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Don't forget to write! The challenges of locating plan participants who've gone missing
Use Internet to Find Missing Participants, DOL Says
The U.S. Department of Labor on Aug. 14, 2014, issued a new set of guidance for tracking missing defined contribution retirement plan participants and distributing their assets. Field Assistance Bulletin 2014-1 takes into account improved Internet search capabilities available to plan sponsors.
Plan fiduciaries can start by using free Internet search tools, which may include search engines, public records, obituaries, and social media, the DOL advised. But “If the free or cheap options don’t work, fiduciaries can’t stop there,” noted an alert by Bryan Cave benefits attorneys. Fiduciaries need to consider how prudent it would be to use other tools, such as commercial locator services, credit reporting agencies, information brokers, and investigation databases.
“Many of those services can be quite cost effective, so it’s important to research them thoroughly before dismissing them out of hand,” according to Bryan Cave. “The DOL notes that the exact steps will depend on the facts and circumstances.” (To learn more, see the SHRM Online article Go Online to Find Missing Plan Participants, DOL Says.)
An employer-provided retirement plan, whether a defined benefit pension or defined contribution 401(k) or 403(b) plan, can have hundreds if not many thousands of participants, many of whom are no longer employed by the retirement plan sponsor. This creates an ongoing challenge for HR benefit managers and plan administrators. As people move around, it's easy to lose track of them.
When former employees don't provide retirement plan sponsors with updated contact information, finding those who are vested in a defined benefit pension plan or who still have assets in a defined contribution plan account can be a challenge. While Internet search engines and other online tools can help, tracking these people down can still be time-consuming.
A Fiduciary Duty
Yet plan sponsors have a responsibility to maintain current contact information for plan participants, particularly when they reach normal retirement age and become eligible to receive plan payouts. “It is the fiduciary duty of plan sponsors to act in the best interest of participants,” said Andrew Malahowski, a partner with law firm Franczek Radelet & Rose in Chicago.
“Plan sponsors are responsible for keeping plan participants abreast of new developments in their retirement plans, such as changes to investment options in a defined contribution plan, plan amendments and other important information,” adds Mary Steigerwalt, president of Keane Retirement Services in Wayne, Pa. “If a plan sponsor does not have current contact information for a participant, it obviously can't provide that participant with the necessary information.”
Of course, terminated employees also bear responsibility to keep their former employer informed of their current address. This is especially important when a plan sponsor is subsequently transformed through a merger or acquisition. Waiting until they're 65 to informed XYZ Corp. that decades earlier they had vested in the pension of ABC Corp. before it merged with HIJ Corp., which was later bought by XYZ, is not going to help matters, a point that should be made clear to departing employees.
Pension Notice: What's Required
Under the Employee Retirement Income Security Act (ERISA) and the Pension Protection Act, defined benefit plan administrators generally must furnish individual statements of accrued and vested pension amounts at least once every three years to vested participants who are employed by the employer, and to other plan participants and beneficiaries on written request. An alternative notice requirement is satisfied if at least once each year the administrator provides notice of the availability of the pension benefit statement and the ways in which to obtain it (these statements are increasingly provided online by the financial services firm administering the plan). An exemption from the triennial automatic statement requirement may be available for frozen plans.
For more on defined benefit plan notification rules, see consultancy Watson Wyatt'sPension and Welfare Plans under ERISAand SHRM Online's The Pension Protection Act: Frequently Asked Questions on Notice Requirements.
There are steps plan sponsors can take before and after a plan participant goes missing to minimize the time and potential liability involved in finding former employees. However, it is a good idea to check with legal counsel on the specific fiduciary issues plan sponsors face. Here are some tips:
Document the process. Like every other part of retirement plan administration, tracking down missing participants requires documented policies and procedures to follow. These should be developed when the plan is established, or at least well before the plan sponsor finds itself in the middle of tracking down a participant. These policies and procedures should spell out everything, including:
“You need to set a standard and have a moral and certifiable process,” said Tom Foster, national spokesman for the retirement plans group with The Hartford, a financial services firm based in Hartford, Conn. “Then, you need to document everything you do” in a given situation.
If an employee has died, plan sponsors can follow these same policies and procedures to track down the participant’s beneficiary.
In the age of Google, there are many free online search engines available with which to track down missing participants. However, if those options don’t pan out when looking for a Joe Smith or Mary Jones, plan sponsors can turn to the letter forwarding service of the U.S. Social Security Administration or the IRS.
No matter what the process for locating lost participants, it should be consistently applied regardless of how large the benefit, who the participant is or what position they held within the company. And there should be documented steps to verify that the individual when found is actually the plan participant.
“It is in the plan sponsor’s self-interest to find the participant and to make sure it has the right person,” said Malahowski. “You don’t want to pay money to a wrong beneficiary and end up with a lawsuit from the real beneficiary.”
------------------------------------------------------------------------“You don’t want to pay money to a wrong beneficiary
and end up with a lawsuit from the real beneficiary.”------------------------------------------------------------------------
Work with vendors. Usually, the first sign that a participant has gone AWOL is returned mail. Therefore, put in place a clear procedure for handling returned mail from participants. If a plan sponsor outsources plan administration to a vendor that also handles all mailings, it is important to know what will happen and how they will be alerted if a participant’s plan-related mailings are returned with no forwarding address. Will the vendor be responsible for tracking down the employee, or will these cases be handled by the plan sponsor's internal HR manager?
The key is to make sure that someone begins taking steps to find missing participants so that these situations don’t fall through the cracks. In some cases, the company may have updated participant contact information in another system within the company, such as HR and payroll systems.
Emphasize rollovers. One way to reduce the need to track down participants is to emphasize asset rollovers when participants in defined contribution plans, particularly 401(k) and profit-sharing plans, leave the company. Regulations already allow automatic rollovers or “cash-outs” of defined contribution accounts of $5,000 or less. However, strong communication and a process that makes rollovers simple for departing employees can further reduce the number of participants who leave money in the retirement plan.
The 401(k) Automatic Rollover 'Safe Harbor' Test
In March 2005, a U.S. Department of Labor (DOL) final regulation created a limited liability "safe harbor" for plan sponsors that automatically roll over into an individual retirement account (IRA) a small amount of funds left by a terminated employee in a defined contribution retirement plan account.
Former employees' failure to roll over small sums in their 401(k)s or other tax-qualified defined contribution plan accounts is a common source of distress for retirement plan fiduciaries. Administrative expenses continue to be incurred on behalf of former employees to maintain small, inactive accounts. However, rolling these funds over to an IRA without specific instructions from the former employees can raise liability concerns under federal pension law.
The DOL's safe harbor helps protect plan fiduciaries who transfer automatic “cash-out” distributions not exceeding $5,000 to IRAs when former employees fail to elect between effecting a direct rollover to an IRA or receiving the distribution. If no election (or an incomplete election) has been made by the former employee, the safe harbor will protect plan fiduciaries from liability under the Employee Retirement Income Security Act when they select a financial institution to provide the IRA and choose certain investments specified under the safe harbor for the IRA (see Satisfying 401(k) Automatic Rollover 'Safe Harbor' Test).
Communicate proactively. When individuals terminate employment, plan sponsors should communicate the importance of staying in touch with the company and keeping contact information up-to-date. In addition, any periodic communication between the participant and plan sponsor should also emphasize this, perhaps with the inclusion of a form that allows participants to send in their updated information.
“It is a good idea to have a policy to remind employees and participants of the need to regularly update their mailing address, beneficiaries and other information and to make it very clear why it is important to do that,” said Jeff Brown, a senior manager in Ernst & Young’s human resources operations group in Dallas.
If there is any good to come out of the recent economic downturn, it is the fact that people are likely to be more diligent about maintaining contact with retirement plan sponsors. “This is likely to become a much smaller problem than before because people need that money,” said Foster.
IRS Stops Forwarding Letters to Missing Participants
In August 2012, the Internal Revenue Serviceissued Revenue Procedure 2012-35, stating it will no longer forward letters on behalf of plan sponsors or administrators of qualified retirement plans, or qualified termination administrators (QTAs) of abandoned plans under the Department of Labor’s Abandoned Plan Program, who are attempting to locate missing plan participants and beneficiaries.
The agency noted that since its letter-forwarding program began, numerous alternative resources, including the Internet, have become available to help plan sponsors or administrators locate missing participants and beneficiaries.
Revenue Procedure 2012-35 applies to requests postmarked on or after August 31, 2012.
Joanne Sammer is a New Jersey-based business and financial writer. Her articles have appeared in a number of publications, including Business Finance, Consulting, Compliance Week and Treasury & Risk Management.
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