Missing participants – part 2
Missing participants - part 2
“Missing participants” is becoming a target issue for regulators and policymakers. In our first article in this series we discussed DOL’s missing participant audit project and Field Assistance Bulletin 2014-01 – fiduciary obligations with respect to missing participants in terminated defined contribution plans. In this article we discuss the Pension Benefit Guaranty Corporation’s 2016 proposal to expand and modify its missing participant program.
Currently, PBGC’s missing participant program only covers terminated ERISA single employer defined benefit plans. Under the proposal, that program would (among other things) be expanded to cover, on a voluntary basis, missing participants under terminated DC plans.
The ultimate goal of the proposed expansion of PBGC’s missing participant program is to enhance the ability of individuals to find retirement benefits they are owed, where the plan owing them those benefits has been unable to find them. In this regard, in the preamble, PBGC explains:
An important part of all of the missing participants programs would be a new unified pension search database. This database would … include information about missing participants and their benefits and a directory through which members of the public could easily query the database (using a choice of fields) to determine whether it contained information about benefits being held for them. PBGC anticipates that its new pension search database would provide a comprehensive, nationwide, authoritative, reliable, easy-to-use source of information about missing participants and the benefits being held for them.
As noted, however, application of the PBGC program to DC plans is, under this proposal and at this time, voluntary. In the preamble PBGC acknowledges a division of opinion on this issue – “employer advocates considered mandatory reporting unnecessarily burdensome, while participant advocates considered it an essential part of an effective pension search program.”
PBGC said it intends to revisit this issue: “After PBGC has gained experience with a voluntary reporting requirement and the clearinghouse of lost retirement benefits that the requirement supports, PBGC will be in a better position to weigh the additional costs of mandatory reporting against the additional benefits of a more fully supported lost-benefits registry.” So it is possible that PBGC missing participant search and filing requirements may, at some point and in some version, become mandatory for all terminating DC plans.
The PBGC proposal is of a piece with other efforts to develop a retirement benefits clearinghouse, e.g., the 2016 proposal of Senators Warren (D-MA) and Daines (R-MT) to create a standalone agency, the Retirement Savings Lost and Found, overseen by the Commissioner of Social Security and the Secretary of the Treasury, as a clearinghouse for retirement benefits for which the participant-beneficiary could not be found.
Now let’s turn to a (brief) review the PBGC proposal.
Definition of “missing participant”
The proposal provides different definitions of “missing participant” for DB and DC plans. Under the proposal, a participant would be “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 mandatory “cashout” under the terms of the plan, or
(2) For a DC plan, or a distributee whose benefit was subject to a mandatory cashout under the terms of a DB plan, the distributee failed to elect a form or manner of distribution.
To be clear about the distinction being made here, in case (2) the participant is treated as “missing” even if the plan actually knows where the participant is, if a payment (e.g., a mandatory DB cashout or a payment in connection with the termination of a DC plan) is going to be made, and the participant does not respond to a distribution election request.
Rules for single employer DB plans
Coverage: With respect to any missing participant, ERISA-governed single employer DB plans generally must, upon termination, either purchase an annuity for the participant or transfer her benefits to the PBGC.
Diligent search: In either event, the plan administrator must make a “diligent search” for the missing participant, including:
Search plan records for information to locate the distributee.
Search the records of the most recent employer of the distributee that maintained the plan and each other plan of that employer in which the distributee participated.
Request information from each beneficiary of the distributee.
Search using an Internet search method for which no fee is charged.
Search using a commercial locator service. In this regard, the preamble states: “This proposed requirement is designed to ensure a more robust search, but might not be cost-effective for distributees with relatively small benefits. PBGC proposes to address this issue by reserving to itself the authority to place limits in the missing participants forms and instructions on the requirement to use a commercial locator service.”
(We note that these PBGC “diligent search” rules are similar to DOL rules under FAB 2014-01 for terminated DC plans.)
Timing of search: Generally, the search for a missing distributee must be made within six months before the last pre-termination distribution or, where applicable, the date the benefit is transferred to PBGC.
Filing: With respect to each missing distributee, the plan administrator must file (as applicable) either (1) information about the annuity purchased for him, or (2) payment of the missing distributee’s benefits and “information about the missing distributee and the missing distributee’s benefits and beneficiaries.” In either case, the administrator must also file “diligent search documentation” and other information, fees, and certifications required by the PBGC’s forms and instructions.
Thus, compliance with PBGC missing participant rules, including diligent search and filing rules, is mandatory for terminating ERISA single employer DB plans. One result of this is that PBGC’s database will (theoretically) have comprehensive information about missing participants under those plans, including, e.g., where applicable, information about a benefit that has been transferred to an annuity carrier.
Rules for single employer DC plans
Coverage: Compliance with the PBGC missing participant program by terminating DC plans is voluntary. A terminating DC plan could (but need not) elect to be either:
A “transferring plan,” and pay a benefit transfer amount to PBGC for each missing distributee, or
A “notifying plan,” and “notify PBGC of the disposition of the benefits of one or more distributes.”
The idea here is that, if the DC plan is transferring missing participants’ benefits to PBGC, it must transfer all missing participants’ benefits – it cannot, e.g., give PBGC its small accounts, while transferring larger (and more profitable) accounts to IRAs. On the other hand, if it is merely notifying PBGC of the disposition of benefits, it may do so with respect to some but not all of its missing participants. In the latter case, PBGC diligent search and filing requirements would only apply to those selected participants.
Diligent search: The plan administrator must have searched for the distributee in accordance with DOL fiduciary regulations and other applicable guidance – e.g., in compliance with the requirements of FAB 2014-01.
Timing of search: For a transferring plan, the search for a missing distributee must be made within six months before the benefit is transferred; for a notifying plan, within six months of the last pre-termination distribution.
Filing: With respect to each missing distributee, the plan administrator must file (in accordance PBGC’s forms), information about the missing distributee and the missing distributee’s benefits and beneficiaries and (1) (for a notifying plan) information about the entity to which the distributee’s benefit has been transferred or (2) (for a transferring plan) payment of the missing distributee’s benefits. In either case, the administrator must also file “diligent search documentation” and other information, fees, and certifications required by the PBGC’s forms and instructions.
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As discussed, under the proposal, participation in PBGC’s missing participant program by terminated DC plans is, at least until PBGC has “gained experience” with it, voluntary. Perhaps the best way to view it is as an alternative “safe harbor” for dealing with participants (1) a terminating DC plan can’t find or (2) who have not made a necessary distribution election.
We will continue to follow this issue.