Locating Missing Plan Participants
It’s not uncommon for previously active employed plan participants to fall off the radar screen. They include retirees and former employees that move away without informing you. Before you or your plan administrator realizes it, they become “lost” participants. Here’s what you need to know about these participants.
What if participants have vested benefits? You can’t just wait for them to reappear and present themselves to you. Rather, the burden — and fiduciary duty — is on you to make a good faith effort to track them down to ensure they receive or have access to those benefits.
In fact, the Department of Labor (“DOL”) has announced that, when it conducts routine plan audits, it’ll pay close attention to how you handle (or plan to handle) locating lost participants. The DOL’s primary concern is that people who are entitled to benefits receive them.
Steps to Take
The DOL’s 2014 field assistance bulletin (“FAB”) 2014-01 outlines and updates its expectations of plan sponsors with respect to keeping tabs on participants of terminated plans. Plan sponsors can charge missing participant accounts “reasonable expense for efforts to find them.” Even though the FAB was written to outline steps required in the event of a plan termination, for now it serves as the best guidance on what to do if your plan is still up and running.
Under the FAB, to locate missing participants, plan sponsors are encouraged to:
- Use certified mail. Certified mail provides an easy way to locate participants to distribute benefits at little cost.
- Check related plan and employer records. If the retirement plan administrator lacks a current address for a former participant, the employer or another of the employer’s benefit plans may have more current information. If these other potential sources decline to provide an address due to privacy concerns, ask them to contact the individual and relay the retirement plan administrator’s message.
- Check with a designated plan beneficiary. It might be possible to find the missing participant by way of a spouse or child who, presumably, would want to be helpful.
- Use free electronic search tools. These include Internet search engines, public record databases, obituaries and social media.
What if these steps fail to locate the participant? According to the FAB, the fiduciary’s required efforts might not stop there, depending on the facts and circumstances.
In deciding which additional measures to take and expenses to incur, plan fiduciaries can consider the size of a participant’s account balance. A fiduciary couldn’t be faulted for abandoning the search if the added cost would approach the size of the lost participant’s account balance.
Otherwise, additional search resources that might be tapped include the following:
- Commercial locator services,
- Credit reporting agencies,
- Information brokers,
- Investigation databases, and
- Analogous services that may involve charges.
When all reasonable efforts to find missing participants come up short in the case of a plan termination, sponsors have some choices of how to distribute the funds. For example, you can roll funds into an IRA in the missing participant’s name, assuming an IRA custodian can be found that is willing to receive them. The choice of such a custodian, as well as how the funds are invested, “requires the exercise of fiduciary judgment,” but the DOL has a safe harbor rule that automatically satisfies fiduciary standards.
Finally, in the plan termination context, if you cannot find a willing IRA custodian to receive missing participant funds, you can open an interest-bearing federally insured bank account in the name of the missing participant or beneficiary. Also, in the past, plans would transfer the account balance to a state unclaimed property fund; however, the IRS frowns on this now, with so many more options available to locate missing participants.
It’s not just the DOL who has an interest in lost participants. The IRS is also interested in the fate of these individuals, but from a different perspective: When retirees hit age 70½, they must begin receiving their taxable required minimum distributions (“RMDs”). The IRS doesn’t want lost participants to avoid paying those taxes because they haven’t received the RMDs.
The consequences for retirees who don’t receive and pay taxes on those RMDs are severe: an excise tax equal to 50% of the distribution they should have received. Retirees who are aware of this penalty will take steps to avoid it, including keeping you informed about where they live. Not all retirees are that savvy, however.
Follow the Blueprint
The DOL’s guidance in this FAB provides a blueprint of the procedures you must follow when faced with a missing participant scenario when a plan is terminated. However, as noted, for now the guidance is the best available for ongoing plans as well. Consult with your benefits specialist to make sure you have the proper steps in place. In case of a plan audit, being able to show the auditor you have such procedures in place should be satisfactory.
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