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Keep Track of 401(k) Participants So They Don't Go Missing

Ex-employees still in your plan can disappear without a trace—but they leave their money behind

A silhouette of a man with a briefcase walking through footprints.

Increased job-hopping and frequently forgetting to update their contact details with previous employers are two reasons why participants in 401(k) and similar employer-sponsored retirement plans may "disappear." Creating a "missing-participant program" can help plan sponsors comply with the requirement that they make sure former employees can access their savings. A proposed legislative remedy also could be on the way.

"When participants terminate employment, either through turnover or retirement, many often leave their defined contribution accounts with their former employers," said Warren Cormier, founder and CEO of Boston Research Technologies (BRT), a provider of business research and analysis. "In these cases, they are still participants, though not actively contributing to their accounts. Nonetheless, it is the plan sponsor's fiduciary responsibility [under the Employer Retirement Income Security Act] to communicate with them as much and as often as [the sponsor does with] active employees."

A new report, The Mobile Workforce's Missing Participant Problem, presents results from a survey BRT conducted in collaboration with Retirement Clearinghouse, a provider of portability and consolidation services for defined contribution plans. The survey, conducted in February, questioned 1,000 respondents who had participated in a former employer's plan—sometimes without knowing it.

Among the findings:

  • 11 percent of former employees' account records had an outdated address. Most of these missing-participant accounts, especially those with balances below $10,000, belonged to Millennials.
  • Low-income households were twice as likely to have missing participants.
  • Mergers and acquisitions often made it difficult for former employees to locate a left-behind plan.

"One out of every three participants in the survey learned about an account they didn't know they had," said Spencer Williams, president and CEO of Retirement Clearinghouse,in a recent podcast. "The dark side of automatic enrollment is that lots of accounts are being created without much employee engagement," making small balances left in a former employer's plan a bigger problem.

[SHRM members-only toolkit: Designing and Administering Defined Contribution Retirement Plans]

Bid Participants Farewell—and Welcome

"At a time when the Department of Labor has been placing more emphasis on missing participants during plan audits, one simple solution is to strongly encourage participants to take their accounts with them to their new employer plans," Williams said.

While a bigger plan with more assets under management can reduce the cost of plan services per participant due to economies of scale, "with a highly mobile workforce, you can collect an awful lot of little accounts that don't add to the plan's efficiency or purchasing power," he pointed out.

At the same time, as part of the onboarding process, "talk to new hires about whether they have accounts left at former employers, and ask if they'd like to roll these into their new employer's plan," Williams advised. "You can also remind current employees they have the option of consolidating money in an old 401(k) into your plan," and that by doing so they can take full advantage of online tools for managing asset allocation among the plan's fund options.

Keeping Track

"People go in and out of missing status, so the plan needs to have a dynamic missing-participant or location service," Williams said. He advised that the program be:

  • Periodic. As records grow stale quickly, implement a periodic program to update mailing addresses. Before annual statements are sent out, for example, do an address scrub of all participants to get the best address.
  • Event-driven. Before required planned distributions, conduct a rigorous search. For instance, contact participants turning 70 this year, because starting at age 70 and a half, 401(k) funds must be paid out through required minimum distributions.

"Many plan sponsors conduct annual or semiannual bad-address audits—which can include death-record searches—in an attempt to identify the status of missing participants," said Monica Gallagher, a Jacksonville, Fla.-based partner in October Three Consulting, a retirement plan advisory firm. "Some third parties who provide bad-address and death audits are now expanding their services to include social media searches."

Allowing participants to provide personal e-mail addresses as the primary way to communicate with them "should help reduce the number of missing participants, as personal e-mail addresses tend to be more constant than home addresses," she said.

IRS Issues Guidance on Missing Plan Participants

In October 2017, the IRS issued administrative enforcement guidance that addressed missing participants. To avoid a challange against the plan by IRS examiners for failure to make a required distribution to a participant or beneficiary, the plan must be able to show it has taken the following three steps:

  • Searched plan and related plan, sponsor, and publicly available records or directories for alternative contact information.
  • Used any of the search methods below: 

o A commercial locator service; 

o A credit reporting agency; or

o A proprietary internet search tool for locating individuals.

  • Attempted contact via United States Postal Service (USPS) certified mail to the last known mailing address and through appropriate means for any address or contact information (including e-mail addresses and telephone numbers). 

If a plan has not completed the steps above, examiners may challenge a qualified plan for violation of the required minimum distribution (RMD) standards.

Unlike the IRS, however, "the DOL does not require that these search methods be used in all cases," according to an online post from law firm Baker Botts LLP. "It is not known whether the DOL will give any deference to the IRS's position on what constitutes 'reasonable efforts' to locate missing participants."

At an August 2017 meeting of the ERISA Advisory Council in Washington, D.C., Timothy Hauser, who was acting director of the DOL's Employee Benefits Security Administration, listed four steps plan sponsors should take until additional guidance on missing participants is released. Plan sponsors should:

  • Send missing participants a certified letter using their last known address. Certified mail "suggests this isn't just another boring mandatory notice to be thrown in the trash unopened," said Norma Sharara, a principal in Mercer's employment practices risk management group in Washington, D.C..
  • Keep good records on efforts to reach terminated vested participants. "Make a deliberate effort to update and keep current records," Sharara recommended. During mergers and acquisitions, pass those records to the successor firm.
  • Contact co-workers of terminated vested participants. Ask "do you know how to get in touch with so-and-so?"
  • Try contacting missing participants through their phone numbers. People may keep their cellphone numbers when they change addresses, Sharara pointed out.

If all else fails, a commercial locator service may be able to find missing participants. Plan sponsors, however, have a fiduciary duty to monitor these efforts.

"In some cases when a commercial locator service said it couldn't locate a person, the Labor Department found [the missing participants] within five minutes doing a Google search. Your duty as a plan sponsor is to monitor your service providers" or risk being held liable for breach of fiduciary duty, Sharara said.

PBGC Expands Program

Effective this year, the Pension Benefit Guaranty Corp. (PBGC) extended its Missing Participants Program beyond terminated defined benefit pensions to include terminated defined contribution plans, such as 401(k)s. The program provides a central repository for retirement benefits from closed plans that individuals are free to search. Use of this program, however, is voluntary for plan sponsors with terminating plans.

Sponsors of terminating defined contribution plans have the option of transferring missing participants' benefits to the PBGC instead of establishing an individual retirement account at a financial institution. Participant accounts will not be diminished by ongoing maintenance fees or distribution charges, and PBGC will pay out benefits with interest when participants are found.

"This is welcome news to [defined contribution] plan fiduciaries attempting to wrap up their plans at a time when Department of Labor auditors are showing increased interest in the handling of missing-participant accounts," said Laura Guin, a Brentwood, Tenn.-based senior consultant for defined contribution plans at advisory firm Findley Davies/BPS&M.

New Legislation Proposed

Sens. Elizabeth Warren, D-Mass., and Steve Daines, R-Mont., earlier this year introduced the Retirement Savings Lost and Found Act of 2018. The legislation would create the Office of Retirement Savings Lost and Found, which would help participants and beneficiaries find unclaimed retirement benefits in plans subject to ERISA's vesting rules, and provide plan administrators with a new option for investing the balances of missing or lost participants. Also, the involuntary cash-out limit for former participants would be increased to $6,000 from $5,000.

"Providing support for retirement savings, including tools to help participants and beneficiaries in finding unclaimed retirement benefits, is critical to [U.S.] workers' retirement security," said Chatrane Birbal, senior advisor of government relations at the Society for Human Resource Management. "With more than 10,000 Americans retiring every day, the need to protect retirement savings has never been greater."

Related SHRM Article:

DOL Is Stepping Up 'Missing Participant' Retirement Plan AuditsSHRM Online Benefits, updated December 2017


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