Dealing with missing participants is a big issue for retirement plan sponsors. The federal agencies that regulate retirement plans have been increasing their audit of defined contribution plans. This article discusses some of the major issues related to missing participants and details how plan sponsors can ensure they’re acting in accordance with agency guidance to protect against an audit and associated penalties.
A missing (or separated) employee is one who cannot be located for any one of a variety of reasons, including a change in marital status, retirement, and death. Additionally, a participant may be considered missing due to failure to provide an updated address following a change of employer and the inability of the participant to locate the plan as a result of corporate transactions such as mergers. When these former employees have account balances or benefits due them under an employer’s retirement plan, they are considered missing participants.
There are numerous costs and risks associated with maintaining accounts for missing participants. Leftover accounts incur additional costs because record keepers often base their fees on the number of participant accounts or the average account balance. The total administrative costs for operating the retirement plan correspondingly increase with the number of accounts in the plan. Additionally, plans are required to engage an independent accountant to examine and render an opinion on the plan’s financial statements based on the number of participants. Terminated or missing participants are also included in the total count for determining whether a plan meets the plan audit exemption. Finally, there are myriad forms that must be filed with the IRS based on all participants, active or missing.
ERISA (the Employee Retirement Income Security Act of 1974) requires that plan fiduciaries serve in the best interest of their participants and beneficiaries regardless of whether the participant is actively contributing. In 2014, the U.S. Department of Labor (DOL) published Field Assistance Bulletin 2014-01 (FAB), which explained that these duties require plan fiduciaries to make a reasonable effort to locate missing plan participants. Failure to do so could leave room for a claim of breach of fiduciary duty.
Most plans provide that benefits for terminated participants will begin at the normal retirement age, although the plan could be written to meet required minimum distribution (RMD) rules after age 70.5. As such, if a plan participant is missing at RMD age, there may be a failure to follow the terms of the plan, which could be a qualification problem under the tax code.
In addition to these specific risks and costs, failure to provide any of the mandatory disclosure documents is a breach of fiduciary duty. The larger the list of terminated participants, the greater the chance some detail will get overlooked.
So how can plan sponsors protect themselves against running afoul of their fiduciary duty—or the long arm of the IRS?
A recent memo from the IRS directed agents not to challenge plan qualification for failing to make RMDs to missing participants if a plan did ALL of the following: 1) Searched plan and related plan, sponsor, and publicly available records or directories for alternative contact information; 2) Used any of the following search methods: Commercial locator service, credit reporting agency or proprietary internet search tools for locating individuals; and 3) Attempted contact via certified mail to the last known mailing address and through appropriate means for any address or contact information including email and cell phones. The IRS memo addresses how to locate missing participants who may be due required minimum distributions from their 403(b) plan. However, the IRS guidance is also helpful for any situation where an employer must locate participants for purposes of distributing benefits.
The DOL’s Field Assistance Bulletin (FAB) 2014-01 requires that the following search procedures be exhausted before a plan fiduciary concludes its search for missing participants: 1) Send notices via certified mail; 2) Check related plan resources; 3) Consult current employees 4) Consult the beneficiary of the missing participant 5) Call the participant; and 6) Use free electronic search tools. If they are unsuccessful in locating a missing participant, plan sponsors might consider using fee-for-service options, such as commercial locator services or credit agencies. Once all of these options have been exhausted, the 2014 FAB allows plan sponsors to transfer a missing participant’s account balance to a rollover IRA in the name of the participant. While the DOL guidance is nominally intended for terminating plans, until the DOL provides formal guidance for locating and handling missing plan participants for an active, ongoing plan, plan fiduciaries should consider utilizing the various search options outlined in the 2014 FAB.
If the account balance is low enough, a cash–out procedure can minimize risk and responsibility for small accounts and can lower plan administrative costs for both the sponsor and the participant. Care must be taken to ensure the cash-out process is completed in conformance with the process outlined in the plan documents.
Based on current rules from regulators, plan sponsors should, at a minimum: search all employer records; use certified mail; use more than one search method; conduct periodic searches; and keep records of when/how searches were done. As with most things ERISA related, a best practice is to document everything. Such documentation can insulate the sponsor from potential liability if the plan is later audited by the IRS or DOL.