It would be wonderful if every 401k plan sponsor maintained meticulous participant data from day one, but that’s rarely the case.
Time, expense, and resource constraints can lead plan sponsors to focus on other priorities.
Often, the consequence of outdated data isn’t recognized until a company does one of the following:
- Takes part in a merger or acquisition,
- Decides to terminate a plan and liquidate all assets,
- Approaches the 100-participant threshold for Form 5500 reporting,
- Needs to make required minimum distributions to retired participants,
- Changes its third-party administrator (TPA) or service provider,
- Accumulates a sizeable uncashed check balance, or
- Receives the recommendations following a Department of Labor or Internal Revenue Service audit.
Search processes have become a focus for DOL and IRS audits during the past year. Consequently, if your plan doesn’t have a formal, documented process for managing participant data, one should be established.
Typically, participant data-management processes include the identification of multiple points of contact, updating participant and beneficiary addresses on a regular basis, establishing and maintaining a systematic internal or external participant search process, and having a method for managing the accounts of participants who cannot be found.
If you rely on a TPA or recordkeeper, review the process it uses to identify and find missing participants. It’s also a good idea to confirm when distributions are required, and how the TPA or recordkeeper manages uncashed check balances.
There’s a catch, however.
While making a reasonable effort to find missing or unresponsive participants is a fiduciary responsibility under ERISA, until recently the DOL and IRS had not defined what that meant for active plans.
In lieu of specific guidance, plan sponsors have often looked to Field Assistance Bulletin No. 2014-01, which provided insight to the search process required for terminating defined contribution plans with missing or unresponsive participants.
In October 2017, additional information was provided when the IRS issued a memo outlining the steps plan sponsors must take to locate missing participants and beneficiaries to satisfy the rules for required minimum distributions.
Drinker Biddle has suggested the search process include:
- Checking the records of related plans and employers for additional contact information,
- Sending notices by certified mail to participants’ last known mailing addresses,
- Sending notices to e-mail addresses, as well as texting or calling telephone numbers,
- Contacting participants’ designated plan beneficiaries for updated information,
- Using free electronic search tools, including Internet searches and public record data sites.
- Using a third party or a proprietary Internet search tool to locate missing participants.
When participants cannot be found, plan sponsors have several options. If the goal is to have accurate participant records, then plan sponsors may want to roll over small accounts to a Safe Harbor IRA (a.k.a. an Automatic Rollover IRA).
This is the DOL’s preferred choice for accounts of missing participants in terminating plans. Automatic Rollover IRAs are more likely to preserve missing participants’ retirement savings than other available options because the assets remain tax-deferred, and any earnings continue to grow tax-deferred.
In addition, Automatic Rollover IRAs can help plan sponsors reduce fiduciary liability, lower plan expenses, and streamline plan operations.
The IRA rollover process is relatively simple:
- Amend plan, if necessary, to provide for forced distributions (and notify participants of the change),
- Select an IRA provider,
- Sign an agreement that defines investment vehicles, services provided, and related fees and expenses,
- Notify terminated employees with small balances requesting distribution instructions,
- Send missing and unresponsive participants’ data to the IRA provider,
- Have the IRA provider establish accounts for the participants,
- Send participants’ balances to the IRA provider,
- Complete the process each quarter or year, as plan provisions designate.
With automatic rollovers into IRAs, plan fiduciaries have a responsibility to choose a competent IRA provider.
Once the provider has been selected and a contract has been signed, the plan sponsor is not required to monitor the IRA provider or ensure the provider’s compliance with IRA agreement terms after funds have been transferred into IRAs. The terms of the IRA agreement are enforceable by the participant for whom the rollover was completed.
Plan sponsors should review plan documents. If there is no Automatic Rollover IRA provision, one may need to be added.
Implementing search processes and automatic rollover provisions can help plan sponsors and administrators clean up out-of-date participant data and make sure plan information remains accurate.
It is now certain that the DOL and IRS are very concerned about missing participants, so it’s also critical to document and periodically review processes so audits don’t uncover any surprises.
Before retirement, Terry Dunne was the senior vice president and managing director of Retirement Services at Millennium Trust Company, LLC. Mr. Dunne has over 40 years of consulting experience in the financial services industry. He has written extensively on retirement planning, industry trends, technology, and legislation. Millennium Trust performs the duties of a directed custodian, and as such does not sell investments or provide investment, legal or tax advice.
