Should a plan’s fiduciary adopt auto-portability?

Imagine your client’s retirement plan provides on severance-from-employment an involuntary distribution of a participant’s account no more than $7,000, accepts rollover-in contributions, and otherwise is eligible for the auto-portability network the plan’s recordkeeper offers.

Imagine your client asks for your advice about whether to approve auto-portability.

And your client specifically asks for your advice not about what’s best for participants, but rather about what’s most risk-avoiding for the fiduciary.

What responsibility and potential liability might a fiduciary face because it approved auto-portability?

What responsibility and potential liability might a fiduciary face because it did not adopt auto-portability?

How do you advise your client?

After almost 200 views with no responses, I suspect many of us suffer from my lack of experience. (I haven’t yet had any client ask me about auto-portability; I hope to prepare for the day when a client is offered the opportunity and wants to evaluate the advantages and disadvantages.)

While we’re seeking to learn more, here’s one difference:

Under ERISA § 404(c)(3), one year after a default rollover to an IRA done according to the Congress-directed Labor rule, the former participant or beneficiary is treated as “exercising control” over the default IRA. That sets up a nonliability for any loss, including an opportunity loss, that results from the former participant’s or beneficiary’s deemed exercise of control. Under EGTRRA § 657(c)(2)(A), naming a default IRA custodian or insurer and investing a default rollover according to the Congress-directed Labor rule “is deemed to satisfy the fiduciary requirements of” ERISA § 404(a).

Nothing in ERISA section 404 sets up any similar nonliability or no-breach for a fiduciary’s approval or disapproval of an auto-portability service.

@Peter Gulia I did not respond to the OP since, frankly, the conversations I have had with plan sponsors have been about how best to serve their participants, and conversation ends there.

Should a plan sponsor pose the question about what responsibility and potential liability they might face because by deciding for a against using auto-portability, I would comment the topic of exposure to fiduciary liability is better answered by their legal counsel.  Auto-portability is not a panacea, and "checking the box" to authorize the use of the service comes with some mandated administrative requirements and commitments, and legal counsel will need to be prepared to explain the pros and cons of the service because of the mandates and commitments (or risk exposure for the plan not doing something the plan agreed to do).  Here is a comment from a PlanSponsor magazine article:

"Auto-portability sounds simple enough. Plan participants change jobs; [Auto-portability provider] tracks them to their new employer and verifies their identities; employees consent to a balance transfer; and the funds from their previous plan are added to their new plan’s balance.

From an operational and legal perspective, auto-portability “wraps around” a mandatory distribution provision[.]  “In order to do auto-portability on a negative consent basis, you have to both force small balances out of a plan on a negative consent basis, as well as roll those balances into a plan on a negative consent basis.”

These transfers require coordination among recordkeepers and sponsors, plus extensive data processing. Participating recordkeepers must be both sending and receiving recordkeepers. That means a recordkeeper and its plan sponsor-clients agree that terminated participants who are eligible for auto-portability because they meet the mandatory distribution provisions will be forced out of the plan and their data included in [auto-portability provider]’s systemwide queries. Also, each recordkeeper and plan sponsor must also accept roll-ins of new hires’ transferred balances to their plans."

Note, there is a lot of baggage associated with auto-portability that is not affordable for smaller recordkeeping service providers.

Paul I, thank you for suggesting some other factors.

Among many points a fiduciary might consider, one I find at least question-raising is that neither the auto-portability provider nor the receiving plan’s recordkeeper seems obligated to evaluate whether the receiving plan is prudently, or even lawfully, administered.

What if, under a next employer’s plan, the expenses borne by a plan account are worse than those charged to a default IRA?

What if none of a new employer’s people handling the plan’s assets is covered by fidelity-bond insurance, one of them steals the new participant’s account, and the employer is judgment-proof?

It’s hard enough to decide defaults for the plan a fiduciary manages. But how does a fiduciary prudently say yes to defaults about an unknown plan that’s beyond the former employer’s control?

Yet, I also can imagine some situations under which not getting auto-portability default contributions might weaken a plan for some of its participants. I wonder whether a plan’s fiduciary has a responsibility to consider that.

And there are impartiality conflicts: Even within one plan, auto-portability could help some participants, and could harm some others.

I guess the analysis might wait until there’s a live candidate with real facts to consider.

Or, maybe Congress will legislate a nonliability provision, or even a command.

On 5/9/2025 at 6:48 PM, Paul I said:

From an operational and legal perspective, auto-portability “wraps around” a mandatory distribution provision[.]  “In order to do auto-portability on a negative consent basis, you have to both force small balances out of a plan on a negative consent basis, as well as roll those balances into a plan on a negative consent basis.”

I'll rob from Paul here to pay Peter. Paul makes an important point in emphasizing negative consent, which from a plan participant's perspective looks very different from Peter's perspective of advising a plan sponsor. In evaluating a course of action for my own clients, I always put on opposing counsel's hat to determine what their responsive legal argument might be before I make my own argument.

For example, if a plan participant is going sue a plan and its fiduciaries, that participant's counsel will home in on actions taken that are arguably not in the best interests of participants, which could be shown by introducing the kinds of evidence you list in your third post, Peter. In particular, negative consent-basis actions would appear to a litigant to be a ripe target for close scrutiny, especially if an end result has demonstrably detrimental effect on participants.

So yes, from a legal perspective, I would think a prudent plan fiduciary has a responsibility to consider those possible outcomes before instituting a practice that has many known unknowns and the result of which have the potential for damaging participants. If a plan participant sues, be prepared in discovery to show plan fiduciaries considered potential outcomes. Even with lots of plan policy communications to participants, jurists will consider whether the average plan participant is likely to understand them.