DOL Guidance on Missing Participants

By Sheldon M. Geller

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The bulletin provides guidance on the steps ERISA fiduciaries should take to locate participants when defined-contribution plans are terminated and how to distribute assets attributed to these missing participants when fiduciaries are unable to locate them.

In the event that routine methods, such as first-class mail or electronic notification, of delivering a notice to participants as well as former employees fail, the ERISA fiduciary should take other steps to locate the participant or beneficiary. Search methods include using certified mail, checking records of related employer plans, or using a letter-forwarding service, as well as Internet search tools, commercial locating services, and credit-reporting agencies.

Fiduciary Responsibility

In the event participants cannot be located or fail to elect a method of distribution, the bulletin indicates that ERISA fiduciaries may follow a new safe harbor regulation governing automatic rollovers for guidance on distributing benefits. The bulletin helps employers comply with ERISA and affects the payment of benefits by establishing an individual retirement account (IRA) on behalf of each missing participant. The DOL issued a final rule regarding fiduciary responsibility under ERISA for the safe harbor automatic rollover of plan distributions. As of March 28, 2005, plan sponsors must set up IRAs for participants entitled to mandatory distributions, which are benefits with a value of $5,000 or less, who could not be found or who failed to give directions concerning their distribution. The DOL regulations provide “safe harbor” fiduciary guidelines for establishing these IRAs. Many employers are unwilling to assume this responsibility and, thus, are avoiding the establishment of these IRAs by reducing the mandatory cash-out threshold from $5,000 to $1,000. Cash-out amounts of $1,000 or less are not subject to the automatic rollover rule. The drawback to this strategy is that retaining a number of small accounts leads to additional administrative costs.

Whatever course of action is chosen in connection with the change in law governing mandatory cash-outs, the necessary plan amendments must be adopted by the end of the 2005 plan year. Defined-contribution plan sponsors are likely to amend their plans to provide for a cash-out on amounts of $1,000 or less to avoid the automatic rollover rule and the establishment of IRAs on behalf of these participants. Defined-benefit plan sponsors, however, are likely to establish the cash-out amount of $5,000, to avoid providing the additional information required beginning in 2006 to explain the alternative forms of payment under pension plans.

Safe Harbor Provision

Certain distributions of retirement plan benefits must be automatically rolled over into an IRA when a separated worker fails to elect a distribution method. The final rule protects retirement plan fiduciaries from liability under ERISA by providing a safe harbor in connection with two aspects of the automatic rollover process. The safe harbor covers the selection of an institution to provide the IRA as well as the selection of the investments for the automatic rollover amount.

To obtain relief under the safe harbor, a plan fiduciary must satisfy certain conditions, including the selection of a plan provider that is qualified to offer IRAs. The investment products must be designed to preserve principal, and the fees and expenses for these accounts may not exceed those charged to other IRA customers.