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Are Missing Participants Jeopardizing the Qualified Status of Your Plan?
By: Brian White, Senior Consultant
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| There has been a shift in thinking regarding defined contribution plans (401(k), 403(b), etc.) in the last several years. Since their inception, in the late 1970’s, the focus has been on the accumulation of assets. Participants have been encouraged to accumulate as much as possible, through savings and investment returns, to supplement their retirement.
As defined benefit plans trend towards freezing or terminating benefits, defined contribution plans have become the primary savings vehicle for many Americans. Participant behavior shows retirees leaving the plan upon retirement and taking a lump sum or rolling assets out. This behavior was engrained in participants, in part, by the plan’s design. When set up, many plans did not allow for periodic withdrawals upon or after normal retirement.
With retirement among baby boomers escalating, the conversation has shifted to retirement plans’ decumulation phase. Plan sponsors are amending plans to keep participants in the Plan through retirement by allowing for periodic withdrawals. Among the many other benefits are:
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| • For Plan Sponsors, retirees in the Plan typically have higher balances. This affords them greater purchasing power with recordkeepers.
• Retirees benefit from access to institutionally priced products that may not be available in a retail Individual Retirement Accounts (IRAs).
• Retirees benefit by having a Fiduciary committee oversee the investment options on their behalf and monitor fees. With the Fiduciary Rule recently vacated, the retail market is no longer held to the same fiduciary standards.
• Retirees benefit by having access to retirement planning tools and calculators provided by recordkeepers and access to live representatives for assistance. Within the retail market, these can be expensive add-ons.
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| Despite the good intentions to amend plans to accommodate retirees, are plan sponsors putting the qualified status of the Plan at risk? And, what happens when this demographic of retired baby boomers decide to downsize or relocate?
Regardless of their reason for moving, one thing is clear, retirees typically don’t contact their previous employer(s) to notify them of their new address, especially when distributions haven’t begun. A threat to the qualified status of a defined contribution plan is when participants miss their Required Minimum Distribution (RMD).
Plan sponsors are fiduciaries and obligated to ensure participants receive any required disclosures. Moreover, problems stemming from missing participants can compound over time. As a fiduciary, plan sponsors need to formulate a strategy to address missing participants before they are a problem. The Department of Labor (DOL) has yet to provide guidelines on locating missing participants, but has offered guidance specific to terminating Plans with missing participants through Field Assistance Bulletin (FAB) 2014-01. With a lack of guidance around active plans, plan sponsors are left with this for best practices when seeking missing participants.
FAB 2014-01 states plan sponsors should, at minimum:
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| 1. Use Certified Mail.
Certified mail is an easy way to find out, at little cost, whether the participant can be located in order to distribute benefits. The Department provided a model notice that could be used for such mailings as part of a regulatory safe harbor (discussed below), but its use is not required and other notices could satisfy the safe harbor.
2. Check Related Plan and Employer Records.
While the records of the terminated plan may not contain current address information, it is possible that the employer or another of the employer’s plans, such as a group health plan, may have more up-to-date information. For this reason, plan fiduciaries of the terminated plan must ask both the employer and administrator(s) of related plans to search their records for a more current address for the missing participant. If there are privacy concerns, the plan fiduciary engaged in the search can request that the employer or other plan fiduciary contact or forward a letter for the terminated plan to the missing participant or beneficiary. The letter would request that the missing participant or beneficiary contact the searching plan fiduciary.
3. Check with Designated Plan Beneficiary.
In searching the terminated plan’s records or the records of related plans, plan fiduciaries must try to identify and contact any individual that the missing participant has designated as a beneficiary (i.e. spouse, children, etc.) to find updated contact information for the missing participant. Again, if there are privacy concerns, the plan fiduciary can request that the designated beneficiary contact or forward a letter for the terminated plan to the missing participant or beneficiary.
4. Use Free Electronic Search Tools.
Plan fiduciaries must make reasonable use of Internet search tools that do not charge a fee to search for a missing participant or beneficiary. Such online services include Internet search engines, public record databases (such as those for licenses, mortgages and real estate taxes), obituaries and social media.
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| Are missing participants a problem for your Plan? Plan sponsors need to engage their recordkeeper regularly to monitor participants deemed “missing”. Once a missing participant is identified, plan sponsors should document any steps taken to locate them. Most recordkeepers have services in place to help locate missing participants. Fees may apply once participants are located.
In addition, plan sponsors should work with their recordkeeper to identify terminated participants with low balances (less than $5,000) and systematically sweep them out of the plan on a regular basis. This can be challenging when a business has seasonal employees or significant rehires. You can adapt the process to your business’ unique needs.
Last, plan sponsors should obtain and maintain the email addresses and cell phone numbers of employees to assist in locating missing participants.
Please reach out to your consultant or any of the professionals at DiMeo Schneider & Associates, L.L.C. to discuss these and other strategies for locating missing participants.
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| This report is intended for the exclusive use of clients or prospective clients of DiMeo Schneider & Associates, L.L.C. Content is privileged and confidential. Any dissemination or distribution is strictly prohibited. Information has been obtained from a variety of sources which are believed though not guaranteed to be accurate.Information has been obtained from a variety of sources believed to be reliable though not independently verified. Past performance does not indicate future performance. This paper does not represent a specific investment recommendation. Please consult with your advisor, attorney and accountant, as appropriate, regarding specific advice.
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