At the 2019 NAPA 401(k) Summit, Assistant Secretary of Labor Preston Rutledge indicated the DOL’s long-term goal is to help employers so participants don’t go missing.
Ever.
It’s a lofty aspiration. One of the most difficult aspects of workplace plan management and administration is maintaining clean participant data.
Many plan sponsors encounter unexpected issues as they work to keep active participant data (names, street addresses, e-mail addresses, and telephone numbers) current, no matter how disciplined their processes.
Participant data management processes often include:
- Identification of multiple points of contact,
- Updating participant and beneficiary addresses on a regular basis,
- Identifying missing and unresponsive participants,
- 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.
Plan sponsors, recordkeepers, and administrators should have a process for sharing up-to-date information, as well as identifying and searching for missing participants.
Retired and inactive participants add an additional layer of complexity to the data management process.
Sometimes, plan sponsors don’t realize former employees’ data is outdated until a distribution check, like a required minimum distribution (RMD), is returned.
Changing plan priorities bring new risks
In the not-so-distant past, the primary purpose of defined contribution (DC) plans was to give Americans a way to save a little extra for retirement.
DC plan assets were expected to supplement monthly income provided by employer-sponsored defined benefit (DB) plans and Social Security benefits.
Today, DC plans have become a primary source of retirement income. In fact, from 2012 to 2016 the percentage of plan sponsors who indicated retirement income was the primary purpose of their DC plans rose from 9% to 85%.
Changing plan priorities have led some plan sponsors to allow active participants to roll in assets from other qualified plans and encourage retired participants to leave assets in plans by modifying investment lineups and adding retiree-friendly features.
These changes bring myriad new issues regarding plan management. For example, plans that actively retain assets will need to develop a process for making RMDs to participants at age 70½.
Failure to pay RMDs can trigger a variety of unwelcome consequences, including potential disqualification of the plan. And for some plans, RMDs have been a source of uncashed checks.
When RMD checks remain uncashed and participants cannot be found, plan sponsors may face an additional risk.
For example, when participants come forward to claim past RMDs that have not been taken, the participant is subject to an excise tax equal to 50% of the distribution amount. This could open the door to a new round of lawsuits, which may include a claim that the plan failed to take adequate steps to find the missing participant.
In 2017, the IRS instructed examiners not to challenge plans that have robust search processes in place, however, and outlined the steps plan sponsors must take to locate missing participants or their beneficiaries. Those steps 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, and
- Using a third party or a proprietary Internet search tool to locate missing participants.
Missing participants and search processes
Over the past few years, regulators’ scrutiny of missing participants and plan search processes has intensified. As a result, plan administrators are under pressure to locate former employees or their beneficiaries. Steve Flores of Winston & Strawn explained:
“Unfortunately for employers, the DOL in particular has been aggressively challenging the adequacy of employer efforts to locate and contact missing participants. Numerous plan sponsors have received letters from the DOL during missing participant audits that threaten sanctions against plan fiduciaries for alleged violations of ERISA, despite a lack of definitive guidance on exactly how employers should follow up on a variety of challenges, including bad addresses, returned mail, and missing or unresponsive participants and beneficiaries.”
In anticipation of audits, plan sponsors have either worked with plan providers to develop, document, and execute search processes or outsourced participant searches to companies, like Millennium Trust, that have established processes and proven ability to reunite participants and beneficiaries with retirement savings.
In addition to implementing or outsourcing search processes, plan sponsors are adopting automatic rollover provisions. Automatic rollovers remain the DOL’s preferred choice for accounts of missing participants in terminating plans.
Among other benefits, Rollover IRAs provide an opportunity to preserve missing participants’ retirement savings and tax advantages.
Automatic Rollover IRAs also can help plan sponsors meet their fiduciary responsibilities with regard to uncashed check balances. Once participant assets have been transferred out of plan accounts and into qualifying IRAs, the plan sponsors’ fiduciary responsibilities have been met. They are not required to monitor the IRA provider and have no responsibility for the IRA provider’s compliance.
The prospect of regulatory audits may be daunting, but keeping better track of participants and reuniting missing participants with retirement assets they’ve left behind can help improve Americans’ retirement security.
Terry Dunne is senior vice president and managing director of Retirement Services at Millennium Trust Company, LLC. Mr. Dunne has over 40 years of extensive consulting experience in the financial services industry. Millennium Trust Company performs the duties of a directed custodian, and as such does not sell investments or provide investment, legal or tax advice.