It’s tough to quantify exactly how many missing participants there are in the U.S. retirement system. During 2013, the most recent Department of Labor (DOL) data indicates, there were about 16 million individuals with retirement assets held in retirement plans at former employers. While not all of these participants are missing or unresponsive, a significant percentage may be.
Anecdotally, retirement market watchers are increasingly noticing a rise in plan participants who for all intents and purposes, are off the grid. There is any number of reasons for this. With relatively high unemployment rates in recent decades, employees have increasingly changed jobs, and many are failing to roll old accounts to their new employers’ retirement plan. Or they relocate and fail to communicate the change of address to their former employer or post office.
In a bid to reduce costs—not to mention reducing exposure to any fiduciary liabilities associated with missing participants—many plan sponsors have decided to tackle this issue head-on now, rather than wait for it to become a more glaring problem.
Solution No. 1: Find Missing Participants
In 2014, the DOL issued updated guidance for locating missing participants. Technically, the directive applies to terminating defined contribution (DC) plans; however, it may prove helpful to all plan sponsors. Field Assistance Bulletin (FAB) 2014-01 outlines specific steps that plan fiduciaries of terminating DC plans must take to find a participant and obtain distribution instructions. At a minimum, they must:
Send notices by certified mail
- Check other plan and employer records for participant information
- Contact the participant’s designated beneficiary
- Use free electronic search tools
For active plans with missing and non-responsive participants providing a process that attempts to locate, communicate with and confirm current information while creating an audit trail on the steps taken can be critical. Being able to defend against questioning from a former employee or their beneficiary on the efforts made to find them is critical for a plan sponsor.
Finding missing participants can have a myriad of benefits for plan sponsors including minimizing fiduciary liability, helping to reduce administrative costs, lowering PBGC premiums, maximizing distribution success rates, and improving the quality of participant and beneficiary data. But it’s not an easy task. Plan sponsors, third party administrators and record keepers are not necessarily good at finding missing people.
In fact, many plan sponsors are now turning to specialized locator services to find missing participants.
According to Mark Sweatman, the president of one such organization called Risk Compliance Performance Solutions (RCP), 10 to 15 percent of a typical DC plan’s participant data has some type of issue. Six to seven percent of the records received by his company are known to have bad addresses or, a participant may have moved and neglected to file change-of-address notifications. Consequently, plan communications delivered to the address of record may never reach the participant.
“Best practices suggest that plan sponsors at mid-sized and larger companies review missing participants annually,” said Sweatman, “They need to have good records that demonstrate their efforts to find people.”
Solution No. 2: Maintain Missing Participants’ Accounts
Plan sponsors can opt to keep missing participants’ accounts in their plans. However, a priority for many plans today is reducing costs. Keeping missing participants’ accounts can increase plan costs.
Millennium Trust estimates that most large record keepers charge a median fee of $92 per participant per year for recordkeeping, investment, and other administrative costs. The ways in which plan sponsors cover this cost varies.
- The plan sponsor may pay the cost.
- The plan participants may pay the cost.
- Mutual fund reimbursements may offset costs.
Often, a combination of these approaches is used. It’s important to note that mutual fund reimbursement amounts for small accounts (often missing participants have smaller account balances) are lower than those for large accounts. As a result, plan sponsors and active participants in plans with many small accounts may have to pay more to cover plan expenses.
A more palatable solution may be distributing the assets of missing and non-responsive participants whose balances are $5,000 or less in order to reduce plan expenses.
Solution No. 3: Distribute Missing Participants’ Assets
If a participant has not been located after sending out a simple notification letter for active plans or by using the methods suggested in FAB 2014-01 for terminating DC plans, then a plan sponsor can make a distribution to an individual retirement account (IRA) or an interest-bearing bank account. If the plan is terminating, there are several options offered by the DOL as an end destination which include rollover to an IRA and transfer to a state’s unclaimed property fund.
IRA rollovers are the DOL’s preferred distribution option. IRAs are more likely to preserve former participants’ funds than any other option because the assets remain tax-deferred, and any earnings continue to grow tax-deferred.
Automatic IRA rollovers are an option that appeals to many plan sponsors, as well. Rollovers help minimize fiduciary liability, reduce plan costs, and simplify plan administration, while preserving the tax deferred nature of the funds and income earned for former participants.
However, plan sponsors must exercise caution when choosing a provider. The choice of an individual retirement plan requires the exercise of fiduciary judgment with respect to the choice of an individual retirement plan trustee, custodian or issuer to receive the distribution, as well as the choice of an initial investment in the individual retirement plan.
Plan sponsors need to thoroughly assess their options. Those who do not have effective processes in place for managing missing participants’ accounts should address the issue promptly before it becomes a serious problem.
ABOUT MILLENNIUM TRUST COMPANY
Millennium Trust Company is a leading financial services company offering niche custody solutions to institutions, advisors and individuals. The firm serves as a complement to services offered by other custodians. Their innovative solutions include rollover solutions, alternative asset custody, private fund custody, and advisor support solutions. Millennium Trust performs the duties of a directed custodian and, as such, does not provide due diligence on prospective investments, sponsors or service providers and does not sell investments or provide investment, tax or legal advice. For more information about Millennium Trust Company visit: www.mtrustcompany.com
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
