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New DOL Guidance on Missing Participants

February 5 2021


On January 12, 2021, the United States Department of Labor (“DOL”) issued a news release containing three pieces of guidance governing a plan fiduciary’s obligations in connection with plan accounts or benefits belonging to unresponsive participants or to participants who cannot be located (“Missing Participants”). Here we discusses the current rules concerning Missing Participants and how this new guidance changes those rules.

What are the current rules governing Missing Participants for Ongoing Plans?

Transferring the accounts or benefits of Missing Participants is a fiduciary decision, and plan fiduciaries must act prudently in the interest of the Missing Participant. This includes making a diligent search for the Missing Participant. After such a search, accounts or benefits valued at $5,000 or less may be rolled over to an Individual Retirement Account for the benefit of a participant without his or her consent.

A plan fiduciary that satisfies a safe harbor issued by DOL will be deemed to satisfy his or her fiduciary obligation with respect to the transfer. Note: the safe harbor is not the exclusive means by which one’s fiduciary duties may be satisfied; for more information, please contact your recordkeeper or third-party administrator (“TPA”).

The conditions of the safe harbor are as follows:

·       The rolled-over funds must be invested in a money market or similar account designed to preserve principal, provide a reasonable rate of return and be issued by a bank or similar institution whose deposits are insured. The fees of the account must not exceed the fees that would be charged for similar accounts not subject to the automatic rollover;

·       Participants must have been furnished a summary of the automatic rollover provisions. This is usually part of the plan’s Summary Plan Description; and

·       The automatic rollover must not result in a prohibited transaction, e.g., where the plan fiduciary has a conflict of interest or receives prohibited compensation with respect to the rollover.

What’s changed with the new guidance?

The release included a list of Best Practices for handling the accounts and benefits of Missing Participants. While these best practices cannot in and of themselves be the basis for sanctioning plan fiduciaries, they do provide guidance what procedures DOL believes should be implemented to avoid Missing Participant issues and potential fiduciary liability.

The best practices for plan sponsors may be summarized as follows:

·       Maintain accurate and up-to-date census information for all plan participants, including terminated participants. This includes following up on undeliverable mail/email and uncashed checks;

·       Implement effective participant communication strategies. This includes the onboarding and exit processes to confirm and update contact information;

·       Search for Missing Participant contact information using all plan and employer records, containing designated plan beneficiaries, using free online search engines or commercial locator services, contacting colleagues who worked in the same office as the Missing Participant, and/or registering the Missing Participant on public or private pension registries; and

·       Document policies and procedures related to Missing Participants, as well as any decisions and steps taken to implement them.

Along with the best practices, the DOL described what it considers to be “red flags” that may indicate action is needed with respect to Missing Participants, such as a plan having:

·       More than a small number of missing or nonresponsive participants;

·       More than a small number of terminated vested participants who have reached normal retirement age but have not started receiving their pension benefits;

·       Missing, inaccurate, or incomplete contact information, census data, or both (e.g., incorrect or out-of-date mail, email, and other contact information, partial social security numbers, missing birthdates, missing spousal information, or placeholder entries);

·       Absence of sound policies and procedures for handling mail returned marked “return to sender,” “wrong address,” “addressee unknown,” or otherwise, and/or undeliverable email; and

·       Absence of sound policies and procedures for handling uncashed checks (as reflected for example, by the absence of an accounting journal or similar record of uncashed checks, a substantial number of stale uncashed distribution checks, or failure to reclaim stale uncashed check funds in distribution accounts).

Plan Sponsor Takeaway:  Does the plan exhibit any of the “red flags?” If so, further action is needed on this issue.

Most recordkeepers handle plan records and communications and have procedures for handling Missing Participants. Contact your recordkeeper to discuss what role it will play, incorporate the same and/or supplement your own written policies. Periodically test and update your policies as necessary (e.g., when changing recordkeepers). Communicate the policies to human resources and persons involved with the administration of employee benefits.

Also, note that not every ‘best practice” may be appropriate for a specific plan. According to the DOL, you “should also consider the size of a participant’s accrued benefit and account balance as well as the cost of search efforts.”

Are there any changes specific to defined benefit pension plans?   

No. There are no changes to the specific rules governing terminated participants in defined benefit plans. What is new is that the DOL issued guidance for its investigators in a Compliance Assistance Release concerning its Terminated Vested Participants Project. In the event of a DOL investigation, the investigator will be looking for the following:

·       Systemic errors in plan recordkeeping and administration that create a risk of loss associated with the failure of a terminated vested participant (“TVP”) to enter pay status (e.g., begin receiving payments) before death;

·       Inadequate procedures for contacting TVPs nearing retirement age, or the date they must begin taking their benefit;

·       Inadequate procedures for identifying and locating Missing Participants; and

·       Inadequate procedures for addressing uncashed distribution checks.

Plan Sponsor Takeaway:  Since DOL has a specific project looking for inadequate procedures for Missing Participants or participants or beneficiaries entitled to begin benefits, make sure adequate procedures are in place with the recordkeeper and/or TPA to ensure benefits are provided when due or, for small benefits (present value of $5,000 or less), that automatic rollover procedures are in place. Use the above-referenced Best Practices as a guide.

What are current rules governing Missing Participants in terminated plans?

Similar to the guidance for ongoing plans, the DOL issued a safe harbor for handling distributions from terminated individual account plans, such as 401(k) plan. The safe harbor may be used regardless of the size of the individual account.

The conditions to qualify for the safe harbor for terminated plans are virtually identical to those that are part of the safe harbor for small accounts in ongoing plans. Similar notice requirements and location efforts also apply. Note: there are additional possible distribution options for plans where the rollover option is not feasible; for more information, please contact your recordkeeper or TPA.

Plan Sponsor Takeaway for Defined Benefit Plans: There is no comparable safe harbor for defined benefit plans because of the requirement that plans provide the benefit (other than small benefits discussed above) in the form of an annuity unless the participant otherwise consents. You may purchase an annuity for the Missing Participant or assets equal to the value of the benefit may be turned over to the Pension Benefit Guaranty Corporation who will attempt to locate the Missing Participant.

What’s changed with the new guidance?

Due to a recent change in the law, the Pension Benefit Guarantee Corporation (“PBGC”) institutes a Defined Contribution Missing Participant Program (the “Program”) to hold benefits for Missing Participants in terminated defined contribution plans such as 401(k) plan. The PBGC will then attempt to find the Missing Participants. The advantage of the Program is as follows:

·       Benefits of any size can be transferred to the PBGC;

·       Periodic active searches by the PBGC increases 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; and

·       Lifetime income options are available for balance transfers over $5,000.

Prior to the new guidance, there was a question whether a transfer to the Program would satisfy the plan fiduciary’s fiduciary duty. The new Field Assistance Bulletin provides a temporary non-enforcement policy and states that the DOL will not pursue fiduciary violations in connection with the transfer of accounts to PBGC in accordance with the Program and the plan fiduciary acts in good faith with respect to any other matters in connection with the termination, including searching for Missing Participants.

Plan Sponsor Takeaway: The PBGC offers two options for participating in its Program by transferring the accounts:

·       of all Missing Participants to PBGC; or

·       to a financial institution and notifying PBGC of the transfers, so it may attempt to locate the Missing Participant(s).

In either case, Missing Participant data is entered in a national data base searchable by participants. You should consult their recordkeeper or TPA to determine whether the Program is an appropriate alternative and, if so, which option is most appropriate.

As always, please contact us if you have any questions.