Introduction

Whether you audit retirement plans, assist employers or individual clients with retirement benefits or are responsible as a fiduciary for your own retirement plan, you know that the proper distribution of benefits is at the very heart of tax-favored retirement plans, which broadly encompass Section 401(k) and 403(b) plans, profit sharing plans, employee stock ownership plans (ESOPs), defined benefit plans, and various other forms of plans, programs, and arrangements. As the enforcement arm with respect to the Internal Revenue Code, the Internal Revenue Service (IRS) has a huge stake in ensuring that tax-favored retirement plans provide benefits as and when due. A failure to satisfy myriad requirements that govern the form and timing of distributions (small balance cash-outs, required minimum distributions, spousal consent obligations, and many others) can result in the loss of a retirement plan’s tax-favored status.

But distribution obligations also exist under the Employee Retirement Income Security Act (ERISA). As a result, the Employee Benefits Security Administration (EBSA), an arm of the Department of Labor (DOL), has a big say in this area; and of late, EBSA has been focusing on ensuring that missing and nonresponsive participants obtain their benefits due under the plan.[1] In contrast to the IRS, the DOL loves a good headline. “In fiscal year 2020 alone,” says EBSA’s Jeanne Klinefelter Wilson, “EBSA’s investigators helped missing and nonresponsive participants recover benefits with a present value in excess of $1.4 billion.” (Using the Form 5500 datasets available on the DOL website, that works out to roughly 0.34% of total benefits reported on Schedules H and I of Form 5500 for a year.)

Welcome Guidance

Having for years adopted a “stick” versus a “carrot” approach, in January 2021 the DOL finally issued guidance to plan fiduciaries who must wrestle with the reality of missing participants. The new guidance comes in three pieces: Best Practices for Pension Plans; Compliance Assistance Release No. 2021-01; and Field Assistance Bulletin 2021-01. Together, these materials provide both an audit roadmap and some best practices to be followed by plan fiduciaries.

Historical Approach

The DOL has not been entirely silent with respect to missing participants. For example, in 2008, the DOL issued a fiduciary safe harbor regulation providing, if various requirements are satisfied, some relief with respect to the problem of missing participants. Under that regulation, a plan fiduciary can distribute the accrued benefits of terminating individual account (defined contribution) plans to an IRA. As long as (i) the benefit is invested in a principal preservation investment (typically a money market type vehicle), (ii) the account is subject only to fees that comply with various requirements, and (iii) various notification and other requirements are satisfied, a plan fiduciary is deemed to have satisfied its fiduciary obligations with respect to the distribution of benefits.

Within the last several years, however, local DOL auditors have been ramping up the pressure on plan fiduciaries to find and/or engage with missing participants, or suffer the consequences of an alleged breach of fiduciary duty or prohibited transaction (the latter somehow being the result of restoring to the plan a failed distribution). Some DOL auditors apparently have insisted on using varying search methods as frequently as annually. “Some plan sponsors have been told that they must do ‘whatever it takes’ to find participants who are missing or not responding to communications.” DOL demands real action over missing participants, Pensions & Investments (March 5, 2018).

All of this ignores a missing participant’s own responsibilities, the entire purpose of the Form 8955-SSA system, privacy concerns – does one really want their former employer relentlessly hunting them down through friends and social media? – and the reality of the need for some form of national lost-and-found system to which missing participants themselves could turn.

Nevertheless, the new guidance is an incremental step in the right direction and fiduciaries who ignore it do so at their peril.

Field Assistance Bulletin (FAB) No. 2021-01

Building on the Missing Participants Program of the Pension Benefit Guaranty Corporation (PBGC), FAB 2021-01 announces a temporary nonenforcement policy with respect to the use of that program by a terminating defined contribution plan. Specifically, FAB 2021-01 provides that the DOL will not pursue a breach of fiduciary duty violation under ERISA Section 404(a) where, following diligent efforts to locate individuals, the benefits of missing participants are transferred to the PBGC’s Missing Participants Program. The FAB cites the following advantages to this approach –

• Benefits of any size can be transferred to the PBGC.
• Periodic active searches by the PBGC increase the likelihood of connecting missing participants with their benefits.
• Benefits are not diminished by ongoing maintenance fees or distribution charges.
• Transferred amounts grow with interest (at the applicable federal mid-term rate).
• Lifetime income options are available for balance transfers over $5,000.

There is a small fee involved – $35 per missing distributee, although no fee is imposed if the benefit is not more than $250. As noted, the FAB provides that plan fiduciaries must still diligently maintain plan and employer records and carefully search for participants and/or attempt to distribute benefits before turning balances over to the PBGC Missing Participants Program. A failure to do so might still result in a violation of ERISA Sections 404 (fiduciary rules) or 406 (prohibited transaction rules).

Compliance Assistance Release (CAR) No. 2021-01

EBSA maintains a national enforcement project known as Protecting Benefits Distribution, which includes the Terminated Vested Participants Project (TVPP). The TVPP, which grew out of the earlier mentioned regional audits, is focused on defined benefit plans, but many of the issues and concerns are equally applicable to defined contribution plans. CAR 2021-01 is aimed at DOL regional office audit consistency and encouraging voluntary compliance by plan fiduciaries.

CAR 2021-01 describes the DOL’s investigation process, including information requested and the types of errors for which the auditor will be on the lookout. A TVPP investigation is typically closed with a voluntary compliance letter. Overall, the focus is on plans with systemic problems in tracking terminated vested participants and in timely distributing benefits. On the specific issue of missing participants, the DOL will examine –

internal procedures and practices for reaching out to unresponsive [terminated vested participants] or for searching for them (for example, through the plan sponsor’s human resources department or in the records of related employee benefit plans), and contracts and experience with third-parties who perform recordkeeping and missing participant search functions for the plan. These documents and information, combined with interviews of the relevant parties, help us to verify what the plan, responsible plan fiduciaries, and relevant service providers do (or do not do) when confronted with [terminated vested participants] who are eligible to receive their benefits, but have not made a claim for benefits or otherwise entered pay status.

Red flag issues that suggest larger problems include –

• More than a small number of missing participants.
• More than a small number of terminated vested participants who have reached normal retirement age but have not started receiving their pension benefits. (This tends to be more relevant to defined benefit plans, but defined contribution plans also have distribution obligations, such as the need to satisfy the required minimum distribution rules.)
• Missing, inaccurate or incomplete contact information and census data.
• Absence of sound policies and procedures for handling returned mail and uncashed checks.

EBSA Release Missing Participants–Best Practices for Pension Plans

The trilogy of guidance is rounded out with an EBSA release, aimed at both defined contribution and defined benefit plan fiduciaries. In it, the DOL lists (and elaborates on) four key practices that it has found helpful in addressing the problem of missing participants –

• Maintain accurate census information for the plan’s participant population.
• Implement effective communication strategies.
• Conduct missing participant searches.
• Document procedures and action.

While some of the details of the suggestions are a bit over the top (seeking out and maintaining on a periodic basis social media contact information and next of kin/emergency contact information for a former employee), most of what is discussed is sound. If mail is returned – the sooner the follow-up, the better. Contact vendors (recordkeepers, actuaries) to see if they offer address search tools. If checks are returned, restore the assets to the plan while making an effort to find the missing recipient. Look for bad census data within the system (the odds of a plan having a participant who was born 01/01/1900 are zero, at least according to this article). Consider sending notices in multiple languages and/or mentioning prior plan sponsor names or the names of merged plans, which may cause the reader to take a more careful look at an item received in the mail, rather than simply assume it is junk mail.

Other Suggestions

In addition to the above-listed items, we have been encouraging plan fiduciaries to adopt additional practices that both assist with the missing participant problem and promote good plan administration. These practices include, for example, adoption of an uncashed check policy, reviewing very small participant balances (which are often the result of trailing dividends or litigation settlement proceeds posting to an account after distribution), and updating the Social Security Administration [via Form 8955-SSA, Code “D” in Line 9(a)] with respect to participants who are reported and thereafter receive a distribution of their benefit.

Legislative Action?

Legislative solutions to the missing participant problem have been introduced, including the creation of a Retirement Savings Lost and Found office and fund, which is part of the Securing a Strong Retirement Act bill, colloquially referred to as SECURE Act 2.0. Expansion of the PBGC’s Missing Participant Program is also worth considering. In the meantime, other tools for plan fiduciaries and participants exist, including commercial services (such as the National Registry of Unclaimed Retirement Benefits) and organizations designed to help reunite participants with their benefits (such as the Pension Action Center).

Final Thoughts

The DOL’s new guidance is a step in the right direction and should be reviewed by plan fiduciaries and their vendors (auditors, recordkeepers, actuaries, and the like). Together, the guidance takes an important step forward in establishing a more cohesive national enforcement strategy for addressing the nettlesome problem of missing participants and provides helpful suggestions to ensure that the benefits offered by plan sponsors serve their intended goal of providing retirement income. At a minimum, a new stake has been put in the ground for how to best handle missing participants, and an informed fiduciary must review and digest this latest guidance, and compare it to current practices. Where existing practices are deficient, it is time to kick it up a notch.

David A. Guadagnoli, Esq., JD, LLM (taxation), is a tax partner specializing in all aspects of employee benefits with the law firm of Sullivan & Worcester LLP. He can be reached at dguadagnoli@sullivanlaw.com or at 617-338-2938. To learn more about the author, please visit https://www.sullivanlaw.com/professionals-David-Guadagnoli.html.

[1] For purposes of this article, I will use the phrase “missing participants” to refer to both individuals (participants, beneficiaries, and alternate payees) with respect to whom the plan fiduciary has lost contact and those individuals for whom the plan fiduciary has current contact information but who simply fail to respond, so-called nonresponsive participants.