DOL Is Stepping Up ‘Missing Participant’ Retirement Plan Audits

Plan sponsors should document efforts to find former employees who are owed benefits

By Stephen Miller, CEBS Oct 12, 2017
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updated on Nov. 15, 2017

The U.S. Department of Labor (DOL) is ramping up its audits of retirement plans with "missing" participants. This is putting pressure on plan administrators to locate former employees—or their beneficiaries—so that they can receive the benefits they're owed.

This is something "completely new" that started in the DOL's Philadelphia office as a pilot project last year and is now going national, said Norma Sharara, a principal in Mercer's employment practices risk management group in Washington, D.C.

To help reunite participants with their benefits, the Philadelphia DOL office began looking at the Forms 5500 of defined benefit plans to identify employers with a high number of terminated vested participants who were not receiving payments and who had not received a lump-sum payout. When officials contacted plan sponsors and asked for names and addresses of these participants, "the sponsors said they were missing," Sharara said. But, she continued, when the Philadelphia DOL sent a certified letter to the participants' last-known addresses, "a lot of participants responded" and said they "hadn't known money was waiting for them in a pension plan somewhere."

From October 2016 to August 2017, the Philadelphia DOL recovered more than $165 million in benefits that should have been paid to participants, Sharara noted.

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

IRS Issues Guidance on Missing Plan Participants

Unlike the DOL, the IRS's Oct. 19 administrative enforcement guidance does not require the administrator to identify and contact the missing participant's designated beneficiary. Moreover, the IRS guidance requires the use of one of three search methods.

"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."


Breach of ERISA Duty

Following the success of the Philadelphia pilot program, the initiative is now going national. DOL auditors will monitor plan sponsors' failures to locate and contact missing participants and will treat the failure to do so as a breach of fiduciary duty under the Employee Retirement Income Security Act (ERISA), which can trigger substantial penalties.

"The DOL thinks that fiduciaries can't do what they've always done, which is to pretty much wait for participants to file a claim," Sharara said. "Instead, you have an affirmative duty to proactively contact participants in advance of benefit start dates."

"The DOL is saying that plan fiduciaries could be personally liable to pay participants their missed benefits," she added.

"It's not top of mind with most plan participants to alert their former employers about address changes, especially if they are still working and not planning to retire for several years," noted Scott Hittner, partner and chief actuary at plan advisory firm October Three Consulting in Greenwood Village, Colo. Nevertheless, "it is critical for plan sponsors to have accurate information so that they can pay their participants on time the benefits they're owed," he said.

Getting Ready

Plan sponsors should get ready for stricter scrutiny of their efforts to contact missing participants, Sharara advised.

At the Aug. 24 meeting of the ERISA Advisory Council in Washington, D.C., Timothy Hauser, acting director of the DOL's Employee Benefits Security Administration, said there will soon be new guidance regarding standards that plan sponsors should follow. He listed four steps plan sponsors should take until the guidance 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," Sharara said.
  • 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.

Plan sponsors also "can head off wild goose chases and potential DOL audits," Sharara said, by following all filing rules for IRS Form 8955-SSA, Annual Registration Statement Identifying Separated Participants with Deferred Vested Benefits.

The initial filing is due no later than the pension plan's Form 5500 due date for the plan year following the plan year in which the participant ended employment (if benefits haven't started by then). Subsequent filings are required if errors are discovered in information previously reported or if the participant's benefits are transferred to a successor plan sponsored by a different employer, for instance.


Prohibited Transaction Risk Sparks Concern

An Oct. 2, 2017 letter from the American Benefits Counsel, an employers group, to the DOL's Hauser points to the following aggressive legal positions recently taken by DOL investigators with respect to missing participants:

  • Failure to locate a missing participant may result in a breach of fiduciary by the plan administrator duty even if the plan's procedures have been followed.
  • The forfeiture of retirement plan benefits owed to unresponsive or missing participants may result in a prohibited transaction, even if the plan provides for reinstatement of the benefit following a participant's subsequent claim for benefits.
  • Plan administrators should perform an annual search for missing participants, using a different search method each year and may be obligated to use methods such as contacting current and former employees who worked at the same time as the missing participant to assist in this process.
  • Plan administrators should keep searching for the same missing participant indefinitely, even though performing unlimited searches for the same participant is not an efficient use of plan resources.

"Perhaps the most troubling of these positions is the second one—that forfeiture of unclaimed retirement benefits may be a prohibited transaction," according to a client alert from Dallas-based law firm Wilkins Finston Freidman. "Because correction would require restoring the forfeited funds, adjusting such amounts for earnings in the case of a defined contribution plan, disgorging any profits earned by the plan sponsor by reason of the forfeiture, and paying a 15 percent excise tax to the Internal Revenue Service."

Notably, even if the plan document provides for the forfeiture and restoration and received a favorable determination letter from the IRS, "this does not insulate the plan sponsor from potential DOL liability because prohibited transaction issues are within the purview of the DOL," the law firm's alert states.




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