How to Navigate the Missing 401(k) Participant Playbook

Plan sponsors are increasingly challenged by the problem of missing participants, and the difficulties they face in performing diligent searches. After all, ensuring plan participants (or their beneficiaries) receive the benefits they’re owed is a sponsor’s primary fiduciary responsibility.

Unfortunately, sponsors must navigate an environment characterized by too-little guidance, combined with inconsistent enforcement actions—so it’s hard to know how their “diligent” efforts will be viewed if placed under a regulatory microscope.

To implement an effective program to deal with missing participants, sponsors should:

• Understand the fundamental nature of the problem
• Take proactive measures to minimize their incidence
• Adopt emerging best practices that vary search intensity with specific participant scenarios
• Engage search providers with a proven ability to perform diligent searches for retirement plans

Understand the problem

Gaining a clear understanding of the missing participant problem is the key to effective action.

Fueled by increased worker mobility and rising plan enrollment, levels of missing or unresponsive participants have grown dramatically over the last decade. Monthly quit rates, as measured by the Bureau of Labor Statistics, have doubled since the Great Recession.

When combined with plan features such as auto-enrollment, these factors have increased the number of terminated participant accounts, which, in turn, drives missing participants.

Research clearly illustrates this effect.  In March 2018, Retirement  Clearinghouse (RCH) partnered with Boston Research Technologies to perform the first-ever survey to understand the behavior of missing participants.

The study found that when plan participants change addresses, 20% simply don’t update the address of record for their retirement accounts.  Another more-surprising finding was that almost a third of the 1,000 respondents learned of an account they didn’t realize they had, a likely by-product of auto-enrollment.

Unfortunately, a rising tide of missing participants isn’t the only problem plan sponsors face.  While the DOL’s guidance for locating participants in terminating plans is quite clear (see Field Assistance Bulletin 2014-01), it’s absent for active plans.  Moreover, DOL plan audits reveal inconsistent enforcement actions and varying positions on the search methods they expect sponsors to undertake.

For plan sponsors, the combination of increased levels of missing participants, a lack of guidance from regulators and inconsistent enforcement actions serves to create confusion and ultimately, fiduciary risk.

Apply an ounce of prevention

In this environment, the most effective search is the one you don’t have to perform – by eliminating accounts prone to going missing.

Many plan sponsors do so with smaller terminated participant accounts – accounts less than $5,000 – through an automatic rollover program that allows employers to remove the accounts without participant consent.

Terminated participant accounts with balances above $5,000 require participant consent to move. While an assisted rollover program can help, most of these account holders are unresponsive to notices about such services upon job change, and the address data on these accounts quickly goes stale as participants move.

Adopt best search practices

Plan sponsors have turned to industry associations, such as the American Benefits Council (ABC), to make their case to the DOL for clear guidance. In so doing, they’re also helping establish best practices for their members to follow.

The emerging framework works as follows:

• On a periodic basis, an electronic scrub of address information for all terminated participant accounts is done to update accounts with the last/best address. This is often conducted prior to participant mailings and should be performed annually, at a minimum—perhaps quarterly.
• For participants near, at or in retirement—where money is in motion – more rigorous search methodologies are applied, including outreach & verification. Often, this means manually following a participant’s cyber trail in attempts to engage and update an address. This kind of forensic search can be very thorough, and if properly-scripted, cost-effective as well.

The RCH missing participant search service conforms to this framework.

Consider engaging a ‘search service provider’

Conducting robust, reliable and scalable searches is a complex undertaking, so many plan sponsors engage search service providers who specialize in locating missing retirement plan participants.

For sponsors screening search providers, below are some important criteria to consider:

• The breadth of Service Offering. Target providers with the breadth and depth of services that cover the spectrum of best practices described in the emerging framework.
• Experience with Regulators. Ensure that a search provider has experience working with regulators, including a history of thought leadership and influence on best practices. This expertise may prove useful in the event of an audit.
• Performance Metrics. Insist on working with a partner that tracks key performance metrics, including:
  • The percentage of “good” addresses found. A good report, or scorecard, is leveraged in an audit.
  • Auditing data sources. For example, there are real data reliability differences among credit rating agency data, largely driven by the frequency that data is updated.
  • The percentage of addresses that are verified by the participants themselves. In addition to the percent produced, what is the provider doing to move the needle on this metric?  Do they do outbound calling? What channels do they provide participants to verify?
• Investment in Product Development. Finally, plan sponsors should partner with a service provider that is investing in their service. Do they treat the service as a business to invest in, or simply a cost to minimize?

Follow the playbook

Plan sponsors who follow this playbook will experience fewer problems dealing with the problem of missing participants, will help ensure that participants receive the retirement benefits owed them, and could greatly reduce their fiduciary risk in the bargain.