Whether an employer wants to terminate its pension plan or streamline 401(k) management costs, tracking down older, missing or unresponsive participants is a complex challenge required under the federal Employee Retirement Income Security Act (ERISA). Let’s take a closer look at this employer responsibility, along with location strategies and best practices to maintain contact with current and former employees.
Financial and regulatory impact of forgotten accounts
Under ERISA, all retirement plan administrators have a fiduciary responsibility to find or “make a reasonable effort” to find missing or unresponsive participants. Failing to do so could expose a plan to liability.
Typically, abandoned retirement accounts contain small dollar amounts that are left behind as employees change jobs or move. While an employee may not worry about a small amount of money saved years ago, the employer may face real consequences for losing contact since it could be construed as a violation of their fiduciary responsibilities.
For both defined benefit (pension) and defined contribution (401(k)) retirement plans, administrators must distribute the funds to participants before shutting down the plan itself or closing individual accounts. These payouts are not possible if employee addresses are outdated, which forces employers to absorb the expense of ongoing maintenance.
In addition to the cost of keeping an entire plan open or maintaining dormant accounts, an abundance of unresponsive participants that leave account balances in a 401(k) plan could push an employer to a higher headcount that could trigger a financial statement audit.
Search tips for employers
All employers offering any type of retirement plan must deal with the complexities associated with finding lost participants, but the challenge is greater for those in industries with high turnover or short-term employment like construction and hospitality. The challenge is further complicated as entities and their retirement plans merge or change hands.
To assist employers in fulfilling ERISA’s search obligations, the U.S. Department of Labor (DOL) in August 2014 issued Field Assistance Bulletin No. 2014-01. Since the IRS and Social Security Administration’s letter forwarding options were discontinued several years ago, the DOL recommends using the following tactics:
- Send notifications via email and U.S. Postal Service to all addresses on file for participant.
- Use certified mail and request a delivery receipt.
- Search for the employee on other plan or company records.
- Compare to the U.S. Postal Service’s National Change of Address (NCOA) database.
- Check with credit reporting bureaus (Experian, Equifax, Transunion).
- Conduct manual internet searches or use free electronic search tools.
- Contact the beneficiary listed on the account.
Using a fee-based commercial locator service may be a worthwhile option for accounts with a larger balance, because ERISA permits using plan assets to pay for searches under certain circumstances.
What to do if search comes up empty
DOL’s August 2014 bulletin also addresses what to do if location attempts are unsuccessful. After conducting the above steps, employers have the fiduciary responsibility to evaluate if additional steps are warranted relative to the account balance.
If participants remain missing after reasonable search efforts, employers have several options permitted by the DOL:
- Distribute the participant’s benefits into an individual account retirement plan (IRA).
- Distribute to PBGC’s missing participant program (currently limited to terminated defined benefit plans, but inclusion of defined contribution plans expected in 2018).
- Open a federally insured interest bearing bank account in name of missing participant to deposit funds.
- Escheat to unclaimed property program in the state of participant’s last known address.
Best practices to keep in touch with participants
Employers can minimize the occurrence of lost participants by implementing processes and procedures to shore up data and maintain contact, including the below best practices:
- Scrub employee data at least annually, if not quarterly. Employers with defined contribution plans should also scrub data when a new employee headcount threshold is about to be reached that would trigger new audit requirements.
- Compare records electronically to the NCOA database and the Social Security Administration Death Index (only updated through March 2014).
- Maintain multiple points of contact (mailing addresses, phone numbers, emails, etc.).
- Regularly update contact information for current participants and remind them to advise of any changes.
- Many plans allow for automatic lump sum distributions if balances are less than $1,000. Take advantage of this option as soon as participants terminate to help limit challenges that results from the passage of time.
Maintaining regular contact with current staff and enlisting them in the effort to keep contact information updated will pay off in the future as employees move on. In the meantime, adhering to ERISA search requirements and permitted distribution methods prevents plan administrators from being exposed to potential liability or running afoul of federal regulations.
RKL’s team of employee benefit plan specialists can provide guidance on this and other ERISA requirements and help plan administrators develop and implement the necessary policies and procedures. Contact one of our local offices today to get started.
