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There are widespread reports of Department of Labor audits focusing on plan procedures with respect to “missing participants.” As we understand it, this audit/enforcement effort began in early 2016 and initially focused on large defined benefit plan procedures for missing participants in connection with the minimum distribution requirements. DOL is treating the failure to adopt and follow adequate missing participant search procedures as a fiduciary breach and (it is reported) a possible prohibited transaction. DOL is also, as we understand it, challenging certain plan policies that apply when a participant cannot be found, e.g., certain forfeiture practices.
In this article, we review current rules and practice with respect to missing participants. In a follow-on article we will review the Pension Benefit Guaranty Corporation’s proposal to expand its missing participant program.
Because, in many defined contribution plans, benefits are paid at termination of employment, they are generally able to maintain current addresses and thus avoid “losing” participants. Nevertheless, large plans and plans in industries with high employee turnover or that employ seasonal or part-time employees may accumulate “missing” participants, as those plans allow participants to leave their money in the plan after termination.
Cash balance plans, again because they typically pay out benefits at termination of employment, will often have a similar experience. Traditional defined benefit plans will present a bigger challenge for plan administrators and fiduciaries, because deferred vested benefits typically are not paid out at termination, and there is more time for contact information to become stale.
Finally, where there has been an error in plan operation, the plan may have to contact a participant, for instance to make a corrective payment to that participant. If that participant has already terminated and received a distribution of his benefit, his address on file with the plan may have become stale.
Another issue for administrators and fiduciaries is: when does a participant become “missing,” and concomitantly when must the administrator/fiduciary begin looking for her? One answer to this question is, when the plan makes a distribution to a participant that is returned because the plan’s address for her is incorrect. Thus, one witness in the ERISA Advisory Council’s (2013) consideration of the issue testified that a participant is “identified as ‘missing’ when he or she is due a benefit and notices sent regarding the benefit are returned as undeliverable or he or she is unresponsive.”
The Pension Benefit Guaranty Corporation has proposed treating a participant as “missing” if:
(1) For a DB plan, the plan did not know where the distributee was (e.g., a notice from the plan was returned as undeliverable), unless the distributee’s benefit was subject to a mandatory “cashout,” or
(2) For a DC plan, or a distributee whose benefit was subject to a mandatory DB plan cash-out, the distributee failed to elect a form or manner of distribution.
While (at least until PBGC’s regulation is made final) we don’t yet have a clear statement from regulators on this issue, the better view is probably that plan fiduciary obligations with respect to a participant (including the obligation to search for the participant) are triggered when (for whatever reasons) a payment has to be made to the participant and she cannot be found or does not respond to a request for distribution instructions.
Thus, typically, “missing” status will be triggered by some rule requiring payment. As we noted, one of the focuses of DOL’s current audit project is sponsor compliance with Tax Code section 401(a)(9), which requires that a qualified plan must provide that benefits will begin no later than the “required beginning date.” The required beginning date is, with certain exceptions, April 1 of the calendar year following the calendar year in which the participant reaches age 70 1/2.
Another situation in which payments may be required to some participants who cannot be found: where a retroactive corrective payment (e.g., under the IRS’s Employee Plans Compliance Resolution System (EPCRS)) must be made.
And, on termination of a plan, the Tax Code requires that all a plan’s assets be distributed as soon as administratively feasible. Making these “winding up” payments may entail contacting participants/former participants whose address on file with the plan is not longer current.
Once it has been determined that a participant is “missing,” plan fiduciaries generally have an obligation to make reasonable efforts to locate them.
What constitutes “reasonable efforts” has changed significantly over the last 15 years. Critically, the IRS and the Social Security Administration letter-forwarding services, the use of which was required under prior DOL guidance (Field Assistance Bulletin (FAB) 2004-02)), were discontinued in 2012 and 2014, respectively.
Current rules (under FAB 2014-01) generally require that, with respect to missing participants in a terminated DC plan, the plan fiduciary must take all of the following steps (as necessary) to locate a missing participant:
Use certified mail.
Check related plan and employer records, e.g., records under another of the employer’s plans.
Check with any designated beneficiary – “plan fiduciaries must try to identify and contact any individual that the missing participant has designated as a beneficiary (e.g., spouse, children, etc.) to find updated contact information for the missing participant.”
Use free electronic search tools – “[p]lan fiduciaries must make reasonable use of Internet search tools that do not charge a fee to search for a missing participant or beneficiary.”
Whether additional, more expensive search services (e.g., “commercial locator services, credit reporting agencies, information brokers, investigation databases and analogous services”) must also be used will generally depend on “the size of a participant’s account balance and the cost of further search efforts” and, generally, on the facts and circumstances. In this regard, FAB 2014-01 permits a plan fiduciary to “charge missing participants’ accounts reasonable expenses for efforts to find them.”
While these are the rules for missing participants under terminated DC plans, they are generally understood to provide (at a minimum) a baseline for searches under active (un-terminated) DC and DB plans. Rules for searches with respect to missing participants under terminated DB plans are generally governed by PBGC procedures.
In our next article in this series we will discuss PBGC’s proposal to expand its missing participant program to cover, among other things, missing participants under terminated DC plans. In this regard, DOL indicated (in FAB 2014-01) that it intends to reevaluate its guidance “after the PBGC publishes final regulations permitting a distribution to its missing participants program.”
In sum: the DOL’s “reasonable efforts” standard is generally a function of search costs relative to account size. Under that general rule, certain efforts are by definition reasonable (because of their low cost), e.g., use of free Internet search utilities. But what is reasonable will ultimately be a function of available technology and services (and changes in them) and the regulatory framework (very much including possible new PBGC rules).
Apart from DOL’s fiduciary requirements, many recommend as a best practice making efforts to keep plan records current, so as to avoid “losing” participants. In this regard, the recommendations of witnesses at the ERISA Advisory Council’s 2013 review of the issue included:
Regularly scrubbing data by comparing the plan’s recordkeeping file to, e.g., the U.S. Postal Service’s National Change of Address database.
Maintaining multiple points of contact (e.g., phone numbers and email), not for regular communications but as a Plan B for maintaining contact with a participant.
Regularly requesting an update/verification of contact information, e.g., in plan communications, call center interactions and website logins.
Finally, good practice includes regularly informing participants about the importance of keeping contact information up to date and their responsibility to do so.
In FAB 2014-01, DOL describes rollovers to an individual retirement plan as the “preferred distribution option” (under terminated DC plans) because they avoid immediate taxation.
In this regard, DOL notes that “the choice of an individual retirement plan requires the exercise of fiduciary judgment with respect to the choice of an individual retirement plan trustee, custodian or issuer to receive the distribution, as well as the choice of an initial investment in the individual retirement plan.” A safe harbor for mandatory ($5,000 and under) distributions is provided with respect to these responsibilities where certain conditions are and where:
The rolled-over funds are invested in a “product designed to preserve principal and provide a reasonable rate of return” and that “seek[s] to maintain, over the term of the investment, the dollar value that is equal to the [principal].”
The investment product is offered by a state or federally regulated financial institution (generally, a bank, insurance company, Investment Company Act of 1940-regulated investment company).
Fees and expenses do not exceed those charged for comparable individual retirement plans established for reasons other than the receipt of a rollover distribution.
The participant has contractual enforcement rights.
A similar safe harbor is provided for distributions in connection with plan termination.
We note that these substantive restrictions on the safe harbor rollover IRA are significant, and it may be difficult to find an IRA provider/investment product that complies with them.
In FAB 2014-01, DOL states that a plan fiduciary that cannot find an IRA provider or “determines not to make a rollover distribution for some other compelling reason” may consider two other options: (1) opening an interest-bearing federally insured bank account; or (2) transferring the account balance to a state unclaimed property fund. But these alternatives carry a significant fiduciary risk: “the fiduciary must prudently conclude that such a distribution is appropriate despite the potential considerable adverse tax consequences to the plan participant.” Hence, the justification for choosing this alternative must be “compelling.” “In fact, in most cases, a fiduciary would violate ERISA section 404(a)’s obligations of prudence and loyalty by causing such negative consequences rather than making an individual retirement plan rollover distribution.”
In DOL’s view, another alternative some have proposed – 100% income tax withholding (which in effect transfers the benefit to the IRS) – would violate ERISA’s fiduciary rules.
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In our next article we will discuss PBGC’s proposed expansion of its missing participant program.