identical manner as the open participation requirement of 
the statute. However, it did not include a condition similar to the 
proposed regulation requirement that ensures a plan sponsor is not 
restricted from engaging more than one automatic portability provider. 
Since this requirement reduces barriers to entry, it will tend to 
encourage RCH/PSN to keep its fee low to discourage other automatic 
portability providers from competing in the market. This would 
represent a transfer from RCH/PSN to participants in the form of lower 
fees and to other automatic portability providers (if others enter the 
market), in the form of lower barriers to entry.
7.2. Transfer of Foregone Government Revenue to Participants
    Assets that stay in the tax-preferred retirement system rather than 
being cashed out will not be subject to regular income tax until a 
future date when they are distributed. They will also avoid altogether 
the 10 percent penalty tax on early distributions that would have 
applied to many cashouts. As the participants pay less in taxes, this 
represents a transfer from the government to participants in the form 
of increased tax expenditures supporting the retirement system.
    The Department estimates that over the ten-year estimation period 
the proposed rule will lead to 1.5 million fewer cashouts with a value 
of approximately $4.6 billion. The Department assumes that the marginal 
income tax rate for small account holders would be 12 percent.\135\ The 
Department also assumes that a 10 percent tax penalty applies to half 
of the foregone cashouts. The other foregone cashouts are assumed to 
fall under one of the exceptions; for example, the separating 
participant turns 55 or older

[[Page 5657]]

in the calendar year in which they take the distribution, or they are 
disabled, or they have certain medical expenses.\136\ The Department 
estimates that the amount of the transfer from the government to 
participants would be about $790 million.\137\
---------------------------------------------------------------------------

    \135\ U.S. Internal Revenue Service, ``IRS Provides Tax 
Inflation Adjustments for Tax Year 2024'' website at https://
www.irs.gov/newsroom/irs-provides-tax-inflation-adjustments-for-tax-
year-
2024#:~:text=Marginal%20rates%3A%20For%20tax%20year,for%20married%20c
ouples%20filing%20jointly).&text=The%20lowest%20rate%20is%2010,for%20
married%20couples%20filing%20jointly).
    \136\ U.S. Internal Revenue Service, ``401(k) Resource Guide--
Plan Participants--General Distribution Rules'' website, at https://www.irs.gov/retirement-plans/plan-participant-employee/401k-resource-guide-plan-participants-general-distribution-rules#tax-on-early-distributions.
    \137\ ($4,646,579,157 * 12%) + ($4,646,579,157 * 50% * 10%) = 
$789,918,457. Using a 3 percent discount rate, this results in 
transfers totaling $655,539,147. Using a 7 percent discount rate, 
this results in transfers totaling $519,964,549.
---------------------------------------------------------------------------

8. Regulatory Alternatives

    Section 6(a)(3)(C)(iii) of Executive Order 12866 requires a 
significant regulation, and encourages other regulations, to include an 
assessment of the costs and benefits of potentially effective and 
reasonable alternatives to the planned regulation. The Department 
considered several alternative approaches in developing this proposed 
regulation which are discussed below.
8.1. Do Not Issue Regulations--Rely Only on Sub-Regulatory Guidance
    The Department considered not proposing regulations with respect to 
the automatic portability provision included in section 120 of the 
SECURE 2.0 Act. Section 120(c) directs the Secretary of Labor to 
``issue such guidance as may be necessary to carry out the purposes of 
the amendments made by this section, including regulations or other 
guidance'' no later than 12 months after the enactment of the statute. 
To this end, the Department has considered whether its responsibilities 
under section 120(c) could be satisfied by issuing only sub-regulatory 
guidance. The Department considered issuing guidance stating that 
compliance with the individual exemption would be sufficient to comply 
with the statutory exemption. However, since the Department anticipates 
that entities not engaging in automatic portability transactions may 
wish to enter the automatic portability market in the future, the 
Department maintains that issuing the proposed regulation would address 
any uncertainty on complying with the statutory exemption in a manner 
that is consistent with directives expressed in section 120(c).
8.2. Issue More Limited Regulations
    The Department considered issuing limited regulations concerning 
only the portions of section 4975(f)(12) focused on the audit and the 
acknowledgement of fiduciary status, both of which called on the 
Department to promulgate regulations to determine compliance. In so 
doing, the Department could have issued sub-regulatory guidance with 
respect to compliance with the rest of the exemption. The Department 
did ensure that these proposed regulations provide the necessary 
blueprint for completing a comprehensive audit and sufficient 
acknowledgement of fiduciary status. However, given that regulations 
were to be proposed, the Department believes that more comprehensive 
regulations ensure that automatic portability transactions are 
protective of plan participants and beneficiaries. Furthermore, the 
Department believes that the novel nature of automatic portability 
transactions necessitates comprehensive proposed regulations followed 
by a notice-and-comment process in which stakeholders can provide 
input.
8.3. Do Not Require an Initial Enrollment Notice
    The Department considered not including a requirement for an 
initial enrollment notice in the proposed regulations. The statute only 
requires that an automatic portability provider furnish IRA owners with 
a pre-transaction notice and a post-transaction notice. However, 
section 120(c)(1) gives the Department the statutory authority to 
require that automatic portability providers furnish a notice ``in 
advance of'' the pre-transaction notice. The Department was not 
mandated to require additional notices and could have considered the 
pre-transaction notice sufficient to provide IRA owners with 
information regarding the automatic portability transactions. However, 
the Department determined that the initial enrollment notice helps to 
ensure the IRA owner's awareness and understanding of the automatic 
portability transaction, including but not limited to, the individual's 
right to affirmatively elect not to participate in the transaction, the 
other available distribution options, the procedures to take advantage 
of such options, and the procedures for doing so.
8.4. Audit Does Not Have To Be ``Independent''
    The Department considered proposing an audit that could be 
conducted as an internal audit. However, the Department determined that 
the factors which led to the inclusion of an independent audit in PTE 
2019-02 still exist with respect to the execution of automatic 
portability transactions, even under the new statutory exemption. The 
novelty of these types of transactions leads the Department to believe 
that the enhanced oversight and credibility associated with an 
independent audit favors the Department's approach in the proposed 
regulation.
8.5. Exemptive Relief for Default IRAs Involving Rollovers of Accounts 
With a Value of $1,000 or Less
    In section E of the preamble the Department is requesting comments 
on whether it should exercise its general exemption authority under 
ERISA section 408(a) to provide the same exemptive relief to mandatory 
distributions with a value of $1,000 or less that the statutory 
exemption provides to mandatory distributions described in Code section 
401(a)(31)(B) with a value between $1,001 and $7,000. The estimated 
benefits and costs in the regulatory impact analysis for this proposed 
rule include all accounts with balances of $7,000 or less. As discussed 
in section E, that analysis aligns with the scope of Department's safe 
harbor regulation at 29 CFR 2550.404a-2 for automatic rollovers to 
individual retirement plans and with PTE 2019-02. Excluding accounts 
with balances of $1,000 or less from the regulatory impact analysis for 
the proposed rule results in a reduction in the ten-year undiscounted 
total estimated benefit to $1.7 billion \138\ (compared to $2.8 billion 
in the main analysis),\139\ reduction in incremental costs to $12.6 
million \140\ (compared to $16.2 million in the main analysis),\141\ 
and an increase of 2.3 million automatic portability transactions 
(compared to an increase of 3.7 million in the main analysis). This 
results in lower net benefits, but those net benefits are still 
substantial.
---------------------------------------------------------------------------

    \138\ Using a 3 percent discount rate, this results in total 
benefits of $1,451,914,016. Using a 7 percent discount rate, this 
results in total benefits of $1,184,887,753.
    \139\ Using a 3 percent discount rate, this results in total 
benefits of $2,341,907,159. Using a 7 percent discount rate, this 
results in total benefits of $1,911,200,700.
    \140\ Using a 3 percent discount rate, this results in total 
costs of $11,259,790. Using a 7 percent discount rate, this results 
in total costs of $9,869,114.
    \141\ Using a 3 percent discount rate, this results in total 
costs of $14,160,023. Using a 7 percent discount rate, this results 
in total costs of $12,073,029.
---------------------------------------------------------------------------

    The Department has substantial uncertainty surrounding these 
estimates and made simplifying assumptions to obtain the estimates. The 
Department seeks comment and data on the following issues. The number 
of mandatory distributions or accounts with a balance of $1,000 or less 
is not certain. The most relevant data available comes from a 2023 
Public Retirement Research Lab report concerning public

[[Page 5658]]

defined contribution plans which indicated that 16 percent of all 
account balances were $1,000 or less. The report also found that 42 
percent of all accounts had balances less than $7,000.\142\ The primary 
analysis assumes that all accounts below the distribution threshold are 
treated the same and the account owners respond similarly regardless of 
the account balance. The Department seeks data on whether mandatory 
distributions with $1,000 or less are treated differently by plan 
sponsors and how the account owners' responses may differ.
---------------------------------------------------------------------------

    \142\ Public Retirement Research Lab, Secure 2.0 Act Low-Balance 
Distribution Limit Changes: A Look by Age and Tenure, (2023), SECURE 
2.0 Act Low-Balance Distribution Limit Changes: A Look by Age and 
Tenure (ebri.org).
---------------------------------------------------------------------------

9. Uncertainty

    The Department acknowledges that there is significant uncertainty 
in how the automatic portability provider market will develop in the 
future. The Department requests comments on these sources of 
uncertainty. For instance, there may be only one automatic portability 
provider in the future, PSN, or there may be multiple automatic 
portability providers, which would allow for specialization on the part 
of the automatic portability providers. If additional firms ultimately 
enter the market as automatic portability providers, resulting in a 
less concentrated market with more competitors, that would likely lead 
to lower fees, better quality service, and less profits for RCH/PSN. 
These benefits and transfers would accrue to the other automatic 
portability providers and to participants.
    In the baseline scenario, the number of recordkeepers joining PSN 
was expected to be flat. However, additional recordkeepers could join 
the network. The model was adjusted to have the number of recordkeepers 
increase at half the rate as was used for the post-statute and 
regulation scenario. Changing this assumption led to a ten-year 
undiscounted total estimated benefit of $615.0 million \143\ (compared 
to $2.8 billion in the main analysis),\144\ $9 million in incremental 
costs \145\ (compared to $16.2 million in the main analysis),\146\ and 
an increase of 1.3 million automatic portability transactions (compared 
to an increase of 3.7 million in the main analysis). Changing this 
assumption results in lower net benefits, but those net benefits are 
still substantial.
---------------------------------------------------------------------------

    \143\ Using a 3 percent discount rate, this results in total 
benefits of $529,400,846. Using a 7 percent discount rate, this 
results in total benefits of $439,280,667.
    \144\ Using a 3 percent discount rate, this results in total 
benefits of $2,341,907,159. Using a 7 percent discount rate, this 
results in total benefits of $1,911,200,700.
    \145\ Using a 3 percent discount rate, this results in total 
costs of $8,265,330. Using a 7 percent discount rate, this results 
in total costs of $7,488,188.
    \146\ Using a 3 percent discount rate, this results in total 
costs of $14,160,023. Using a 7 percent discount rate, this results 
in total costs of $12,073,029.
---------------------------------------------------------------------------

    There is uncertainty about the number of future automatic 
portability transactions, in large part because the Department is 
unclear how the proposed rule will impact DB plans and participants. 
While the Department believes that the statutory regulation applies to 
both DB and DC plan participants, the Department assumes that DB plan 
participants will rarely be affected by this proposed rule. DB plan 
benefits are generally derived from a formula based on an employee's 
wages and years of service, which an employee is only entitled to once 
they are fully vested. Vesting periods vary, however, with five-year 
``cliff'' vesting being very common and for which few vested 
participants would separate from service with benefits that are less 
than $7,000. However, participants in DB plans with graded vesting 
would be more likely to have accrued benefits below the threshold. The 
Department requests comments on the number of DB plans and participants 
that would be affected by this statutory exemption and how they would 
be impacted.
    While the share of workers covered by DB plans has continued to 
decline, those covered by DC plans have increased substantially, with 
45 percent of civilian workers participating in DC plans compared to 
just 19 percent participating in DB plans.\147\ If DC plan coverage 
continues to increase in the future, the amount of automatic 
portability transactions will likely also increase.
---------------------------------------------------------------------------

    \147\ U.S. Bureau of Labor Statistics, National Compensation 
Survey, (March, 2023).
---------------------------------------------------------------------------

    Workers affected on the margin by increased retirement plan 
coverage would likely have a lower income on average than workers 
currently covered by a retirement plan and therefore would tend to 
contribute less to their plan. Employers sponsoring new plans may also 
contribute less. These factors would lead to more small balance 
accounts that would be subject to forced transfers into Default IRAs. 
These workers would also be more likely to experience a larger number 
of job turnovers on average, so there would be more Default IRA owners. 
Under the assumption that DC plan coverage will increase in the future, 
Default IRA owners would be more likely to have coverage at their new 
jobs, leading to more automatic portability transactions.
    There are also many factors at the level of individual employee 
behavior that will affect the impact of the statutory exemption and any 
accompanying regulations. This includes employee decisions about 
whether to contribute to their DC plan, which will be influenced by 
plan designs that have automatic enrollment. Furthermore, employee 
decisions about how to handle their account when separating from a job 
will be key. It is difficult to know what the trends will be around 
such decisions in the future since they may be affected by financial 
advice, and any possible changes to the scope of coverage under DB 
pension plans and Social Security. While the scale of such developments 
is difficult to predict, they will surely have a substantial impact on 
the scope of automatic portability transactions, the number of 
participants, plans, and financial institutions affected, as well as 
the size of the benefits and costs.

G. Paperwork Reduction Act

    As part of its continuing effort to reduce paperwork and respondent 
burden, the Department conducts a preclearance consultation program to 
allow the general public and Federal agencies to comment on proposed 
and continuing collections of information in accordance with the 
Paperwork Reduction Act of 1995 (PRA). This helps ensure that the 
public understands the Department's collection instructions, 
respondents can provide the requested data in the desired format, 
reporting burden (time and financial resources) is minimized, 
collection instruments are clearly understood, and the Department can 
properly assess the impact of collection requirements on respondents.
    The Department is soliciting comments regarding the information 
collection request (ICR) included in the NPRM. To obtain a copy of the 
ICR, contact the PRA addressee below or go to RegInfo.gov. The 
Department has submitted a copy of the rule to the Office of Management 
and Budget (OMB) in accordance with 44 U.S.C. 3507(d) for review of its 
information collections. The Department and OMB are particularly 
interested in comments that:
     Evaluate whether the collection of information is 
necessary for the functions of the agency, including whether the 
information will have practical utility;
     Evaluate the accuracy of the agency's estimate of the 
burden of the collection of information, including the

[[Page 5659]]

validity of the methodology and assumptions used;
     Enhance the quality, utility, and clarity of the 
information to be collected; and
     Minimize the burden of the collection of information on 
those who are to respond, including through the use of appropriate 
automated, electronic, mechanical, or other technological collection 
techniques or other forms of information technology (e.g., permitting 
electronically delivered responses).
    Commenters may send their views on the Department's PRA analysis in 
the same way they send comments in response to the proposed rule as a 
whole (for example, through the www.regulations.gov website), including 
as part of a comment responding to the broader proposed rule. Comments 
are due by March 29, 2024 to ensure their consideration.
    ICRs are available at RegInfo.gov (reginfo.gov/public/do/PRAMain). 
Requests for copies of the ICR can be sent to the PRA addressee:

By mail: James Butikofer, Office of Research and Analysis, Employee 
Benefits Security Administration, U.S. Department of Labor, 200 
Constitution Avenue NW, Room N-5718, Washington, DC 20210
By email: [email protected]

1. Preliminary Assumptions and Cost Estimate Inputs

    For the purposes of this analysis, the Department assumes that the 
percent of retirement investors receiving electronic disclosures would 
be similar to the percent of plan participants receiving electronic 
disclosures under the Department's 2002 and 2020 electronic disclosure 
safe harbors.\148\ Accordingly, the Department estimates that 96.1 
percent of the disclosures sent to retirement investors would be sent 
electronically, and the remaining 3.9 percent would be sent by 
mail.\149\ For disclosures sent by mail, the Department estimates that 
entities will incur a cost of $0.66 \150\ for postage and $0.05 per 
page for material and printing costs.
---------------------------------------------------------------------------

    \148\ 67 FR 17264, 85 FR 31884.
    \149\ The Department estimates 96.1 percent of retirement 
investors receive disclosures electronically. This is the sum of the 
estimated share of retirement investors receiving electronic 
disclosures under the 2002 electronic disclosure safe harbor (58.3 
percent) and the estimated share of retirement investors receiving 
electronic disclosures under the 2020 electronic disclosure safe 
harbor (37.8 percent).
    \150\ United States Postal Service. ``First-Class Mail.'' 
(2023). https://www.usps.com/ship/first-class-mail.htm.
---------------------------------------------------------------------------

    Additionally, the Department assumes that several types of 
personnel would perform the tasks associated with information 
collection requests at an hourly wage rate of $63.45 for clerical 
personnel, $128.11 for a Senior Executive, $134.93 for a plan 
fiduciary, $155.61 for a web developer, and $159.34 for a legal 
professional.\151\
---------------------------------------------------------------------------

    \151\ Internal DOL calculation based on 2023 labor cost data. 
For a description of the Department's methodology for calculating 
wage rates, see https://www.dol.gov/sites/dolgov/files/EBSA/laws-and-regulations/rules-and-regulations/technical-appendices/labor-cost-inputs-used-in-ebsa-opr-ria-and-pra-burden-calculations-june-2019.pdf.
---------------------------------------------------------------------------

2. Summary of Affected Entities

    As discussed in the Affected Entities section of the Regulatory 
Impact Analysis, the Department expects that the statutory exemption 
and accompanying proposed regulation would impose paperwork burdens on 
automatic portability providers and plans. For the purposes of this 
analysis, the Department assumes that there will only be one entity 
providing automatic portability provider services. The Department 
acknowledges that there is significant uncertainty in how the automatic 
portability provider market will develop in the future. For a larger 
discussion on the factors the Department considered in this estimate, 
refer to the Affected Entities section of the Regulatory Impact 
Analysis.
    In 2023, PSN noted that their member recordkeepers represent over 
185,000 employer-sponsored retirement plans.\152\ PSN does not clarify 
what type of plans are included in this estimate or whether all of 
these plans are eligible for automatic portability services. The 
Department relies on this estimate for purposes of this analysis with 
the acknowledgement of this uncertainty. The Department requests 
comment on how many plans are expected be eligible for automatic 
portability services in the near future, as well as what percentage of 
plans might be eligible in the future.
---------------------------------------------------------------------------

    \152\ Portability Services Network, An Industry Led Utility, 
(2023), https://psn1.com/.
---------------------------------------------------------------------------

    As discussed in the Affected Entities section of the Regulatory 
Impact Analysis, the Department estimates that there are 954,786 
account holders for whom default IRAs will be established in the first 
year, 976,384 in year two and 994,897 in year three. The Department 
requests comment on this estimate, as well as how it would likely 
change after the exemption becomes effective. The table below 
summarizes the Department's estimate for the accounts eligible for 
automatic portability transactions, the number of accounts that would 
opt out of automatic portability transactions, and the number of 
executed automatic portability transactions. For more information on 
how these estimates were calculated, refer to the Affected Entities 
section of the Regulatory Impact Analysis.

                Table 11--Affected Participants/Accounts
------------------------------------------------------------------------
                                           Year 1     Year 2     Year 3
------------------------------------------------------------------------
Participants (Total)...................    954,786    976,384    994,897
    Accounts Located and Matched for       403,397    526,984    639,538
     Automatic Portability.............
    Accounts Opting Out of Automatic         5,648      8,953      8,953
     Portability.......................
    Automatic Portability Transactions.    397,749    519,606    630,585
------------------------------------------------------------------------

3. Acknowledgement of Fiduciary Status

    The proposed regulation requires the automatic portability provider 
to acknowledge in writing that it is a fiduciary upon being engaged by 
a plan fiduciary. The Department anticipates that a single standard 
acknowledgement would be included in contracts with plan sponsors. The 
Department estimates that it would take a legal professional one hour 
to draft this acknowledgement in the first year, resulting in an hour 
burden of one hour with an equivalent cost of $159.\153\
---------------------------------------------------------------------------

    \153\ The hour burden is estimated as: 1 automatic portability 
provider x 1 hour = 1 hour. The equivalent cost is estimated as: 1 
automatic portability provider x 1 hour x $159.34 = $159.34, rounded 
to $159.
---------------------------------------------------------------------------

    Additionally, the Department estimates that 185,000 
acknowledgements of fiduciary status \154\ would be sent to plan

[[Page 5660]]

fiduciaries in the first year and that it would take a clerical 
professional two minutes to prepare and send the acknowledgement. This 
results in an hour burden of 6,167 hours with an equivalent cost of 
$391,275.\155\ The Department expects that acknowledgements sent in 
subsequent years would be included in contract documents and would 
result in a de minimis burden.
---------------------------------------------------------------------------

    \154\ As of 2023, PSN estimated that their members represented 
185,000 employer-sponsored retirement plans. (Portability Services 
Network, A Retirement Industry-Led Utility, (2023), https://psn1.com/learning-center/about-psn/a-retirement-industry-led-utility.)
    \155\ The hour burden is estimated as: 185,000 plan fiduciaries 
x 2/60 hours = 6,167 hours. The equivalent cost is estimated as: 
185,000 plan fiduciaries x 2/60 hours x $63.45 = $391,275.
---------------------------------------------------------------------------

    The Department assumes that the acknowledgement of fiduciary status 
generally would be sent electronically. Therefore, the Department 
assumes there would be no associated material or postage cost.

4. Summary Plan Description

    The proposal would require the automatic portability provider to 
provide the administrator of participating plans with a model 
description of the automatic portability program for plan sponsors to 
include in their summary plan description (SPD), including fees and 
expenses, as applicable. The Department anticipates that the automatic 
portability provider would draft and send the same standard model 
description to all plans. The Department estimates that drafting the 
SPD would take a legal professional 10 hours, resulting in an hour 
burden of 10 hours with an equivalent cost of $1,593 in the first 
year.\156\ The Department estimates that it would take a clerical 
professional two minutes to prepare and send the summary plan 
description to each of the 185,000 plans, resulting in an annual hour 
burden of 6,167 hours and an equivalent cost of $391,275.\157\
---------------------------------------------------------------------------

    \156\ The hour burden is estimated as: 1 automatic portability 
provider x 10 hours = 10 hours. The equivalent cost is estimated as: 
1 automatic portability provider x 10 hours x $159.34 = $1,593.40, 
rounded to $1,593.
    \157\ The hour burden is estimated as: 185,000 plans x 2/60 
hours = 6,167 hours. The equivalent cost is estimated as: 185,000 
plans x 2/60 hours x $63.45 = $391,275.
---------------------------------------------------------------------------

    The Department assumes that this document would be sent 
electronically and thus would not incur any postage or material costs.

5. Policies and Procedures

    The proposal requires automatic portability providers to establish, 
maintain, and follow written policies and procedures to ensure that 
they obtain or have access to current and accurate census and contact 
data on individual participants and IRA owners and to specify standards 
and timeframes that apply to all automatic portability transactions. 
The proposal also includes the ability for the automatic portability 
provider to establish policies and procedures in connection with the 
limitation on the exercise of discretion. An automatic portability 
provider will be deemed to satisfy the limited discretion requirement 
if it establishes, maintains, and follows policies and procedures 
regarding the process for executing automatic portability transactions.
    The Department estimates that it would take a legal professional 
approximately 10 hours to establish, or modify as applicable, policies 
and procedures satisfying the requirements in the first year, resulting 
in an hour burden of 10 hours in the first year with an equivalent cost 
of $1,593.\158\ In subsequent years, the Department estimates that it 
would take a legal professional two hours for the automatic portability 
provider to modify the policies and procedures as needed, resulting in 
an hour burden of two hours with an equivalent cost of $319.\159\
---------------------------------------------------------------------------

    \158\ The hour burden is estimated as: 1 automatic portability 
provider x 10 hours = 10 hours. The equivalent cost is estimated as: 
1 automatic portability provider x 10 hours x $159.34 = $1,593.40, 
rounded to $1,593.
    \159\ The hour burden is estimated as: 1 automatic portability 
provider x 2 hours = 2 hours. The equivalent cost is estimated as: 1 
automatic portability provider x 2 hours x $159.34 = $318.68, 
rounded to $319.
---------------------------------------------------------------------------

6. Audit

    The proposal requires automatic portability providers to retain an 
independent auditor to conduct an annual audit to demonstrate 
compliance and identify any noncompliance issues. The auditor shall, at 
a minimum, review: the policies and procedures, a representative sample 
of the required disclosures, a representative sample of automatic 
portability transactions, and the requirements of section 4975(d)(25), 
4975(f)(12), and these regulations. The auditor shall prepare a written 
audit report signed by the auditor.
    The Department estimates that it would take a clerical professional 
five hours to collect and provide records to the independent auditor, 
resulting in an annual hour burden of five hours with an equivalent 
cost of $317.\160\ While the Department lacks precise information on 
how much it would cost an automatic portability provider to hire an 
independent auditor to satisfy the required conditions, the Department 
estimates that it would cost $30,000. This estimate is based on 
information previously provided by stakeholders for similar audits, and 
the Department requests comment on this figure.
---------------------------------------------------------------------------

    \160\ The hour burden is estimated as: 1 automatic portability 
provider x 5 hours = 5 hours. The equivalent cost is estimated as: 1 
automatic portability provider x 5 hours x $63.45 = $317.25, rounded 
to $317.
---------------------------------------------------------------------------

    The Department estimates that it will take a legal professional 
three hours to draft the certification in the first year, resulting in 
an hour burden of three hours and equivalent cost of $478.\161\ The 
Department estimates that it would take a senior executive 30 minutes 
to execute the certification, resulting in an annual hour burden of 30 
minutes with an equivalent cost of $64.\162\ Finally, the Department 
approximates that it would take a clerical professional 15 minutes to 
send the report to the Department once finalized, resulting in an hour 
burden of 15 minutes and an equivalent cost of $16.\163\
---------------------------------------------------------------------------

    \161\ The hour burden is estimated as: 1 automatic portability 
provider x 3 hours = 3 hours. The equivalent cost is estimated as: 1 
automatic portability provider x 3 hours x $159.34 = $478.02, 
rounded to $478.
    \162\ The hour burden is estimated as: 1 automatic portability 
provider x 30/60 hours = 30/60 hours. The equivalent cost is 
estimated as: 1 automatic portability provider x 30/60 hours x 
$128.11 = $64.06, rounded to $64.
    \163\ The hour burden is estimated as: 1 automatic portability 
provider x 15/60 hours = 15/60 hours. The equivalent cost is 
estimated as: 1 automatic portability provider x 15/60 hours x 
$63.45 = $15.86, rounded to $16.
---------------------------------------------------------------------------

    The proposal requires that the written audit include certain 
information, described in the regulatory text. If the automatic 
portability provider does not have direct access to this information, 
the proposal would require the partnering recordkeepers and 
participating plans to provide such information as a condition of 
receiving the automatic portability provider's services. This 
obligation may require an automatic portability provider to update 
requirements with its recordkeepers and plans. The Department estimates 
that updating the standardized contracts would take a legal 
professional at the automatic portability provider one hour, resulting 
in an hour burden of one hour and an equivalent cost of $159.\164\ 
Additionally, the Department estimates that it would take 15 minutes 
for plan fiduciaries to execute the updated contract, resulting in an 
hour burden of 46,250 hours with an equivalent cost of $6,240,513.\165\
---------------------------------------------------------------------------

    \164\ The hour burden is estimated as: 1 automatic portability 
provider x 1 hour = 1 hour. The equivalent cost is estimated as: 1 
automatic portability provider x 1 hour x $159.34 = $159.34, rounded 
to $159.
    \165\ The hour burden is estimated as: 185,000 plans x 15/60 
hour = 46,250 hours. The equivalent cost is estimated as: 185,000 
plans x 15/60 hour x $134.93 = $6,240,512.50, rounded to $6,240,513.

---------------------------------------------------------------------------

[[Page 5661]]

7. Corrections

    If the auditor determines the automatic portability provider was 
not in compliance with the statute and related regulations, the 
proposal includes an opportunity for self-correction.
    As such, the proposal would require the automatic portability 
provider to establish policies for the corrections permitted by the 
proposal. The Department assumes that establishing such policies and 
procedures would take a legal professional 20 hours in the first year, 
resulting in an hour burden of 20 hours and an equivalent cost of 
$3,187.\166\
---------------------------------------------------------------------------

    \166\ The hour burden is estimated as: 1 automatic portability 
provider x 20 hours = 20 hours. The equivalent cost is estimated as: 
1 automatic portability provider x 20 hours x $159.34 = $3.186.80, 
rounded to $3,187.
---------------------------------------------------------------------------

    In the case of a violation, the automatic portability provider 
would be required to correct the violation and document the correction 
in writing within 30 calendar days of correction. The Department does 
not expect that an automatic portability provider would have a 
violation on an annual basis, and the Department acknowledges that the 
correction and related documentation could vary significantly, 
depending on the nature of the violation. For the purposes of this 
analysis, the Department considers the cost on an average annual basis. 
The Department estimates that, on average, it would take a clerical 
professional two hours to draft and send the documentation of the 
correction, resulting in an average annual hour burden of two hours and 
an equivalent cost of $127.\167\
---------------------------------------------------------------------------

    \167\ The hour burden is estimated as: 1 automatic portability 
provider x 2 hours = 2 hours. The equivalent cost is estimated as: 1 
automatic portability provider x 2 hours x $63.46 = $126.90, rounded 
to $127.
---------------------------------------------------------------------------

8. Notices and Disclosures

8.1. Notice to the Secretary of Labor
    Under the proposed regulation, within 90 calendar days of the date 
that the automatic portability provider begins operating an automatic 
portability transaction program that is intended to rely on prohibited 
transaction relief, the automatic portability provider must notify the 
Secretary. Because PTE 2019-02 was issued to a single entity, there was 
no such requirement in the exemption. However, the Department believes 
based on the small number of expected automatic portability providers 
entering the market, that the possible cost burden associated with 
submitting the simple notice via email to the Department to be roughly 
$16, which is estimated as 15 minutes of a clerical worker's time with 
an hourly wage rate of $63.45. This notification needs to be updated to 
report a change to the legal or operating name(s) of the automatic 
portability provider that is relying upon the exemption. The Department 
expects that such a change would be rare and thus does not estimate an 
associated cost.
8.2. Fee and Compensation Disclosure Requirement
    The proposed regulation requires the automatic portability provider 
to disclose fees and compensation to a fiduciary of the employer-
sponsored plan and receive an approval in writing in advance of the 
transaction. This includes fees and compensation received, directly or 
indirectly, by the automatic portability provider (including its 
affiliates) for services provided in connection with the automatic 
portability transaction. The Department assumes that the disclosure 
would be standard across transactions, requiring an update no more 
frequently than once a year. The Department requests comment on this 
assumption.
    The Department estimates that preparing the disclosures of fees and 
compensation would take a legal professional two hours in the first 
year to draft the disclosure. This results in a burden of two hours and 
an equivalent cost of $319 in the first year.\168\ The Department 
estimates that it would take a clerical professional two minutes to 
prepare and send the disclosure to the fiduciary of the estimated 
185,000 plans, resulting in a burden of 6,167 hours in the first year 
and an equivalent cost of $391,275.\169\
---------------------------------------------------------------------------

    \168\ The hour burden is estimated as: 1 automatic portability 
provider x 2 hours = 2 hours. The equivalent cost is estimated as: 1 
automatic portability provider x 2 hours x $159.34 = $318.68, 
rounded to $319.
    \169\ The hour burden is estimated as: 185,000 plans x 2/60 
hours = 6,167 hours. The equivalent cost is estimated as: 185,000 
plans x 2/60 hours x $63.45 = $391,275.
---------------------------------------------------------------------------

    The Department assumes that the disclosure and approval would be 
sent electronically between the automatic portability provider and the 
plan. Therefore, the Department assumes there would be no associated 
material or postage cost.
8.3. Initial Enrollment Notice
    The proposal requires an automatic portability provider to send 
each individual on whose behalf the individual retirement plan was 
established an initial notice within 15 calendar days of the individual 
retirement plan's enrollment or participation in an arrangement that 
includes the possibility of a future automatic portability transaction 
executed by the automatic portability provider. The Department 
estimates that preparing this disclosure would take a legal 
professional two hours, resulting in an hour burden of two hours and an 
equivalent cost of $319.\170\
---------------------------------------------------------------------------

    \170\ The hour burden is estimated as: 1 automatic portability 
provider x 2 hours = 2 hours. The equivalent cost is estimated as: 1 
automatic portability provider x 2 hours x $159.34 = $318.68, 
rounded to $319.
---------------------------------------------------------------------------

    As discussed above, the Department estimates that the disclosures 
would be sent to an average of 975,35 individuals in the first three 
years, and that it would take a clerical professional two minutes to 
prepare and send the disclosures. This results in an average hour 
burden of 32,512 hours with an average equivalent cost of roughly $2 
million per year.\171\ The Department estimates that an automatic 
portability provider would incur $0.66 for postage and $0.25 for the 
paper and printing costs of five pages, which the Department estimates 
to cost on average $34,615 per year in the first three years.\172\
---------------------------------------------------------------------------

    \171\ The detailed annual hour burden is estimated as:
    Year 1: 954,786 individuals x 2/60 hours = 31,826 hours. The 
equivalent cost is estimated as: 31,826 hours x $63.45 = $2,019,372.
    Year 2: 976,384 individuals x 2/60 hours = 32,546 hours. The 
equivalent cost is estimated as: 32,546 hours x $63.45 = $2,065,052.
    Year 3: 994,897 individuals x 2/60 hours = 33,163 hours. The 
equivalent cost is estimated as: 33,163 hours x $63.45 = $2,104,207.
    \172\ The detailed cost is estimated as: [(((954,786 year 1) + 
(976,384 year 2) + (994,897 year 3)) = 2,926,067 x 3.9% = 114,117 x 
(5 pages x $0.05+ $0.66 postage) = $103,846 total for the three 
years. $103,846.47/3 = $34,615 period average.
---------------------------------------------------------------------------

8.4. Pre-Transaction Notice
    639,538 in the third year. The Department estimates that drafting 
this notice would take a legal professional two hours in the first year 
and that preparing and sending each disclosure would take a clerical 
professional two minutes.
    As discussed at the beginning of this section, the Department 
estimates that 3.9 percent of the notices would be sent by mail. The 
Department estimates that an automatic portability provider would incur 
a cost of $0.76 to send each disclosure, including $0.66 for postage 
and $0.10 for the paper and printing costs of two pages. The hour 
burden, equivalent cost, postage, and material costs are summarized in 
the table below.

[[Page 5662]]



                                    Table 12--Burden and Cost to Draft Notice
                                        [Automatic portability provider]
----------------------------------------------------------------------------------------------------------------
                                                                    Year 1           Year 2           Year 3
----------------------------------------------------------------------------------------------------------------
Affected Entities.............................................               1  ...............  ...............
x Annual Hour Burden per Entity (Hours).......................               2  ...............  ...............
= Total Hours.................................................               2  ...............  ...............
x Labor Cost (Legal Professional).............................         $159.34  ...............  ...............
= Equivalent Cost.............................................         $318.68  ...............  ...............
----------------------------------------------------------------------------------------------------------------
Note: Components may not sum to parts due to rounding.


                              Table 13--Burden and Cost To Prepare and Send Notice
                                        [Automatic portability provider]
----------------------------------------------------------------------------------------------------------------
                                                                    Year 1           Year 2           Year 3
----------------------------------------------------------------------------------------------------------------
Number of Notices.............................................         403,397          526,984          639,538
x Annual Hour Burden per Transaction (Hours)..................            2/60             2/60             2/60
= Total Hours.................................................          13,447           17,566           21,318
x Labor Cost (Clerical Professional)..........................          $63.45           $63.45           $63.45
= Equivalent Cost.............................................     $853,184.66    $1,114,570.24    $1,352,623.70
----------------------------------------------------------------------------------------------------------------
Note: Components may not sum to parts due to rounding.


                                       Table 14--Material and Postage Cost
                                        [Automatic portability provider]
----------------------------------------------------------------------------------------------------------------
                                                                    Year 1           Year 2           Year 3
----------------------------------------------------------------------------------------------------------------
Number of Notices.............................................         403,397          526,984          639,538
x Percent of Notices Sent by Mail.............................            3.9%             3.9%             3.9%
= Number of Notices Sent by Mail..............................          15,732           20,552           24,942
x Postage and Material Cost per Notice........................           $0.76            $0.76            $0.76
= Material and Postage Cost...................................      $11,956.32       $15,619.52       $18,955.92
----------------------------------------------------------------------------------------------------------------
Note: Components may not sum to parts due to rounding.

8.5. Post-Transaction Notice
    The proposal requires an automatic portability provider, not later 
than three business days after an automatic portability transaction is 
completed, to provide notice to the individual on whose behalf the 
individual retirement plan was established. As discussed above, the 
Department estimates that 397,749 automatic portability transactions 
would occur in first year, 519,606 in the second year, and 630,585 in 
the third year. The Department estimates that drafting this notice 
would take a legal professional two hours in the first year and that 
preparing and sending each disclosure would take a clerical 
professional two minutes.
    As discussed at the beginning of this section, the Department 
estimates that 3.9 percent of the notices would be sent by mail. The 
Department estimates that an automatic portability provider would incur 
a cost of $0.76 to send each disclosure, including $0.66 for postage 
and $0.10 for the paper and printing costs of two pages. The hour 
burden, equivalent cost, postage, and material costs are summarized in 
the table below.

                                        Table 15--Burden To Draft Notice
                                        [Automatic portability provider]
----------------------------------------------------------------------------------------------------------------
                                                                    Year 1           Year 2           Year 3
----------------------------------------------------------------------------------------------------------------
Affected Entities.............................................               1  ...............  ...............
x Annual Hour Burden per Entity (Hours).......................               2  ...............  ...............
= Total Hours.................................................               2  ...............  ...............
x Labor Cost (Legal Professional).............................         $159.34  ...............  ...............
= Equivalent Cost.............................................         $318.68  ...............  ...............
----------------------------------------------------------------------------------------------------------------
Note: Components may not sum to parts due to rounding.


                                   Table 16--Burden To Prepare and Send Notice
                                        [Automatic portability provider]
----------------------------------------------------------------------------------------------------------------
                                                                    Year 1           Year 2           Year 3
----------------------------------------------------------------------------------------------------------------
Number of Notices.............................................         397,749          519,606          630,585
x Annual Hour Burden per Transaction (Hours)..................            2/60             2/60             2/60
= Total Hours.................................................          13,258           17,320           21,020
x Labor Cost (Clerical Professional)..........................          $63.45           $63.45           $63.45

[[Page 5663]]

 
= Equivalent Cost.............................................     $841,239.14    $1,098,966.69    $1,333,687.28
----------------------------------------------------------------------------------------------------------------
Note: Components may not sum to parts due to rounding.


                                       Table 17--Material and Postage Cost
                                        [Automatic portability provider]
----------------------------------------------------------------------------------------------------------------
                                                                    Year 1           Year 2           Year 3
----------------------------------------------------------------------------------------------------------------
Number of Notices.............................................         397,749          519,606          630,585
x Percent of Notices Sent by Mail.............................            3.9%             3.9%             3.9%
= Number of Notices Sent by Mail..............................          15,512           20,265           24,593
x Postage and Material Cost per Notice........................           $0.76            $0.76            $0.76
= Equivalent Cost.............................................      $11,789.12       $15,401.40       $18,690.68
----------------------------------------------------------------------------------------------------------------
Note: Components may not sum to parts due to rounding.

8.6. Culturally and Linguistically Appropriate Notices
    The proposed regulation would require that notices and disclosures 
to participants and IRA owners be provided in a culturally and 
linguistically appropriate manner if the address of a recipient is in a 
county where 10 percent or more of the population is literate only in 
the same non-English language. In these counties, the automatic 
portability provider must include in the English versions of all 
required notices and disclosure, a statement prominently displayed in 
any applicable non-English language clearly indicating how to access 
the language services provided by the automatic portability provider. 
The Department estimates that satisfying this requirement would result 
in a de minimis cost.
    Additionally, the automatic portability provider would be required 
to provide, upon request, a notice or disclosure in any applicable non-
English language. In the 2016-2020 ACS data, 230 counties or county 
equivalents met or exceeded the 10 percent threshold (rounded to the 
nearest percent).\173\ In the 2016-2020 ACS, the Department identified 
eight languages that met the 10 percent threshold in at least one 
county. The eight languages were Spanish, Chinese, Navajo, Tagalog, 
Samoan, Carolinian, and Chamorro. For the purposes of this analysis, 
the Department estimates that an automatic portability provider will 
need to translate the notices into eight languages. Document 
translation costs vary depending on the length of the document, the 
complexity of the document, and the complexity of the language.\174\ 
One source, estimates that the average translation cost per page ranges 
between $20 and $130.\175\ The Department assumes that, on average, it 
will cost $100 per page to translate the notices in this proposal. The 
translation costs for the initial enrollment notice, pre-transaction 
notice, and the post-transaction notice are summarized in the table 
below.
---------------------------------------------------------------------------

    \173\ The relevant ACS data set used is the U.S. Census, 2016-
2020 American Community Survey 5-Year Estimates, Table B16001, 
Language Spoken at Home by Ability to Speak English for the 
Population 5 Years and Over, available at https://data.census.gov/cedsci/table?tid=ACSDT5Y2020.B16001.
    \174\ American Translators Association, How Much Does a 
Translation Cost? (May 2023), https://www.atanet.org/client-assistance/how-much-does-translation-cost/.
    \175\ Lettier, Mariel, Translation Rates in 2023--A Complete 
Guide, Rush Translate, (2023), https://rushtranslate.com/blog/
translation-rates#:~:text=for%201000%20words.-
,What%20is%20the%20average%20rate%20for%20translation%20per%20page%3F
,certified%20translation%20and%20charges%20%2424.95.

                       Table 18--Translation Costs
------------------------------------------------------------------------
                                                       Cost per
                                   Languages   Pages     page      Cost
------------------------------------------------------------------------
Initial Enrollment Notice.......           8       5       $100   $4,000
Pre-Transaction Notice..........           8       2        100    1,600
Post Transaction Notice.........           8       2        100    1,600
                                 ---------------------------------------
    Total.......................  ..........       9  .........    7,200
------------------------------------------------------------------------

    A similar analysis conducted by the Department estimated that the 
average requests for translations of written documents averages 0.098 
requests per 1,000 health benefit plan members.\176\ For the purposes 
of this analysis, the Department assumes that recipients of the notices 
in this proposal would request translations at the same rate. The 
estimated number of translated notices requested is summarized in the 
table below. The Department requests comment on how frequently 
translations would be requested for such notices.
---------------------------------------------------------------------------

    \176\ 81 FR 92316.

[[Page 5664]]



        Table 19--Translated Initial Enrollment Notices Requested
------------------------------------------------------------------------
                                           Year 1     Year 2     Year 3
------------------------------------------------------------------------
Total Initial Enrollment Notices.......    954,786    976,384    994,897
x Percent Requesting Translated Notice.    0.0098%    0.0098%    0.0098%
= Translated Notices Distributed.......         94         96         97
------------------------------------------------------------------------
Note: Components may not sum to parts due to rounding.


         Table 20--Translated Pre-Transaction Notices Requested
------------------------------------------------------------------------
                                           Year 1     Year 2     Year 3
------------------------------------------------------------------------
Total Pre-Transaction Notices..........    403,397    526,984    639,538
x Percent Requesting Translated Notice.    0.0098%    0.0098%    0.0098%
= Translated Notices Distributed.......         40         52         63
------------------------------------------------------------------------
Note: Components may not sum to parts due to rounding.


         Table 21--Translated Post-Transaction Notices Requested
------------------------------------------------------------------------
                                           Year 1     Year 2     Year 3
------------------------------------------------------------------------
Total Post-Transaction Notices.........    397,749    519,606    630,585
x Percent Requesting Translated Notice.    0.0098%    0.0098%    0.0098%
= Translated Notices Distributed.......         39         51         62
------------------------------------------------------------------------
Note: Components may not sum to parts due to rounding.

    The Department assumes that it would take a clerical professional 
two minutes to prepare and send each disclosure. The Department assumes 
that all of the translated notices would be sent by mail. The 
Department requests comment on this assumption. Additionally, the 
Department estimates that an automatic portability provider would incur 
a cost of $0.66 for postage and $0.05 for the material and printing 
costs of each page. The hour burden, equivalent cost, postage, and 
material costs are summarized in the table below.

       Table 22--Burden To Prepare and Send Translated Disclosures
                    [Automatic portability provider]
------------------------------------------------------------------------
                                           Year 1     Year 2     Year 3
------------------------------------------------------------------------
Number of Notices......................        173        199        222
x Annual Hour Burden per Transaction          2/60       2/60       2/60
 (Hours)...............................
= Total Hours..........................        5.8        6.6        7.4
x Labor Cost (Clerical Professional)...     $63.45     $63.45     $63.45
= Equivalent Cost......................    $365.90    $420.89    $469.53
------------------------------------------------------------------------
Note: Components may not sum to parts due to rounding.


     Table 23--Material and Postage Cost for the Translated Initial
                           Enrollment Notices
------------------------------------------------------------------------
                                           Year 1     Year 2     Year 3
------------------------------------------------------------------------
Initial Enrollment Notices:
    Number of Notices Sent by Mail.....         94         96         97
    x Postage and Material Cost per          $0.91      $0.91      $0.91
     Notice (5 Pages)..................
    = Postage and Material Cost........     $85.54     $87.36     $88.27
------------------------------------------------------------------------
Note: Components may not sum to parts due to rounding.


 Table 24--Material and Postage Cost for the Translated Pre-Transaction
                                 Notices
------------------------------------------------------------------------
                                           Year 1     Year 2     Year 3
------------------------------------------------------------------------
Pre-Transaction Notice:
    Number of Notices Sent by Mail.....         40         52         63
    x Postage and Material Cost per          $0.76      $0.76      $0.76
     Notice (2 Pages)..................
    = Postage and Material Cost........     $30.40     $39.52     $47.88
------------------------------------------------------------------------
Note: Components may not sum to parts due to rounding.


[[Page 5665]]


 Table 25--Material and Postage Cost for the Translated Post-Transaction
                                 Notices
------------------------------------------------------------------------
                                           Year 1     Year 2     Year 3
------------------------------------------------------------------------
Post-Transaction Notice:
    Number of Notices Sent by Mail.....         39         51         62
    x Postage and Material Cost per          $0.76      $0.76      $0.76
     Notice (2 Pages)..................
    = Postage and Material Cost........     $29.64     $38.76     $47.12
------------------------------------------------------------------------
Note: Components may not sum to parts due to rounding.

9. Website

    The proposal would require the automatic portability provider to 
maintain a website with three categories of disclosures: (1) a 
description of all the fees and compensation received, directly or 
indirectly, by the automatic portability provider for services provided 
in connection with the automatic portability transaction; (2) a list of 
recordkeepers for each employer-sponsored retirement plan with respect 
to which the automatic portability provider carries out automatic 
portability transactions; and (3) the number of plans and participants 
covered by each recordkeeper. The Department assumes that an automatic 
portability provider would already have such a website, readily 
available access to the required information, and would only incur 
costs associated with drafting and posting the required disclosures.
    The Department estimates that a senior executive employed by the 
automatic portability provider would spend one hour providing a web 
designer the requirements for the disclosures in the first year, 
resulting in an hour burden of one hour with an equivalent cost of 
$128.\177\ Additionally, the Department estimates that it would take a 
web designer five hours to update and test the website in the first 
year, resulting in an hour burden of five hours and equivalent cost of 
$778.\178\ The Department estimates that it would take a web developer 
one hour in subsequent years to make any necessary revisions or updates 
to the disclosures, resulting in an hour burden of one hour with an 
equivalent cost of $156.\179\
---------------------------------------------------------------------------

    \177\ The hour burden is estimated as: 1 automatic portability 
provider x 1 hour = 1 hour. The equivalent cost is estimated as: 1 
automatic portability provider x 1 hour x $128.11 = $128.11, rounded 
to $128.
    \178\ The hour burden is estimated as: 1 automatic portability 
provider x 5 hours = 5 hours. The equivalent cost is estimated as: 1 
automatic portability provider x 5 hours x $155.61 = $778.05, 
rounded to $778.
    \179\ The hour burden is estimated as: 1 automatic portability 
provider x 1 hour = 1 hour. The equivalent cost is estimated as: 1 
automatic portability provider x 1 hour x $155.61 = $155.61, rounded 
to $156.
---------------------------------------------------------------------------

10. Recordkeeping

    An automatic portability provider would be required to maintain 
records sufficient to demonstrate compliance with the requirements of 
Code section 4975(f)(12) and this regulation. The Department expects 
adequate records will be automatically generated through the systems 
created by the automatic portability provider and thus would not create 
an additional burden.
    The proposal would require the records to be made available to any 
duly authorized employee or representative of the Department of Labor 
or the Department of the Treasury within 30 calendar days of the date 
of a written request for such records. The Department estimates that 
providing records to the Department would take a clerical professional 
two hours on average to prepare and send requested records, resulting 
in a per request equivalent cost of $127.\180\ The Department expects 
that such requests would occur rarely. As such, the Department 
estimates that one request a year would result in an average annual 
burden of $127.
---------------------------------------------------------------------------

    \180\ The hour burden is estimated as: 1 automatic portability 
provider x 2 hours = 2 hours. The equivalent cost is estimated as: 1 
automatic portability provider x 2 hours x $63.45 = $126.90, rounded 
to $127.
---------------------------------------------------------------------------

11. Summary

    The paperwork burden estimates are summarized as follows:
    Type of Review: New collection.
    Agency: Employee Benefits Security Administration, Department of 
Labor.
    Title: Automatic Portability Transaction Regulations.
    OMB Control Number: 1210-NEW.
    Affected Public: Business or other for-profit institution.
    Estimated Number of Respondents: 185,001.
    Estimated Number of Annual Responses: 2,384,846.
    Frequency of Response: Initially, Annually, and when engaging in 
exempted transaction.
    Estimated Total Annual Burden Hours: 92,887.
    Estimated Total Annual Burden Cost: $97,985.

H. Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) \181\ imposes certain 
requirements on rules subject to the notice and comment requirements of 
section 553(b) of the Administrative Procedure Act or any other 
law.\182\ Under section 603 of the RFA, agencies must submit an initial 
regulatory flexibility analysis (IRFA) of a proposal that is likely to 
have a significant economic impact on a substantial number of small 
entities, such as small businesses, organizations, and governmental 
jurisdictions. The Department's IRFA is below.
---------------------------------------------------------------------------

    \181\ 5 U.S.C. 601 et seq.
    \182\ 5 U.S.C. 601(2), 603(a); also see 5 U.S.C. 551.
---------------------------------------------------------------------------

    The Affected Entities of the Regulatory Impact Analysis identifies 
automatic portability providers, recordkeepers, and plans as entities 
potentially impacted by the proposal. While there may be a substantial 
number of small recordkeepers and plans affected by the proposal, the 
Department has determined that there would not be a significant impact 
on these entities.\183\ The analysis below estimates the effect on 
small automatic portability providers.
---------------------------------------------------------------------------

    \183\ For recordkeepers, the proposal would require automatic 
portability providers to contractually require certain information 
be provided in connection with its services as an automatic 
portability provider. This would likely require the automatic 
portability provider to update contracts with plans. The Department 
estimates that this would require plan fiduciaries to execute the 
updated contract. The Department estimates that this would take a 
plan fiduciary 15 minutes. The Department does not consider this to 
be a significant impact on plans. For plans, the proposal would not 
require a substantial action, with respect to the requirements under 
PTE 2019-02.
---------------------------------------------------------------------------

1. Need for and Objectives of the Rule

    Section 120 of the SECURE 2.0 Act of 2022 amended Code section 4975 
to add a statutory exemption for the receipt of fees and compensation 
by an automatic portability provider for services provided in 
connection with an automatic portability transaction. This proposed 
rule implements the statutory prohibited transaction under Code section 
4975 for automatic portability transactions.
    When a plan participant intentionally or unintentionally leaves 
money in a former employer's defined contribution

[[Page 5666]]

plan, depending on plan provisions the former employer has the option 
to cash out balances of $5,000 or less and to force a transfer of 
balances between $1,001 and $5,000 to a Default IRA. This Default IRA 
transfer is commonly referred to as a ``force-out'' and is only 
implemented if the participant does not elect to have the account 
balance paid directly to an eligible retirement plan or to receive the 
balance directly. As part of the SECURE 2.0 Act, the $5,000 threshold 
is being raised to $7,000.\184\
---------------------------------------------------------------------------

    \184\ See SECURE 2.0 Act, Sec. 304.
---------------------------------------------------------------------------

    Default IRAs, while intended to preserve retirement assets in 
conservatively managed accounts, typically yield only minimal returns 
for investors while often imposing considerable fees.\185\ 
Additionally, these Default IRAs, established on behalf of 
participants, are more susceptible to being abandoned or forgotten 
while potentially exposing those with multiple accounts to unnecessary 
losses from duplicated fees that might otherwise be avoided were their 
assets consolidated into a single account. Cashouts also directly 
impact participants by removing their assets from tax-favored 
retirement accounts.\186\
---------------------------------------------------------------------------

    \185\ Government Accountability Office (GAO). ``401(k) Plans: 
Greater Protections Needed for Forced Transfers and Inactive 
Accounts.'' (2014).
    \186\ The Code does not require a mandatory distribution of 
$1000 or less to be rolled into an IRA.
---------------------------------------------------------------------------

    Automated portability services allow plan providers to transfer 
assets into the plan of a participant's new employer, effectively 
automating roll-ins from Default IRAs established on behalf of the 
separated employee to consolidate assets into an active, employer-
sponsored defined contribution plan.

2. Affected Small Entities

    The Department anticipates an automatic portability provider would 
be classified as NAICS 522320, Financial Transactions Processing, 
Reserve, and Clearinghouse Activities. According to the size standards 
set by the Small Business Administration, entities with NAICS 522320 
are considered small if they have average annual receipts less than $47 
million.\187\ According to data published by the NAICS Association, by 
this standard, approximately 99 percent of entities with NAICS 522320 
are considered small entities.\188\
---------------------------------------------------------------------------

    \187\ U.S. Small Business Administration, Table of Small 
Business Size Standards Matched to North American Industry 
Classification System Codes, (March 17, 2023), https://www.sba.gov/sites/sbagov/files/2023-03/Table%20of%20Size%20Standards_Effective%20March%2017%2C%202023%20%281%29%20%281%29_0.pdf.
    \188\ This estimate is based on data released by the NAICS 
Association. (NAICS Association, Market Analysis Profile: NAICS Code 
& Annual Sales, (2022), https://www.naics.com/custom-market-analysis-profiles/.)
---------------------------------------------------------------------------

    As discussed in the Regulatory Impact Analysis, the Department 
assumes that only one entity would rely on the proposed exemption. This 
entity, RCH, in service of PSN, has stated that the maximum per-
transaction fee for its services is $30.\189\ Further, as discussed in 
the Regulatory Impact Analysis, the Department estimates that there 
would be 60,265 additional transactions in the first year and an 
average of 399,341 additional transactions in years two through ten. If 
the average transaction fee ranged between $15 and $30, the annual 
additional receipts in the first year for this service would be between 
$0.9 and $1.8 million \190\ and between $6.0 million and $12.0 million 
in years two through ten.\191\
---------------------------------------------------------------------------

    \189\ Portability Services Network, Our Fees, https://psn1.com/
learning-center/about-psn/what-are-psns-
fees#:~:text=Key%20aspects%20of%20PSN's%20fee,be%20processed%20at%20n
o%20charge.
    \190\ The lower bound estimate is calculated as 60,265 
additional transactions x $15 = $903,975. The upper bound estimate 
is calculated as 60,265 additional transactions x $30 = $1,807,950.
    \191\ The lower bound estimate is calculated as 399,341 
additional transactions x $15 = $5,990,115. The upper bound estimate 
is calculated as 399,341 additional transactions x $30 = 
$11,980,230.
---------------------------------------------------------------------------

    The automatic portability services operations at RCH represent just 
one portion of the business. However, because the entity is private, 
the Department does not have access to its total annual receipts. While 
the Department estimates that the annual receipts of RCH may exceed the 
small entity size thresholds, the Department cannot confirm. 
Accordingly, the Department has conducted an analysis of the costs 
imposed by the proposal.

3. Impact of the Rule

    As discussed in the Regulatory Impact Analysis, the Department 
assumes that one entity would rely on the proposed exemption. The 
Department is presenting the estimated costs and costs savings of this 
entity, RCH/PSN. RCH/PSN currently operates under an individual 
exemption, PTE 2019-02. The Regulatory Impact Analysis considers the 
costs and cost savings this proposal would impose, with respect to the 
requirements under PTE 2019-02.
    The Department estimates that the proposal would result in a cost 
savings for an automatic portability provider operating under the 
conditions in PTE 2019-02. The table below summarizes the costs and 
cost savings under the proposal. For more information on these 
estimates, refer to the Cost section of the Regulatory Impact Analysis.

  Table 26--Per Entity Costs and Cost Savings for Automatic Portability
                                Providers
------------------------------------------------------------------------
                                                          Years 2-10
                                        Year 1             (average)
------------------------------------------------------------------------
Acknowledgment of Fiduciary              $391,434.34  ..................
 Status.........................
Policies and Procedures.........            1,593.40             $318.68
Independent Audit...............            6,034.53            5,397.17
Corrections to Audit............            6,188.20            3,001.40
Website Requirements............              906.16              155.61
Notice to the Secretary of Labor               15.86  ..................
Initial Enrollment Notice \a\...  \b\ (1,426,704.81)  \b\ (1,302,599.20)
Pre-Transaction Notice \a\......          132,859.13          824,218.62
Post Transaction Notice \a\.....          855,059.22        1,580,430.41
                                 ---------------------------------------
    Total.......................     \b\ (32,613.97)        1,110,922.70
------------------------------------------------------------------------
Note: Components may not sum to parts due to rounding.
\a\ Includes costs associated with providing disclosures in a culturally
  and linguistically appropriate manner.
\b\ This value represents a cost savings, when compared to requirements
  for RCH/PSN under PTE 2019-02.


[[Page 5667]]

4. Duplicate, Overlapping, or Relevant Federal Rules

    The proposal is intended to align with the requirements in the 
individual exemption PTE 2019-02. The proposal also incorporates the 
statutory exemption requirements in the SECURE 2.0 Act and supplements 
them accordingly. While PTE 2019-02 and the statutory exemption, as 
supplemented by this proposal, differ slightly, the Department has 
worked to ensure that the requirements are complimentary. Because PTE 
2019-02 and the statutory exemption provide prohibited transaction 
relief for the same categories of transactions, RCH/PSN will only need 
to rely on either the statutory or individual exemption. Therefore, it 
is important for the requirements of the statutory and individual 
exemptions to be aligned.
    Please note that RCH/PSN most likely will rely on the statutory 
exemption, because it has an unlimited term while the class exemption 
is limited to a five-year term that expires on July 31, 2024. The 
Department expects that RCH/PSN will rely upon the statutory exemption 
and this proposal once it becomes effective rather than PTE 2019-02. 
Because PTE 2019-02 is an individual exemption granted solely to RCH 
and its affiliates, any other automatic portability providers that 
enter the market will only be able to rely upon the statutory exemption 
and this proposal, so there will be no duplicative requirements imposed 
on them.

5. Description of Alternatives Considered

    This section of the IRFA analysis addresses alternatives the 
Department considered when developing the proposal. As stated above in 
this Regulatory Impact Analysis, the Department estimates that only one 
automatic portability provider would operate under the proposal. 
Therefore, the regulatory alternatives considered for small entities 
does not differ from those considered in the Regulatory Impact 
Analysis. The Department considered the following alternatives:
     Relying Only on Sub-Regulatory Guidance--Section 120(c) 
directs the Secretary of Labor to ``issue such guidance as may be 
necessary to carry out the purposes of the amendments made by this 
section, including regulations or other guidance'' no later than 12 
months after the enactment of the statute. The Department considered 
whether its responsibilities under section 120(c) of SECURE 2.0 could 
be satisfied by issuing only sub-regulatory guidance.
     Issuing More Limited Regulations--The Department 
considered issuing limited regulations concerning only the portions of 
Code section 4975(f)(12) focused on the audit and the acknowledgement 
of fiduciary status, both of which called on the Department to 
promulgate regulations to determine compliance. In so doing, the 
Department could have issued sub-regulatory guidance with respect to 
compliance with the rest of the exemption.
     Not Requiring an Initial Enrollment Notice--The Department 
considered not including a requirement for an initial enrollment notice 
in the proposed regulations. The statute only requires that an 
automatic portability provider furnish IRA owners with a pre-
transaction notice and a post-transaction notice. Additional notices 
were left to the discretion of the Department in connection with 
carrying out the purposes of the statutory exemption.
     Not Requiring the Audit to be an Independent Audit--The 
Department considered proposing an audit that could be conducted as an 
internal audit.
    A more in-depth discussion of the regulatory alternatives and the 
Department's decision process is included in the Regulatory 
Alternatives section of the Regulatory Impact Analysis above.

I. Unfunded Mandates Reform Act

    Title II of the Unfunded Mandates Reform Act of 1995 requires each 
Federal agency to prepare a written statement assessing the effects of 
any Federal mandate in a proposed or final agency rule that may result 
in an expenditure of $100 million or more (adjusted annually for 
inflation with the base year 1995) in any one year by state, local, and 
tribal governments, in the aggregate, or by the private sector.\192\ 
For purposes of the Unfunded Mandates Reform Act, as well as Executive 
Order 12875, this proposal does not include any Federal mandate that 
the Department expects would result in such expenditures by state, 
local, or tribal governments, or the private sector.\193\
---------------------------------------------------------------------------

    \192\ 2 U.S.C. 1501 et seq. (1995).
    \193\ Enhancing the Intergovernmental Partnership, 58 FR 58093 
(Oct. 28, 1993).
---------------------------------------------------------------------------

J. Federalism Statement

    Executive Order 13132 outlines fundamental principles of 
federalism, and requires adherence by Federal agencies to specific 
criteria in the process of their formulation and implementation of 
policies that have ``substantial direct effects'' on the states, the 
relationship between the national government and states, or on the 
distribution of power and responsibilities among the various levels of 
government.\194\ Federal agencies promulgating regulations that have 
federalism implications must consult with state and local officials and 
describe the extent of their consultation and the nature of the 
concerns of state and local officials in the preamble to the final 
rule.
---------------------------------------------------------------------------

    \194\ Federalism, 64 FR 153 (Aug. 4, 1999).
---------------------------------------------------------------------------

    In the Department's view, this proposal will not have federalism 
implications because it would not have direct effects on the states, on 
the relationship between the national government and the states, nor on 
the distribution of power and responsibilities among various levels of 
government. The Department welcomes input from affected states 
regarding this assessment.

Statutory Authority

    This regulation is issued pursuant to the authority in section 505 
of ERISA (Pub. L. 93-406, 88 Stat. 894; 29 U.S.C. 1135), section 102 of 
Reorganization Plan No. 4 of 1978, 5 U.S.C. App. 237, Public Law 117-
328, 136 Stat. 4459, and under Secretary of Labor's Order No. 1-2011, 
77 FR 1088 (Jan. 9, 2012).

List of Subjects in 29 CFR Part 2550

    Employee benefit plans, Individual retirement accounts, Pensions, 
Plans.

    For the reasons set forth in the preamble, the Department is 
proposing to amend 29 CFR part 2550 as follows:

PART 2550--RULES AND REGULATIONS FOR FIDUCIARY RESPONSIBILITY

0
1. The authority citation for part 2550 is revised to read as follows:

    Authority: 29 U.S.C. 1135 and Secretary of Labor's Order No. 1-
2011, 77 FR 1088 (January 9, 2012). Sec. 102, Reorganization Plan 
No. 4 of 1978, 5 U.S.C. App. At 727 (2012). Sec. 2550.401c-1 also 
issued under 29 U.S.C. 1101. Sec. 2550.404a-1 also issued under sec. 
657, Pub. L. 107-16, 115 Stat 38. Sec. 2550.404a-2 also issued under 
sec. 657 of Pub. L. 107-16, 115 Stat. 38. Sections 2550.404c-1 and 
2550.404c-5 also issued under 29 U.S.C. 1104. Sec. 2550.408b-1 also 
issued under 29 U.S.C. 1108(b)(1). Sec. 2550.408b-19 also issued 
under sec. 611, Pub. L. 109-280, 120 Stat. 780, 972. Sec. 2550.412-1 
also issued under 29 U.S.C. 1112. Sec. 2550.4975f-12 also issued 
under Pub. L. 117-328, 136 Stat. 4459.

0
2. Add Sec.  2550.4975f-12 to read as follows:

[[Page 5668]]

Sec.  2550.4975f-12  Rules relating to automatic portability 
transactions.

    (a) In general and scope of exemption. (1) Internal Revenue Code 
(Code) section 4975(d)(25) exempts from the excise taxes imposed by 
Code section 4975(a) and (b), by reason of Code sections 4975(c)(1)(D) 
and (E), the receipt of fees and compensation by an automatic 
portability provider for services provided in connection with an 
automatic portability transaction. Code section 4975(d)(25) further 
exempts from the excise taxes imposed by Code section 4975(a) and (b), 
by reason of Code section 4975(c)(1)(F), the receipt of a fee by an 
automatic portability provider from an employer-sponsored retirement 
plan sponsor in lieu of a fee imposed on an individual retirement plan 
owner. Code section 4975(f)(12) establishes conditions for automatic 
portability transactions to be covered by the exemption. Effective 
December 31, 1978, section 102 of the Reorganization Plan No. 4 of 
1978, 5 U.S.C. App. 237, transferred the authority of the Secretary of 
the Treasury to promulgate regulations of the type published herein to 
the Secretary of Labor. This section implements the statutory exemption 
and conditions set forth at Code section 4975(d)(25) and (f)(12).
    (2) Automatic portability transaction. An automatic portability 
transaction is a transfer of assets made:
    (i) From an individual retirement plan which is established on 
behalf of an individual and to which amounts were transferred under 
Code section 401(a)(31)(B)(i),
    (ii) To an employer-sponsored retirement plan described in clause 
(iii), (iv), (v), or (vi) of Code section 402(c)(8)(B) (other than a 
defined benefit plan) in which such individual is an active 
participant, and
    (iii) After such individual has been given advance notice of the 
transfer and has not affirmatively opted out of such transfer.
    (3) Automatic portability provider. An automatic portability 
provider is a person, other than an individual, that executes transfers 
described in paragraph (a)(2) of this section.
    (4) Code section 4975(d)(25) does not contain an exemption for 
other acts described in Code section 4975(c)(1)(D) and (E) (relating to 
transfer to, or use by or for the benefit of, a disqualified person of 
the income or assets of a plan and to fiduciaries as defined in Code 
section 4975(e)(3) dealing with the income or assets of plans in their 
own interest or for their own account) that are not services provided 
in connection with automatic portability transactions. Services shall 
not be considered provided in connection with an automatic portability 
transaction if the services would have been provided in the absence of 
an automatic portability transaction or anticipation of a future 
automatic portability transaction. Except as described in paragraph 
(a)(1) of this section, Code section 4975(d)(25) does not contain an 
exemption for acts described in Code section 4975(c)(1)(F) (relating to 
fiduciaries as defined in Code section 4975(e)(3) receiving 
consideration for their own personal account from any party dealing 
with a plan in connection with a transaction involving the income or 
assets of the plan). Such acts are separate transactions not described 
in Code section 4975(d)(25). Code section 4975(d)(25) also does not 
contain an exemption from other provisions of the Code, such as section 
401, or other provisions of law which may impose requirements or 
restrictions relating to the transactions which are exempt under 
section 4975(d)(25).
    (b) This paragraph (b) sets forth conditions that must be satisfied 
in order for an automatic portability transaction to be covered by the 
statutory exemption in Code section 4975(d)(25).
    (1) Acknowledgment of fiduciary status. The automatic portability 
provider shall acknowledge in writing that it is a fiduciary with 
respect to the individual retirement plan in connection with its 
processing of automatic portability transactions:
    (i) Upon being engaged by an employer-sponsored retirement plan; 
and
    (ii) In the notices to individuals described in paragraphs 
(b)(5)(iii) through (v) of this section.
    (2) Fees and compensation. The fees and compensation received, 
directly or indirectly, by the automatic portability provider 
(including its affiliates) for services provided in connection with the 
automatic portability transaction (including any fees or compensation 
in connection with, but received before, the transaction):
    (i) Do not exceed reasonable compensation, as the term is defined 
in 26 CFR 54.4975-6(e); and
    (ii) Are fully disclosed to and approved in writing in advance of 
the transaction by a fiduciary of the employer-sponsored retirement 
plan described in paragraph (a)(2)(ii) of this section which is 
independent of the automatic portability provider. The information that 
shall be disclosed includes the information that is required to be 
disclosed under Sec.  2550.408b-2(c) by a covered service provider as 
defined in Sec.  2550.408b-2(c)(1)(iii)(A) (services as a fiduciary 
within the meaning of ERISA section 3(21)) and Sec.  2550.408b-
2(c)(1)(iii)(B) (recordkeeping services).
    (iii) An automatic portability provider (including its affiliates) 
may not receive or pay third-party fees or compensation to any party in 
connection with an automatic portability transaction. This restriction 
on third-party compensation does not apply to a fee paid by the sponsor 
of an employer-sponsored retirement plan that is in lieu of a fee 
imposed on an individual retirement plan owner or a fee that is shared 
with another automatic portability provider, as long as the overall fee 
associated with the automatic portability transaction does not increase 
as compared to the fees disclosed to the plan administrator and 
individuals in the notices described in paragraphs (b)(5)(ii) and (iii) 
of this section. This restriction does not prevent an automatic 
portability provider (or its affiliates) from receiving fees for 
services provided to an individual retirement plan or employer-
sponsored retirement plan that are in addition to services provided in 
connection with the execution of automatic portability transactions. 
The prohibited transaction relief provided in Code section 4975(d)(25) 
does not apply to fees or compensation paid by an employer-sponsored 
retirement plan or to fees or compensation for such additional 
services.
    (iv) Automatic portability provider-sponsored plan. An automatic 
portability provider (including its affiliates) shall not receive any 
fees or compensation in connection with an automatic portability 
transaction involving a plan that is sponsored or maintained by the 
automatic portability provider or an affiliate.
    (3) Data usage and protection. An automatic portability provider 
(including its affiliates) shall not market or sell to third parties 
participant-related data or individual retirement plan data that the 
automatic portability provider accesses or obtains in connection with 
an automatic portability transaction. An automatic portability provider 
shall take all necessary steps that a reasonable fiduciary would take 
to safeguard participant and individual retirement plan data to the 
extent the automatic portability provider exercises control over the 
data. If data is improperly accessed, the automatic portability 
provider shall take appropriate remedial actions that to safeguard the 
data based on the sensitivity of the accessed data and the nature and 
severity of the breach.
    (4) Open participation and limitation on exclusive engagements. (i) 
The

[[Page 5669]]

automatic portability provider shall offer to execute automatic 
portability transactions on the same terms to any employer-sponsored 
retirement plan described in paragraph (a)(2)(ii) of this section.
    (ii) The automatic portability provider shall not restrict or limit 
the ability of unrelated third parties to develop, market, and/or 
maintain a locate-and-match process or to execute automatic portability 
transactions separate from the automatic portability provider. The 
automatic portability provider also shall not restrict the ability of 
an employer-sponsored retirement plan, individual retirement plan 
provider (including custodians, trustees, and issuers), or recordkeeper 
to engage other automatic portability providers to execute automatic 
portability transactions.
    (5) Notices--(i) Notice to the Secretary of Labor. Within 90 
calendar days of the date that the automatic portability provider 
begins operating an automatic portability transaction program that is 
intended to rely on the prohibited transaction relief provided by Code 
section 4975(d)(25), the automatic portability provider shall notify 
the Secretary of Labor at [email protected] that it is operating 
as an automatic portability provider and relying on Code section 
4975(d)(25), (f)(12), and these regulations. Each automatic portability 
provider that relies upon the exemption must report the legal name of 
each business entity relying upon the exemption in the email to the 
Secretary and any name under which the automatic portability provider 
may be operating. This notification needs to be reported only once 
unless there is a change to the legal name or operating name(s) of the 
automatic portability provider relying upon the exemption. The 
automatic portability provider shall have 90 calendar days to report a 
change to the legal or operating name. The automatic portability 
provider may notify the Secretary if it is no longer operating in 
reliance upon this exemption.
    (ii) Notice to plan administrator. The automatic portability 
provider shall provide each plan administrator a model description of 
the automatic portability program, including fees and expenses related 
to the automatic portability program and automatic portability 
transactions. For any employer-sponsored plan that is subject to 
ERISA's summary plan description requirement, the automatic portability 
provider shall send a notice to each administrator of such plan that 
participates in an arrangement with the automatic portability provider 
that the administrator must fully describe the automatic portability 
program and disclose fees related to an automatic portability 
transaction in its summary plan description or summary of material 
modifications. The model description must be written in a manner so 
that it could be used by the plan administrator to fulfill summary plan 
description or summary of material modifications obligations, as 
relevant.
    (iii) Initial enrollment notice. The automatic portability provider 
shall furnish each individual on whose behalf the individual retirement 
plan was established an initial notice within 15 calendar days of the 
individual retirement plan's enrollment or participation in an 
arrangement that includes the possibility of a future automatic 
portability transaction executed by the automatic portability provider. 
The notice shall include:
    (A) A description of the automatic portability transaction, 
including that the automatic portability provider will send a notice at 
least 60 calendar days, but no more than 90 calendar days, in advance 
of executing an automatic portability transaction;
    (B) A description of the applicable account fees that will be 
charged in connection with the automatic portability transaction;
    (C) A clear and prominent description of the individual's right to 
affirmatively elect not to participate in the transaction, the other 
available distribution options, and the procedures to take advantage of 
such options;
    (D) The contact information for the automatic portability provider 
and the individual retirement plan provider (if not the automatic 
portability provider), including toll-free customer service numbers; 
and
    (E) The right to designate a beneficiary and the procedures to do 
so, including the appropriate party to contact if the automatic 
portability provider is not the provider of the individual retirement 
plan.
    (iv) Pre-transaction notice. The automatic portability provider 
shall furnish each individual on whose behalf the individual retirement 
plan was established a pre-transaction notice. The notice shall be 
provided at least 60 calendar days, but not more than 90 calendar days, 
in advance of an automatic portability transaction. The notice shall 
include:
    (A) A description of the automatic portability transaction and a 
complete and accurate statement of all fees which will be charged and 
all compensation which will be received by the automatic portability 
provider (including its affiliates) in connection with the transaction. 
The description of the automatic portability transaction shall include 
that the individual retirement plan assets will not be transferred for 
at least 60 calendar days from the date of the notice, that the 
individual has been matched with an account in an employer-sponsored 
retirement plan of a current employer, the name of the employer, and 
the name of the plan;
    (B) A statement requesting the individual's affirmative consent to 
transfer the assets from the individual retirement plan to the account 
in the employer-sponsored retirement plan;
    (C) A description of the individual's right to affirmatively elect 
not to participate in the transaction, the other available distribution 
options, the deadline by which the individual must make an election, 
and the procedures for doing so. The description shall indicate that if 
the individual does not affirmatively consent or elect not to 
participate by the deadline, the automatic portability provider will 
consider the individual to have given consent to the automatic 
portability transaction;
    (D) The contact information for the automatic portability provider 
and the individual retirement plan provider (if not the automatic 
portability provider) including toll-free customer service numbers that 
the individual may contact to make an election, pursue other available 
distributions options, or for other information or assistance with the 
automatic portability program; and
    (E) The right to designate a beneficiary and the procedures to do 
so for the individual retirement plan if it is not transferred to an 
employer-sponsored retirement plan in which the individual is an active 
participant, including the appropriate party to contact if the 
automatic portability provider is not the provider of the individual 
retirement plan.
    (v) Post-transaction notice. Not later than 3 business days after 
an automatic portability transaction is completed, the automatic 
portability provider shall provide notice to the individual on whose 
behalf the individual retirement plan was established of:
    (A) The actions taken by the automatic portability provider with 
respect to the individual retirement plan, including that the 
individual was matched with an account in an employer-sponsored 
retirement plan of the individual's current employer;
    (B) All relevant information regarding the location and amount of 
any transferred assets which includes, but is not limited to, the name 
of the employer and the name of the plan;
    (C) A statement of fees charged against the individual retirement 
plan

[[Page 5670]]

by the automatic portability provider or its affiliates in connection 
with the transfer; and
    (D) A customer service telephone number at which the individual can 
contact the automatic portability provider.
    (vi) Accessibility of notices. (A) The notices described in 
paragraphs (b)(5)(iii) through (v) of this section shall be written in 
a manner calculated to be understood by the average person, which for 
purposes of these regulations, is the average intended recipient. The 
disclosures must be accurate, not include inaccurate or misleading 
statements, and be sufficiently comprehensive to apprise the individual 
of their rights and obligations under the automatic portability 
program, must not be formatted to have the effect of misleading, 
misinforming or failing to inform the recipient, and be written in a 
culturally and linguistically appropriate manner. In fulfilling these 
requirements, the automatic portability provider shall exercise 
considered judgment and discretion by taking into account such factors 
as the level of comprehension and education of the typical intended 
recipient and the complexity of the terms of the program. Consideration 
of these factors will usually require the limitation or elimination of 
technical jargon and of long, complex sentences, the use of clarifying 
examples and illustrations, the use of clear cross references, and a 
table of contents be included.
    (B) Standards for culturally and linguistically appropriate 
notices. An automatic portability provider is considered to provide 
relevant notices and disclosures in a ``culturally and linguistically 
appropriate manner'' if the automatic portability provider meets all 
the requirements of the paragraph (b)(5)(vi)(C) of this section with 
respect to the applicable non-English languages described in paragraph 
(b)(5)(vi)(D) of this section.
    (C) Requirements. (1) The automatic portability provider must 
provide oral language services (such as a telephone customer assistance 
hotline) that include the ability to answer questions in any applicable 
non-English language and provide assistance with automatic portability 
transactions in any applicable non-English language;
    (2) The automatic portability provider must provide, upon request, 
a notice or disclosure in any applicable non-English language; and
    (3) The automatic portability provider must include in the English 
versions of all required notices and disclosure, a statement 
prominently displayed in any applicable non-English language clearly 
indicating how to access the language services provided by the 
automatic portability provider.
    (D) Applicable non-English language. With respect to an address in 
any United States county to which a notice is sent, a non-English 
language is an applicable non-English language if ten percent or more 
of the population residing in the county is literate only in the same 
non-English language, as determined in guidance published by the 
Secretary of Labor.
    (vii) Ensuring participants receive notices and disclosures. The 
automatic portability provider shall adopt and implement prudent 
policies and procedures to ensure that it obtains or has access to 
current and accurate census and contact data on individual participants 
and individuals on whose behalf an individual retirement plan is 
established, necessary to effectively administer the automatic 
portability program. An individual cannot participate in the automatic 
portability provider's automatic portability transaction program unless 
the automatic portability provider has a reasonable basis for believing 
the automatic portability provider has a valid address for the 
individual. Notices and disclosures to participants and individuals 
must be made using methods that satisfy the disclosure requirements in 
Sec.  2520.104b-1(b) of this chapter.
    (6) Frequency of searches. The automatic portability provider shall 
use a locate-and-match service to query cooperating record-keepers, on 
at least a monthly basis, whether the individual for whose benefit the 
individual retirement plan is established has an active account in an 
employer-sponsored retirement plan. The automatic portability provider 
shall take prudent steps to verify the accuracy of the individual's 
information (including such information as the participant's social 
security number, first name, last name, middle name or initial, date of 
birth, phone number, etc.) to ensure the match is correct. The 
verification steps must include ongoing participant address validation 
searches via automated checks of:
    (i) National Change of Address records;
    (ii) Two separate commercial locator databases; and
    (iii) Any internal databases maintained by the automatic 
portability provider. If a valid address is not obtained from the 
automated checks, the automatic portability provider must also perform 
a manual internet-based search. These verification steps must be 
performed at least twice in the first year an account is entered into 
the automatic portability provider system and once a year thereafter.
    (7) Monitoring transfers into an employer-sponsored retirement 
plan. The automatic portability provider shall ensure that an employer-
sponsored retirement plan that accepts transfers into the plan in 
connection with an automatic portability transaction designates a plan 
official responsible for monitoring transfers into the plan due to 
automatic portability transactions, including ensuring the amounts 
received on behalf of a participant are invested properly. Amounts 
received are deemed to be invested properly if made in accordance with 
the participant's current investment election under the plan or, if no 
election is made or permitted, in the plan's qualified default 
investment alternative under Sec.  2550.404c-5 or in another investment 
selected by a fiduciary with respect to such plan.
    (8) Timeliness of automatic portability transaction execution. If 
the automatic portability provider identifies a match, and the affected 
individual does not affirmatively elect not to participate in the 
transaction within the timeframe indicated in the pre-transaction 
notice, the automatic portability provider shall, after liquidating the 
assets of the individual retirement plan to cash in accordance with the 
timeframes established in the policies and procedures adopted pursuant 
to paragraph (b)(9) of this section, transfer the account balance of 
such plan as soon as practicable to the participant's account in the 
employer-sponsored retirement plan.
    (9) Limitation on exercise of discretion and on policies and 
procedures. The automatic portability provider shall neither have nor 
exercise discretion to affect the timing or amount of the transfer, 
other than to deduct the appropriate fees as described in paragraph 
(b)(2) of this section. An automatic portability provider will be 
deemed to satisfy this paragraph (b)(9) if it establishes, maintains, 
and follows written policies and procedures that set specific standards 
and timeframes that apply to all automatic portability transactions. 
The policies and procedures shall, at a minimum, address:
    (i) The process to ensure that an employer-sponsored retirement 
plan that accepts transfers into the plan in connection with an 
automatic portability transaction designates a representative that will 
be responsible for monitoring transfers into the plan due to automatic 
portability transactions and investment of amounts received;

[[Page 5671]]

    (ii) The process and timing for liquidating the assets of the 
individual retirement plan to cash and closing the individual 
retirement plan;
    (iii) The process for verifying and validating that the correct 
fees are withdrawn from the individual retirement plan;
    (iv) The process and timing for transmitting assets to employer-
sponsored retirement plans;
    (v) The process for verifying the assets were received by the 
employer-sponsored retirement plan; and
    (vi) The process for sending all required notices to plan 
participants or individuals on whose behalf an individual retirement 
plan is established, in accordance with paragraph (h) of this section.
    (c) Annual audit and corrections. (1) An automatic portability 
provider shall retain an independent auditor to conduct an annual audit 
to assist the automatic portability provider in demonstrating 
compliance with the automatic portability provider's policies and 
procedures, the requirements of Code section 4975(d)(25), (f)(12), and 
these regulations and identifying any instances of noncompliance. The 
auditor shall, at a minimum, review: the policies and procedures, a 
representative sample of the required disclosures, a representative 
sample of automatic portability transactions, and the requirements of 
Code section 4975(d)(25), 4975(f)(12), and these regulations. The 
auditor shall have appropriate technical training and proficiency with 
respect to ERISA Title I, the Code, and the automatic portability 
transactions described in these regulations to conduct the audit.
    (2) Independence of auditor. An auditor is independent if the 
automatic portability provider does not have an ownership interest in 
or control the auditor and the auditor derives no more than two percent 
of its annual revenue from services provided directly or indirectly to 
the automatic portability provider or any of its affiliates.
    (3) Access to information. The automatic portability provider shall 
grant the auditor access to its automatic portability operations and 
records (including, as necessary, the operations and records of its 
affiliates) sufficient to allow the auditor to make the determinations 
and findings required by these regulations.
    (4) Audit report findings and determinations. The auditor shall 
prepare a written audit report signed by the auditor. The written audit 
report shall include the following findings and determinations:
    (i) The total number of completed automatic portability 
transactions during the audit period;
    (ii) Whether the notices in the reviewed sample met the timing and 
content requirements of Code section 4975(f)(12) and these regulations 
and were delivered in a manner reasonably designed to ensure affected 
individuals would receive the notices;
    (iii) Whether any required notices were returned as undeliverable 
and what steps were taken by the automatic portability provider to 
address undeliverable notices;
    (iv) Whether the notices in the reviewed sample were written in a 
manner reasonably calculated to be understood by the average intended 
recipient, including whether the notices include inaccurate or 
misleading statements;
    (v) Whether the appropriate accounts in the employer-sponsored 
retirement plan in the reviewed sample received all the assets due as a 
result of the automatic portability transaction;
    (vi) A summary of the fees individuals were charged by the 
automatic portability provider (and any affiliates) for services 
provided in connection with automatic portability transactions, 
including whether those fees increased since the last report;
    (vii) Whether the fees and compensation received by the automatic 
portability provider (including its affiliates) in connection with the 
automatic portability transactions are consistent with the fees 
authorized by appropriate plan fiduciaries and did not exceed 
reasonable compensation, as described in paragraph (b)(2)(i) of this 
section;
    (viii) Whether all requirements of Code section 4975(f)(12) and 
these regulations were satisfied with respect to:
    (A) The policies and procedures; and
    (B) The transactions and disclosures that were reviewed;
    (ix) A summary of compliance issues reported to or discovered by 
the auditor, the auditor's recommendations, and the extent to which the 
automatic portability provider has addressed or is addressing the 
issues pursuant to the correction procedures in paragraph (c)(9) of 
this section;
    (x) Any other recommendations from the auditor to improve the 
policies and procedures and overall execution of automatic portability 
transactions to ensure compliance with the requirements of Code section 
4975(f)(12) and these regulations; and
    (xi) A description of the auditor's methodology and procedures in 
performing the audit.
    (5) Additional information to be included in the audit report. The 
written audit report shall also include:
    (i) The number of mandatory distributions into individual 
retirement plans described in paragraph (a)(2)(i) of this section for 
which the automatic portability provider is conducting searches as 
required by paragraph (b)(6) of this section; and
    (ii) The number of individual retirement plans described in 
paragraph (a)(2)(i) of this section:
    (A) Which have been transferred to designated beneficiaries;
    (B) For which the automatic portability provider is searching for 
next of kin due to the death of an account holder without a designated 
beneficiary; and
    (C) That were reduced to a zero balance while in the automatic 
portability provider's custody.
    (6) Records not in possession of the automatic portability 
provider. If the automatic portability provider does not have access to 
the records or information to be included in the audit report, the 
automatic portability provider, as a condition of its services, shall 
require that the appropriate information is provided to the automatic 
portability provider.
    (7) Timing of the audit report and submission to the Secretary of 
Labor. The written audit report shall be completed within 180 calendar 
days following the annual period to which the audit relates. The 
automatic portability provider shall submit the written audit report to 
the Secretary of Labor at [email protected] within 30 
calendar days of completion.
    (8) Certification of audit review and addressing compliance issues. 
The automatic portability provider shall include a certification filed 
with the written audit report, under penalty of perjury, that the 
automatic portability provider reviewed the audit report. The automatic 
portability provider shall also certify that it has addressed, 
corrected, or remedied any noncompliance or inadequacy in its 
compliance or has an appropriate written plan to address any such 
issues identified in the audit report.
    (9)(i) Correction procedures. The automatic portability provider 
shall establish procedures for the correction of failures to comply 
with Code section 4975(f)(12) and these regulations. The procedures 
shall, at a minimum, require the automatic portability provider to 
notify the auditor during the applicable audit cycle of any 
correction(s) the automatic portability provider made on its own. The 
automatic portability provider may engage in corrections on

[[Page 5672]]

its own, without the auditor's input and without losing relief under 
Code section 4975(d)(25), if:
    (A) Either the violation did not result in losses to the individual 
retirement plan or the automatic portability provider made the 
individual retirement plan whole for any resulting losses;
    (B) The automatic portability provider corrects the violation and 
documents the correction in writing within 30 calendar days of 
correction;
    (C) The correction occurs no later than 90 calendar days after the 
automatic portability provider learned of the violation or reasonably 
should have learned of the violation; and
    (D) All instances of noncompliance and accompanying corrections are 
reported in writing to the auditor.
    (ii) Auditor recommendations. If the auditor determines the 
automatic portability provider was not in compliance with any provision 
of Code section 4975(f)(12) or these regulations during the audit 
period, the auditor shall identify the instances of noncompliance in 
the audit report along with a description of corrective actions taken 
by the automatic portability provider and any recommended additional 
corrections. An automatic portability provider will not be treated as 
having failed to comply with any provision of Code section 4975(f)(12) 
or these regulations, provided it corrects any instance of 
noncompliance identified by the auditor as soon as reasonably 
practicable.
    (10) Additional corrective actions. The Secretary of Labor may 
require the automatic portability provider to submit to supplemental 
audits and corrective actions, including a temporary prohibition from 
relying on the exemption if the automatic portability provider or an 
affiliate is found to be:
    (i)(A) Engaging in a systematic pattern or practice of violating 
any provision of Code section 4975(f)(12) or this regulation;
    (B) Intentionally violating any provision of Code section 
4975(f)(12) or this regulation; or
    (C) Providing materially misleading information to the Secretary of 
Labor, Secretary of the Treasury, or the auditor in connection with 
automatic portability transactions; or
    (ii) The subject of a foreign or domestic criminal conviction:
    (A) Involving or arising out of the conduct of the automatic 
portability program or any automatic portability transaction; or
    (B) For any felony involving larceny, theft, robbery, extortion, 
forgery, counterfeiting, fraudulent concealment, embezzlement, 
fraudulent conversion, misappropriation of funds or securities, or 
conspiracy to commit any such crimes or a crime in which any of the 
foregoing crimes is an element.
    (d) Website. (1) The automatic portability provider shall maintain 
a website which displays:
    (i) A description of all the fees and compensation received, 
directly or indirectly, by the automatic portability provider for 
services provided in connection with the automatic portability 
transaction;
    (ii) A list of recordkeepers for each employer-sponsored retirement 
plan with respect to which the automatic portability provider carries 
out automatic portability transactions; and
    (iii) The number of plans and participants covered by each 
recordkeeper.
    (2) The website is not required to be limited to the information 
described in paragraphs (d)(1)(i) through (iii) of this section, and 
may include other information, for example, about the automatic 
portability provider, the automatic portability program, or other 
services provided to employer-sponsored retirement plans or individual 
retirement plans, but the automatic portability provider must ensure 
that the information described in paragraphs (d)(1)(i) and (ii) of this 
section is displayed in a way that clearly sets forth the automatic 
portability transaction fees and compensation separately from other 
fees and compensation.
    (e) Limitation on exculpatory provisions. The automatic portability 
provider shall not include exculpatory provisions in its contracts or 
communications with individuals described in paragraph (a)(2)(i) of 
this section disclaiming or limiting the automatic portability 
provider's liability in the event the automatic portability provider 
causes an improper transfer of assets in connection with an automatic 
portability transaction. This limitation does not prohibit disclaimers 
for:
    (1) Liability caused by an error, a misrepresentation, or 
misconduct of a party independent of the automatic portability provider 
and its affiliates, or
    (2) Damages arising from acts outside the control of the automatic 
portability provider.
    (f) Record retention requirements. (1)(i) An automatic portability 
provider shall, for not less than 6 years after the automatic 
portability transaction has occurred, maintain records sufficient to 
demonstrate compliance with the requirements of Code section 
4975(f)(12) and this regulation.
    (ii) No prohibited transaction will be considered to have occurred 
solely on the basis of the unavailability of such records if they are 
lost or destroyed due to circumstances beyond the control of the 
automatic portability provider before the end of the six-year period. 
An automatic portability provider's failure to maintain the records 
necessary to determine whether the conditions of Code section 
4975(f)(12) and this regulation have been met will result in the loss 
of the relief provided by Code section 4975(d)(25) and this regulation 
only for the transaction or transactions for which such records are 
missing or have not been maintained.
    (2) The records maintained to demonstrate compliance with the 
requirements of Code section 4975(f)(12) and this regulation shall be 
made available to any duly authorized employee or representative of the 
Department of Labor or the Department of the Treasury within 30 
calendar days of the date of a written request for such records by the 
Department of Labor or the Department of the Treasury.
    (g) Definitions. (1) A person or entity is an affiliate if, 
directly or indirectly (through one or more intermediaries) it 
controls, is controlled by, or is under common control with such person 
or entity; or is an officer, director, or employee of, or partner in, 
such person or entity. Unless otherwise specified, an affiliate refers 
to an affiliate of the automatic portability provider.
    (2) The term control means the power to exercise a controlling 
influence over the management or policies of an entity or person other 
than an individual.
    (3) The term individual retirement plan means:
    (A) An individual retirement account described in Code section 
408(a); and
    (B) An individual retirement annuity described in Code section 
408(b).

    Signed at Washington, DC, this 16th day of January 2024.
Lisa M. Gomez,
Assistant Secretary, Employee Benefits Security Administration, U.S. 
Department of Labor.
[FR Doc. 2024-01208 Filed 1-26-24; 8:45 am]
BILLING CODE 4510-29-P