A Twist in the Lost Participant Conundrum

By Pete Shuler and Mark Swanson
9/26/2018
Lost participants create a special issue – companies want to pay them their vested benefit but can’t always find them. The administrative issues that arise from missing participants and those who simply ignore plan communications or don’t cash benefit checks (also dubbed "recalcitrant participants") can be quite costly.

Adding to these administrative issues are the recent actions of the Employee Benefits Security Administration (EBSA), the agency within the Department of Labor (DOL) that has authority to investigate and enforce violations of fiduciary duties. The EBSA, under its Terminated Vested Participant Project (TVPP) that looks at whether pension plan fiduciaries adequately searched for missing participants, has asserted that a plan’s inability to locate participants is a breach of fiduciary duty. While the TVPP was primarily focused on traditional defined benefit pension plans, it might provide forewarning for other plan types.   

Following are some of the reported findings that came out of the TVPP:
  • EBSA assumed every missing participant could be found.
  • EBSA assumed that if a missing or recalcitrant participant responded to a DOL letter, the plan’s efforts to locate the participant must have been flawed.
  • EBSA investigators took positions contrary to settled fiduciary standards.
  • EBSA investigators took positions that plans should do whatever it takes to locate a participant.

Guidance is lacking

Compounding the concern about these assertions is a lack of guidance about what fiduciaries should do to meet their duties with regard to missing and recalcitrant participants in ongoing plans. The duties under these plans include participant disclosures and letting participants know about benefits they are entitled to receive. The IRS and Social Security Administration (SSA) have eliminated their letter-forwarding programs that were available as a mechanism to locate missing participants. While it’s not known how successful these programs were in reaching missing participants (the IRS and SSA would not disclose if a participant received the letter), the programs were important in the sense that fiduciaries could meet their duty by using these programs in combination with other actions. 

A game of hide-and-seek

Absent guidance specifically for ongoing plans, the guidance issued in the DOL Field Assistance Bulletin 2014-01 that’s focused on terminating plans provides some help for ongoing plans. When a plan is terminating, the fiduciary must take the following four steps to locate participants (not in any particular order):
  1. Send appropriate notices by certified mail to last known address.
  2. Check related plan and employer records.
  3. Check with the participant’s designated beneficiary.
  4. Use free electronic search tools (such as internet searches and public record databases).
The DOL considers failure to take all four steps in the case of a terminating plan to be a breach of fiduciary duty. To minimize risk, it is important to document all attempts and steps taken or not taken to reach the participant and to document why no related plan or employer records exist, if that’s the case. This documentation is especially important when a plan is terminating, but it is similarly important in cases of ongoing plans. 

If a participant cannot be located, the fiduciary must consider other approaches that would be appropriate under the particular facts and circumstances, including using fee-based internet search tools, commercial locator services, credit reporting agencies, and investigation services. This enhanced search should involve a cost-benefit analysis that considers the participant’s account balance relative to the cost of further search options. If the terms of the plan permit, the reasonable costs associated with locating the participant can be charged to the participant’s account.  

If a plan is terminating and a participant cannot be located after taking the required and other appropriate actions, the fiduciary then needs to decide how to distribute the participant’s balance. The preferred method is to distribute to an individual retirement account (IRA). (Existing DOL safe harbors for selecting an IRA provider can be used to provide fiduciary protection.) If an IRA provider cannot be found, the fiduciary can consider establishing an interest-bearing bank account or transferring funds to a state unclaimed property fund. The appropriate option might differ from participant to participant. For example, it might be possible to find an IRA provider willing to accept a rollover if the balance meets a particular threshold. For accounts that the provider will not accept, establishing a bank account or transferring to a state unclaimed property fund might be appropriate. The DOL made it clear that applying 100-percent income tax withholding to the distribution is not an acceptable option under any circumstance.

Focusing on the positives

As a result of the TVPP findings, plan sponsors and industry groups are taking action. In one case, the ERISA Industry Committee (ERIC) sent a letter to the DOL encouraging it to focus efforts on developing guidance for ongoing plans. These efforts hopefully will provide much-needed guidance for plan administrators and appropriate guidelines for DOL investigators. While the number of lost and recalcitrant participants in 401(k) plans is expected to rise, there is reason to be optimistic, albeit cautiously, that regulators finally will provide guidance and programs to provide relief.  

The process to locate a participant can be cumbersome, time-consuming, expensive, and pose a fiduciary risk. As such, plans should be proactive and implement ongoing processes to keep track of participants. For instance, remind current and exiting participants to update address information if they move. If plan information is returned undelivered, investigate as soon as possible. Ask current employees if they know a former participant’s whereabouts.

Also, plans should distribute small balances as soon as is administratively feasible following a participant’s departure. If an ESOP restricts distributions until the acquisition loan is repaid, consider amending the plan document or distribution policy to apply exceptions for small balances. Balances less than $200 can be paid without a participant’s consent. If a participant has been given notice of his or her right to elect a direct rollover and at least 30 days to respond and has not made an election, balances between $200 and $1,000 can be paid out to the participant. Balances between $1,000 and $5,000 can be rolled over to an IRA established for the participant. Getting small balances off the books will help reduce the need to locate lost participants in future years and can help a plan that is close to reaching the number of participants that would require a plan audit. 

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Mark Swanson
Pete Shuler - social
Pete Shuler
Principal, Benefit Plan Tax Services Leader