It’s not always easy for plan sponsors to communicate with participants. As technology changes how information gets shared, it takes time for the retirement industry and the associated regulations to catch up.
This can create costly administrative headaches for plan sponsors and, when these costs are passed on, participants too.
Regulators and legislators have recently thrust two issues into the spotlight: outdated requirements for communication distribution and the process to communicate with missing participants.
e-Delivery in plan sponsor communications
Today, plan sponsors are required to share mandatory updates and communications by mail. The costs of these printed materials and postage are often passed on to participants.
According to a NAPA/ARA survey, $500 million a year is unnecessarily spent on paper disclosures.
As the 115th session of Congress ended last year, bipartisan legislation to update the default distribution method for plan sponsor communications was reintroduced.
The “Receiving Electronic Statements to Improve Retiree Earnings (RETIRE) Act” (S. 3795) would allow retirement plan sponsors the option to automatically enroll participants in digital delivery, while providing an opt-out for anyone who wishes to continue receiving paper statements.
Beyond establishing a new electronic delivery system, the RETIRE Act also requires plan sponsors to provide certain protections to participants. They must:
- Protect the confidentiality of personal information related to the employee’s accounts.
- Provide a paper notice that details the participant’s current method of receiving notifications along with a statement explaining the employee’s right to change that method at any time.
- Provide readable electronically delivered documents that contain the same content as their paper counterparts.
The RETIRE Act will enhance the effectiveness of ERISA communications as well as generate cost savings for the plans that decide to opt for e-delivery, all while maintaining security of information.
With bipartisan sponsors, the bill is still expected to move quickly through the 116th Congress, which reconvened January 3, 2019.
Missing Participants
The median job tenure for those 25 years and older, according to the Employee Benefit Research Institute, is 5.1 years. For plan sponsors, that means a steady rise in orphaned 401k accounts.
Trying to find these missing participants can drive up administrative costs. According to the DOL, in 2002 professional recordkeepers estimated that about 2% of total plan assets administered were orphaned accounts.
Finding the owners of these orphaned accounts can be burdensome for plan sponsors.
If there is less than $5000 in assets in an orphaned account, plan sponsors can transfer funds into an IRA established on the participant’s behalf without obtaining permission.
For accounts with more than $5000, plan sponsors must try to contact former employees and remind them of their options to roll funds into an IRA, to roll funds into a new employer’s plan, or to keep them in the current plan.
This requirement often proves difficult, as former employees can be hard to track down.
Until 2012, the IRS assisted in locating missing participants. In the absence of this service, the DOL recommends using commercial locator services, credit reporting agencies, and internet search tools to locate participants.
Plan sponsors may also find the DOL guidance issued in Field Assistance Bulletin No. 2014-01 helpful in locating missing participants. While the bulletin was meant for terminated DC plan fiduciaries, it lists several relevant steps for plan sponsors trying to locate participants including:
- Send a notice using certified mail
- Check the employer records
- Send an inquiry to the designated beneficiary of the missing participant
- Use free electronic search tools
The guidelines also come into play for participants who reach the age of 70 ½ and must begin required minimum distributions (RMDs).
Efforts must be made to reach these plan participants to guarantee plan tax-qualification status, even if they are not actively contributing.
The IRS has confirmed that RMD failure due to missing participants will not occur if the plan sponsor follows DOL search procedures.
After failed attempts to reach a missing participant, a plan sponsor can take steps to transfer the account out of the retirement plan. Plan service providers maintain a fiduciary responsibility to all plan participants, even those who are no longer employees.
Therefore, plan sponsors must carefully weigh all options when it comes to missing participants. According to the DOL, the preferred distribution method for orphaned accounts is an IRA rollover. However, if this is not possible, there are two acceptable alternates for plan sponsors:
- Opening an interest-bearing federally insured bank account in the name of the missing participant or beneficiary, or
- Transferring the account balance to a state unclaimed property fund.
Given heightened DOL awareness surrounding orphaned accounts, it’s essential that plan sponsors make serious attempts to locate missing participants. Establishing a standard roadmap for dealing with missing participants can help facilitate this process.
Likewise, implementing regular checks can help fulfill your fiduciary obligations while streamlining the administrative work.
Many plan sponsors are hopeful that these communications regulations will be adopted, knowing the clarity and savings these regulations could bring.
In the meantime, ensure your established communication process with current and former plan participants is streamlined to avoid paying unnecessary costs.
Vice President, Administration at NFP Retirement Division
