Dec. 4, 2015
By Pete J. Shuler and Mark D. Swanson, J.D., CEBS
When former employees leave a balance in their retirement plans and don’t leave behind forwarding contact information, plan fiduciaries need to make reasonable efforts to locate the missing participants in order to receive consent and directions for making plan distributions. The IRS and Social Security Administration programs that were available to help locate participants have been eliminated in the past few years. In response, the Department of Labor (DOL) updated its guidance (Field Assistance Bulletin (FAB) 2014-1) on locating lost participants. Although the FAB is focused on terminating plans, it is useful for ongoing plans as well.
When a plan is terminating, the fiduciary must take the following four steps to locate participants (not in any particular order):
- Send notices by certified mail to the last known address.
- Check related plan and employer records.
- Check with the participant’s designated beneficiary.
- 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 and why, such as no related plan or employer records existing) to reach the participant. Although taking these steps is required when a plan is terminating, they also should be done in cases of lost participants for ongoing plans.
If a participant cannot be located using the steps outlined by the DOL, a fiduciary must consider other approaches that would be appropriate under the particular facts and circumstances, such as using fee-based Internet search tools, commercial locator services, credit reporting agencies, or investigative services. Such approaches undoubtedly should include a cost-benefit analysis that considers the participant’s account balance relative to the cost of other options. (Some very effective fee-based locators charge as little as $10 per participant, so such services generally are worth pursuing.) 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 still 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). 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. Keep in mind that the appropriate option may differ by participant. For example, it may 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 benefits to a state unclaimed property fund may be appropriate. The DOL has made it clear that applying 100 percent income tax withholding to the distribution is not an acceptable option under any circumstance.
Given that the process to locate a participant can be cumbersome, time-consuming, and expensive, the adage “an ounce of prevention is worth a pound of cure” certainly applies. If a plan can implement ongoing processes to keep track of participants, it will be worthwhile. Following are some suggestions for doing so:
- When employees are leaving, ask them to update the organization if their home address changes and ask for a personal email address.
- When plan information is returned undelivered, investigate as soon as possible. Ask former co-workers if they know the participant’s whereabouts.
- Distribute small balances as soon as administratively feasible following a participant’s departure. In cases where an ESOP restricts distributions until the acquisition loan is repaid, consider amending the plan or distribution policy to allow exceptions for small balances. For example, consider amending the plan or distribution policy to include a provision that balances less than $200 can be paid without the participant’s consent; balances more than $200 and less than $1,000 can be paid without consent after the participant has been given notice of his or her right to elect direct rollover and at least 30 days to respond; and balances between $1,000 and $5,000 automatically can be rolled over to an IRA established for the participant after notification and 30 days to respond. Not only will getting small balances out of the plan reduce the risk and costs associated with locating lost participants in future years, it also can help if your plan is close to reaching the number of participants that will require a plan audit.