With the Department of Labor by all accounts stepping up a national audit campaign targeting 401k plans with missing participants, plan sponsors today need to be both proactive and creative in their attempts to locate missing or non-responsive participants or beneficiaries.
When missing participants leave balances behind, it can cause serious complications for administrators and sponsors, not to mention being a drain on resources.
Failure to take necessary steps to locate missing participants is a breach of fiduciary duty, and could put the company’s retirement plan at risk of disqualification for failing to make required minimum distributions.
It’s enough to stress a plan sponsor out!
401k advisors can help alleviate that stress and protect their plan sponsor clients from monetary sanctions and costly lawsuits by working with them and the record keeper to develop an effective plan governance strategy.
In doing so, you help them reduce costs and liabilities, and importantly, achieve the end goal of better serving plan participants.
A proactive approach by 401k plan sponsors of strongly encouraging plan participants to take their accounts with them when they move to new jobs is a start, but with increased job-hopping, auto-enrollment in plans that require less employee engagement and a tendency of former employees to forget to update contact info, the chances of participants going missing over time are significant.
If the proper steps are taken (and documented) to locate missing participants or beneficiaries, the plan administrator stays in compliance with fiduciary duties under ERISA as well as tax law requirements to provide required minimum distributions to participants and beneficiaries on a timely basis.
Everybody’s happy, right? You’ve mitigated the risk of fiduciary breach and everybody sleeps peacefully.
If only it were so easy.
The DOL turned its regulatory attention to defined contribution plans after recovering more than $1.1 billion for thousands of missing participants in pension plans.
This development is a big cause of plan sponsor stress, especially the ones who have received letters from the DOL during missing participant audits that threaten sanctions against plan fiduciaries for alleged violations of ERISA.
With the uptick in enforcement efforts and tougher rulings and corrective actions that plan sponsors feel are inconsistent or unfair, some plan sponsors are sending their own letters to the DOL complaining about heavy-handed auditors and “ad hoc” enforcement.
Part of the problem results from a lack of clear federal 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.
The DOL, in Field Assistance Bulletin (FAB) 2014-01 back in August 2014, provided some guidance on locating missing participants in connection with the termination of a defined contribution plan. That guidance said a plan fiduciary must, at a minimum:
- Send a notice to missing participants using certified mail;
- Check the records of the employer and any related plans of the employer;
- Check with the designated beneficiary of the missing participant;
- Use free electronic search tools; and
- If none of the efforts is successful, then, after considering the size of the account balance and the cost of additional search efforts, consider use of commercial locator services, credit reporting agencies, information brokers, investigation databases, internet search tools and similar services that may involve charges.
But with FAB 2014-01 expressly addressing terminating defined contribution plans, it does not necessarily apply to ongoing defined contribution plans.
As a result, it has remained unclear whether the DOL expects plan administrators to follow the procedures laid out in FAB 2014-01 when dealing with missing participants.
Despite the lack of clear guidance, plan fiduciaries are generally advised to consider FAB 2014-01 when reviewing their procedures for dealing with missing participants.
The IRS addressed the missing participant issue in an October 2017 directive to its audit personnel, stating the IRS will not challenge a plan’s failure to make required minimum distributions to a missing participant turning 70½ or beneficiary if the plan administrator has taken all of the following actions:
- Searched all of the records of the plan, related plans and the plan sponsor;
- Searched publicly available records or directories for alternative contact information;
- Used either a commercial locator service, credit reporting agency or proprietary internet search tool; and
- Attempted contact via United States Postal Service certified mail to the last known mailing address and through appropriate means for any address or contact information, including email addresses and phone numbers.
According to a firm thought leadership post from law firm Baker Botts LLP, the DOL, unlike the IRS, does not require that these search methods be used in all cases but may require the use of more than one of these methods if justified under the circumstances. It is not known whether the DOL will give any deference to the IRS’s position on what constitutes “reasonable efforts” to locate missing participants.
DOL still studying missing participant issue
At the 2019 NAPA 401k Summit in Las Vegas in April, Assistant Secretary of Labor Preston Rutledge told attendees the DOL’s long-term goal with its regulations is to help employers put processes in place, so participants never go missing to begin with.
“We want to understand the process and procedures [for finding missing participants] up until now so we can better understand,” Rutledge said, before adding that audits have rightly focused on whether benefits have not been paid for some time.
“The purpose of a [defined contribution] is to make sure accrued benefits are paid,” he said. “There’s so much focus on the accumulation of benefits, but what’s the point if they’re not paid?”
So the DOL is studying the issue and further guidance is likely, but there’s no known timetable for it. Until that further guidance comes, plan sponsors have increasingly been working with plan providers to develop, document and execute search processes or outsource participant searches to companies that have established processes and a proven ability to reunite participants and beneficiaries with the retirement account distributions that are due to them.
A 2018 “Compensation and Benefits Update” from Winston & Strawn, LLP about the missing participant issue said it is a good practice to have a missing participants policy and designated persons within the organization who make regular efforts to keep participant information current.
“Plan administrators should have a process for following up on mail that is returned to the plan sponsor or third-party administrator, and should keep on an annual basis an ‘audit trail’ of detailed records that document all efforts to locate missing participants and beneficiaries, which can be produced in the event of an audit,” the brief said.
Automatic rollovers
In addition to implementing search processes, plan sponsors are adopting automatic rollover provisions (which can be established on the participant’s behalf without obtaining permission), as they remain the DOL’s preferred choice for accounts of missing participants in terminating plans.
Establishing an automatic rollover program for missing participants with small accounts ($5,000 or less) generally helps reduce plan costs (as many recordkeepers base their fees on the number of participant accounts or average account balances), reduces administrative responsibilities and eliminates the fiduciary obligation for the balances in small accounts.
For accounts with more than $5,000, plan sponsors must try to contact former employees and remind them of their options to roll funds into an IRA, roll funds into a current employer’s plan, or to keep them in the existing plan.
Section 404(a) of ERISA requires plan fiduciaries to consider distributing missing participant benefits into an individual retirement account (IRA), because this option is more likely to preserve retirement funds than any other option and retains tax advantages.
Automatic rollover IRAs also help plan sponsors meet their fiduciary responsibilities with regard to RMDs. Once participant assets have been transferred out of plan accounts into qualifying IRAs, the plan sponsors’ fiduciary responsibilities have been met, according to FAB 2014-01. Plan sponsors are not required to monitor the IRA provider and have no responsibility for the IRA provider’s compliance.
401k advisors can provide a valuable service to their clients by educating them on the benefits of adopting an automatic rollover IRA program and helping to establish one to make mandatory distributions a routine process. And, both fiduciary and non-fiduciary advisors can be compensated by automatic rollover IRA providers for referrals.
Given the heightened DOL awareness surrounding orphaned accounts, it is essential that 401k advisors see that plan sponsors make serious attempts to locate missing participants to protect them from potential fiduciary breaches while also avoiding unnecessary costs and administrative work.
Brian Anderson is Managing Editor of 401k Specialist.
Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.
