Improving the retirement security of all Americans isn’t easy. After decades of education and guidance on which employees and participants often failed to act, plan sponsors began to adopt automatic enrollment.
Safe harbor for automatic-enrollment was established by the Pension Protection Act of 2006. From 2007 to 2016, the number of plans that adopted the feature increased from 36 percent to 60 percent, according to the Profit Sharing Council of America’s 60th Annual Survey of Profit Sharing and 401(k) Plans.
To date, auto-enrollment is widely considered a success. It has accelerated participation in workplace retirement plans and may help improve contribution levels as more adopt higher default rates.
Automatic enrollment, along with automatic deferral escalation, was the brainchild of experts in behavioral finance who theorized that employee inertia could be used to improve retirement outcomes.
While auto-enrollment has improved participation and encouraged saving, participant inertia has created new challenges for plan sponsors.
In recent years, the number of accounts left behind by plan participants who leave companies has grown.
Often, these accounts add to a plan’s administrative and cost burdens. In addition, they have the potential to create fiduciary vulnerabilities for plan sponsors.
In a 2017 report, the U.S. Government Accountability Office (GAO) estimated that between 2005 and 2015, 25 million terminating employees left one workplace plan account behind.
Additional millions left more than one job without requesting distributions from those plan sponsors.
In some cases, this leaves plan administration tangled by missing and unresponsive former participants. The longer a plan takes to address accounts that have been left behind, the more likely it is that participants’ personal information will become outdated.
It’s a circumstance that has captured the attention of regulators.
In early October 2017, the American Benefits Council sent a letter to the Department of Labor protesting “inconsistent” and “aggressive” positions taken by DOL auditors with regard to the management of accounts belonging to missing and unresponsive participants.
In addition, the Council requested, “… that the [DOL] engage in a rulemaking process to issue comprehensive guidance on plan fiduciary responsibilities with respect to unresponsive and missing participants and cease taking ad hoc enforcement positions until the Department provides actual guidance.”
While that has yet to happen, the Internal Revenue Service (IRS) issued a field memo in mid-October indicating that plan sponsors following specific steps could avoid an IRS challenge on failure to comply with required minimum distribution (RMD) rules.
Plans with missing participants of RMD age were required to:
- Search plan and related plan, sponsor, and publicly-available records or directories for alternative contact information;
- Employ any of the following search methods: A commercial locator service; a credit reporting agency; or a proprietary internet search tool for locating individuals; and
- Attempt contact via United States Postal Service (USPS) certified mail to the last known mailing address and through appropriate means for any address or contact information (including email addresses and telephone numbers).
In December 2017, the Pension Benefit Guaranty Corporation (PBGC) issued its final rule for terminating defined contribution retirement plans that want to transfer assets to the PBGC. Its rule echoes the search standard set by the DOL and states that nine months is a “reasonable time frame for a diligent search”.
Still, it’s difficult to implement a compliant search process when no unified, formal set of guidelines has been issued for active plans.
It seems prudent for plan sponsors and providers to have well documented and consistently executed processes that incorporate outlined steps for locating missing participants and managing accounts that have been left behind by former employees.
In addition, plan sponsors may want to adopt Safe Harbor IRA (automatic rollover) provisions pursuant to rules adopted by the DOL effective in 2005.
The provision allows active plans to roll accounts with vested balances of $5,000 or less into IRAs, while terminating plans can roll accounts with balances of any size to IRAs.
Once the IRA rollover is complete, the former employee is no longer considered a participant in the plan. While plan sponsors have a responsibility to choose a qualified IRA provider, once the provider has been chosen plan fiduciaries are not required to monitor the IRA provider.
The terms of the IRA agreement are enforceable by the participant, and the plan sponsor is considered to have satisfied its fiduciary duties as long as safe harbor requirements have been met.
With automatic-enrollment a proven success in helping more Americans save for retirement, the side effect of missing participants will not go away.
Until the DOL provides decisive guidance for how to handle these situations, the best solution for plan sponsors who are struggling with this issue is making timely, diligent efforts to find missing participants, thoroughly documenting those efforts, and partnering with a trusted provider.
Terry Dunne is senior vice president and managing director of Retirement Services at Millennium Trust Company. Dunne has over 35 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.