I recently applauded the American Benefits Council for their letter to the Department of Labor (DOL), which clearly identified the root causes of missing participants: a highly-mobile workforce and lack of retirement savings portability.
Taking the council’s insight a step further, I maintained that what’s really missing in our defined contribution system are initiatives that move retirement savings forward when participants change jobs, such as auto portability.
When implemented, these initiatives could serve to dramatically decrease the overall incidence of missing participants.
Meanwhile, as a practical matter, fiduciaries of ongoing plans must still confront the problem of locating missing participants, and must do so with incomplete guidance. If audited, they’ll potentially face ad hoc enforcement positions by the DOL, which the council asserts have been inconsistent and, in many cases, unreasonable.
So, what are the council’s specific recommendations to the DOL as set forth in their letter? The recommendations, if adopted, could establish a more complete, consistent and reasonable framework for plans to address the missing participant problem, going forward.
The Present State of Guidance
The council notes that the present state of guidance for locating missing participants is woefully inadequate. The most-specific guidance available, in the form of Field Assistance Bulletin 2014-01, addresses the scenario of locating missing participants for a terminating plan.
In the plan termination process, when a distribution is imminent, FAB 2014-01 describes a two-step structure that defines “reasonable” search steps that a plan fiduciary should take, including:
Step 1:
- Send notice via USPS Certified Mail
- Check related plan and employer records for more up-to-date information
- Check with named beneficiary for more up-to-date information
- Make use of internet search tools that do not charge a fee
Step 2:
- Consider if additional search steps are appropriate, based on size of balance and cost of further search efforts (ex. – internet, commercial search tools, etc.)
If the missing participant—or their beneficiary—is not located, then the sponsor can distribute the participant’s savings to a). a safe harbor IRA, b). an interest-bearing bank account, or c). to state unclaimed property—with the DOL favoring the safe harbor IRA option.
This guidance, while valuable, is limited in that it does little to inform the fiduciaries of ongoing plans, who encounter a broader range of missing participant scenarios.
Council’s Recommendations to the DOL
Specifically, the council has requested that the DOL offer guidance that answers three questions:
For ongoing plan fiduciaries, what search steps are reasonable to locate a missing participant:
- Before a distribution event?
- At the time of distribution, if the participant cannot be located, refuses to respond, or does not negotiate a distribution check?
- After the participant has experienced a distribution event?
Unlike the one-size-fits-all approach described in FAB 2014-01, the council’s three questions establish the cornerstone of an adaptive framework for locating missing participants. This framework allows plan fiduciaries to triage their location efforts, based upon the participant’s proximity in time to a distribution event.
Under the three scenarios, the Council’s recommendations make use of elements of FAB 2014-01, but also introduce the following key elements:
- Placing limits on search requirements for missing participants whose contact information may not be up-to-date, but for whom no distribution event is imminent.
- Introducing, extending or expressly recognizing mechanisms to deal with missing participants just prior to a distribution event, including:
- Forfeiture & reinstatement of missing participant balances
- Use of automatic rollovers (or “missing participant IRA”) for missing participants whose amounts are distributable at normal retirement age
- Use of taxable accounts, where a safe harbor IRA is not appropriate
Lastly, the council’s letter offers some pointed recommendations for the DOL to revisit their audit policies and guidelines to make them more “consistent and reasonable” including:
- It should not be suggested that a plan’s forfeiture and reinstatement provisions result in a prohibited transaction.
- Audits must provide employers with finality, when completed.
- Data requests must be reasonable.
- Plans should not be told that they should go beyond the reasonable search steps described in FAB 2014-01.
Clear, Consistent, Portable
In our view, the council’s recommendations to the DOL for guidance seem reasonable, and if adopted, would deliver much-needed clarity and consistency to the process of locating missing participants.
When combined with measures that promote retirement savings portability (ex.–auto portability), the administrative burden of locating missing participants could not only become much more manageable for plan sponsors, but would deliver better outcomes for participants—a goal shared by all.
Tom Hawkins is vice president of sales and marketing with Retirement Clearinghouse, and oversees all key operational aspects of this area, including RCH’s web presence, digital marketing and plan sponsor proposals. In other roles for RCH, Hawkins has performed product development, helped lead the company’s re-branding, evaluated & organized industry data and makes significant contributions to RCH thought leadership positions.
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.
