Need Help Finding Your Plan's Missing Participants?
The Department of Labor (DOL) recently issued a new Field Assistance Bulletin (FAB 2014-01) that provides guidance regarding the steps a plan administrator should take to fulfill his or her fiduciary duty to locate and distribute account balances to missing participants in terminated defined contribution plans. FAB 2014-01 replaces the 10-year-old Field Assistance Bulletin 2004-02 (FAB 2004-02). Since FAB 2004-02, many changes have occurred that warranted updated guidance. These changes include the discontinuance of the letter-forwarding services by the Internal Revenue Service (IRS) and the Social Security Administration, and the expansion in internet search technologies.
FAB 2014-01 does not apply to situations where the plan has an annuity option, or the plan sponsor maintains another defined contribution plan to which account balances from the terminated plan can be transferred. The Pension Benefit Guaranty Corporation (PBGC) has a missing participant program for defined benefit plans that allows plan administrators to distribute a missing participant’s benefit to PBGC. PBGC is in the process of expanding this program to include distributions from terminated defined contribution plans. The DOL will reevaluate this guidance when PBGC issues final regulations.
So why is it important to locate missing participants? As FAB 2014-01 points out, a plan administrator is required under the Internal Revenue Code to distribute all assets to participants upon termination of the plan. Additionally, section 404(a) of the Employee Retirement Income Security Act of 1974 (ERISA) imposes a duty of prudence and loyalty on the plan administrator, as a fiduciary, to distribute properly all of the plan’s assets to participants and beneficiaries. Failure to search for missing participants and properly distribute account balances is, therefore, a breach of a plan administrator’s fiduciary duties.
Fiduciaries searching for missing participants should at a minimum use one or more of the following search methods:
- Certified Mail. The DOL has a model notice that can be used as a safe harbor.
- Check Related Plan and Employer Records. For example, information maintained in connection with a group health plan may provide updated contact information for the missing participant.
- Check with Designated Plan Beneficiary. This can include a designated beneficiary in a related plan such as a life insurance policy. The fiduciary can also have the designated beneficiary forward the plan termination letter to the missing participant.
- Use the Internet. The fiduciary should use internet search engines, social media, public record databases, and newspaper announcements to locate the missing participant. Google, Facebook and Twitter can be very helpful.
If all of the required search methods above fail to locate the missing participant, the fiduciary may use services that charge a fee, such as commercial locators, credit reporting agencies, information brokers, or investigation brokers. However, the fiduciary must consider the cost and size of the participant’s account when deciding if further searching is appropriate. Fiduciaries may charge missing participants’ accounts the reasonable cost of the search efforts.
Acceptable Distribution Options
In situations where the fiduciary is unable to locate the missing participant after following all of the steps above, the fiduciary may utilize an appropriate distribution option to complete the plan’s termination.
- Individual Retirement Plans. The DOL’s preferred distribution option is to roll the missing participant’s account balance into an individual retirement plan, such as an IRA. Choosing an individual retirement plan is a fiduciary decision subject to section 404(a) of ERISA, therefore, fiduciaries should follow the DOL’s regulatory safe harbor for rollover distributions to individual retirement plans.
- Interest-Bearing Account. If for some compelling reason a fiduciary is unable to set up an individual retirement plan, he or she may open an interest-bearing account in the participant’s name with a federally-insured bank. When opening an account, the fiduciary should make sure to understand any fees or charges imposed by the bank.
- Escheat to the State. The fiduciary may also forward the missing participant’s funds to the state of the participant’s last known residence or work location.
The decision to set up an interest-bearing account or transfer the funds to the state should be an absolute last resort because these two options have potential adverse tax consequences to the participant. In fact, according to the DOL, “a fiduciary would violate ERISA section 404(a)’s obligations of prudence and loyalty by causing such negative consequences rather than making an individual retirement plan rollover distribution.”
Inappropriate Distribution Option
100% Income Tax Withholding. Fiduciaries should never withhold 100% of a participant’s account balance. The DOL views this option as a transfer of the participant’s benefit to the IRS. This option is not in the best interest of the participant and is a violation of section 404(a) of ERISA.