Missing Participant Guidance Trifecta

On January 12, 2021, the Department of Labor (DOL) issued a 3-part set of missing participant guidance for employer-sponsored retirement plans, addressing a variety of issues:

Best practices for reducing missing participant populations;
Explanation of the DOL’s goals and process in missing participant audits under the Terminated Vested Participant Project; and
Authority for fiduciaries of terminating defined contribution plans to use the PBGC Missing Participant Program.

Uniting participants with their retirement benefits has been a priority for the DOL for a number of years, as well as for plan sponsors and fiduciaries who want to see their employees benefit from their hard earned retirement dollars. In that regard, while additional guidance is always welcome, as discussed below, several of the DOL’s best practices could be viewed as impractical at best, or at worst, unworkable by plan fiduciaries.

Best Practices for Reducing Missing Retirement Plan Participants

Under ERISA, a plan fiduciary has a legal duty to act prudently and to administer an ERISA-governed retirement plan in accordance with its terms. The DOL (mostly via plan audits) has long been on a mission to alert and remind plan fiduciaries of their obligations under ERISA to locate and distribute retirement benefits to “missing” participants and beneficiaries.

Missing participants and beneficiaries are commonly identified in connection with:

becoming entitled to a distribution as the result of a plan termination;
becoming eligible for a mandatory distribution upon termination of employment under the plan’s small benefit cash out rules;
reaching their required beginning date for minimum distributions (or earlier required distributions, if applicable);
becoming entitled to a plan benefit upon someone’s death;
becoming entitled to a benefit under the terms of a qualified domestic relations order; and
by not cashing a plan check (or by having undeliverable mail).

Prior to this most recent guidance, the most extensive, albeit informal, guidance issued by the DOL in this area focused on missing participants and beneficiaries under a terminated defined contribution plan. See DOL Field Assistance Bulletin (FAB) 2014-1. Not surprisingly, plan fiduciaries (as well as DOL investigators) have applied the principals espoused in FAB 2014-1, by analogy, to active plans.

The DOL’s most recent foray into the issues of missing participants and beneficiaries was published on January 12, 2021, as an informal “best practices” memo (the “Memo”). In its own words, the Memo “outlines best practices that the fiduciaries of defined benefit and defined contribution plans, such as 401(k) plans, can follow to ensure that plan participants and beneficiaries receive promised benefits when they reach retirement age.”

The Memo begins by listing a number of “red flags” fiduciaries should be aware of that may indicate a systemic issue is either around the corner or exists currently, and in either case, should be addressed promptly. These red flags include (among others) missing, inaccurate, or incomplete contact information in the plan’s system, and the absence of procedures for handling uncashed checks.

The memo then describes the DOL’s vision of best practices in the form of the following four categories of action items, along with the DOL’s relatively extensive bullet point “recommendations” for satisfying a fiduciary’s duty under each category:

Maintaining accurate census information for the plan’s participant population.
Implementing effective communication strategies.
Conducting missing participant searches.
Documenting procedures and actions.

While many of the suggestions are seemingly prudent and sensible, others may not be feasible for some plans or may be cost prohibitive. Additionally, each plan’s circumstances may differ based on a number of factors such as plan size and type (e.g., defined benefit or defined contribution). Correctly, the DOL agrees with this sentiment, stating “[n]ot every practice …is necessarily appropriate for every plan.” We suggest, nonetheless, that all plan fiduciaries review their policies and procedures for locating missing participants, at least to be prepared for questions that may arise if their plan is examined by the DOL. This latest guidance can be found here: Missing Participants – Best Practices for Pension Plans (dol.gov)

DOL’s Goals and Process in Missing Participant Audits

The second part of the DOL’s January 12, 2021 guidance on missing participants, Compliance Assistance Release 2021-01 (Release), describes the DOL’s approach on auditing defined benefit plans under its Terminated Vested Participants Project (TVPP). The DOL’s purpose is to unite participants and beneficiaries with their benefits and help them avoid significant and unnecessary RMD-related excise taxes. The goals of the TVPP are to ensure plans:

maintain adequate records to identify their participants, the amount they are due under the plan, and when their benefits can start,
inform participants of their rights and responsibilities (e.g., steps required to avoid required minimum distribution excise taxes), and
implement appropriate search procedures where participant and beneficiary information is incorrect or incomplete.

To that end, the Release explains how the DOL identifies plans that have difficulty tracking terminated vested participants and timely distributing benefits, red flags that can suggest a problem, and its approach to closing out cases. In particular, the DOL identified (i) plans that report a large number of terminated vested participants entitled to future benefits, (ii) bankruptcy, and (iii) corporate merger and acquisition activities, as instances where plans could face problems with loss of participant data.

Investigation Process

The DOL generally sends two letters when opening an investigation: one opening the case and one requesting more targeted information and documentation. During the investigation, the DOL generally looks for evidence of:

systemic errors in plan recordkeeping and administration associated with failure of a participant or beneficiary to enter pay status before death or RMD beginning dates,
inadequate procedures for identifying and locating missing participants and beneficiaries,
inadequate communications (see Further on Communications, below) with terminated vested participants nearing normal retirement age (and beneficiaries of terminated vested participants) informing them of their right to commence benefits, and
inadequate procedures for addressing uncashed distribution checks.

Red flags suggesting possible problems include: census data with missing or incomplete participant data, more than a “small” number of terminated vested participants who are eligible to claim benefits but have not done so, continuing to mail to bad addresses without taking steps to find the correct address, failing to use resources like the USPS Address Correction Service and/or the National Change of Address database to find replacement addresses, and not taking advantage of recordkeeper services for finding missing participants. The DOL also said fiduciaries should monitor the performance of retained third party search firms and ensure they are complying with any contractual commitments regarding missing persons.

Further on Communications

The DOL commented on conditions that can reduce a notice’s effectiveness. For example, benefit notices that do not clearly explain the participant’s right to pension benefits, e.g., his/her vested status, right to benefits, and/or the consequence of excise taxes, can contribute to a terminated vested participant problem. Failure to write in “plain English” and sending to populations not fluent in English without providing language assistance, or communicating the availability of assistance, also can make communications less effective than intended. Participants may have benefits under prior plans or worked for a company under a different name due to mergers or acquisitions, and the DOL is concerned that participants might not recognize the connection to their benefits if a successor plan’s correspondence does not include the name of the prior employer or plan.

Working with the Fiduciary and Closing the Case

The DOL seemed to express a collaborative approach, reiterating its goal of helping the plan find missing participants. It noted it will give reasonable time to respond to information requests, engage in meaningful discussions with plan fiduciaries, and grant time extensions where appropriate. Further, the DOL indicated that if the plan provides appropriate remedies for affected individuals and corrects flaws in its recordkeeping, communication, search and other relevant policies, the DOL will generally list those corrective steps without citing the individual plan fiduciaries for specific violations of ERISA when closing out a case.

Temporary Enforcement Policy for Use of PBGC Missing Participant Program by Terminating Defined Contribution Plans

In conjunction with the above guidance, the DOL also issued Field Assistance Bulletin (FAB) 2021-01, which announces a temporary enforcement policy on terminating defined contribution plans’ use of the Pension Benefit Guaranty Corporation’s (PBGC) Missing Participants Program (Program). The policy applies to both plan fiduciaries of terminating defined contribution plans and qualified termination administrators (QTA) of abandoned individual account plans.

As background, the DOL currently provides a fiduciary safe harbor under DOL Reg. § 2550.404a-3 for use in making distributions from terminated defined contribution plans and abandoned plans to missing and nonresponsive participants and beneficiaries. The safe harbor generally requires that distributions be rolled over to an IRA, although in limited circumstances fiduciaries may make distributions to certain bank accounts or to a state unclaimed property fund. If the conditions of the safe harbor are met, the plan fiduciary or QTA will be deemed to have satisfied ERISA’s requirements with respect to the distribution of benefits.

In December 2017, the PBGC issued final regulations expanding the Program to defined contribution plans that are terminated on or after January 1, 2018. Under the expanded Program, terminating defined contribution plans may either (i) transfer missing or nonresponsive participant benefits to the PBGC, in which case the PBGC will make payments to missing participants once they are located; or (ii) submit missing or nonresponsive participant information to the PBGC (but not transfer the account), in which case the PBGC will communicate such information to the participants once they are located. The Program requires fiduciaries to conduct a diligent search to locate missing participants before reporting them as missing.

Under FAB 2021-01, the DOL announced that, pending further guidance, it will not pursue fiduciary breach claims against plan fiduciaries of terminating defined contribution plans or QTAs of abandoned plans in connection with the transfer of a missing or non-responsive participant’s or beneficiary’s account balance to the Program rather than using one of the available options under the DOL’s fiduciary safe harbor regulation described above (i.e., an IRA). To qualify for this relief, the plan fiduciary or QTA must comply with the guidance in FAB 2021-01 and have acted in accordance with a good faith, reasonable interpretation of ERISA. The DOL also indicated the fee charged by the PBGC for certain accounts transferred to the Program could be paid for from the transferred account, as long as the plan’s terms do not prohibit such payment.

The DOL noted, however, that the temporary enforcement policy does not preclude the DOL from pursuing ERISA violations for a failure to diligently search for participants and beneficiaries prior to transferring their accounts to the PBGC or for a failure to maintain plan and employer records. Additionally, the temporary enforcement policy does not legally protect plan fiduciaries or QTAs from civil claims made by plan participants or their beneficiaries. Nonetheless, the DOL’s announcement is welcome news for fiduciaries and QTAs who opt to take advantage of the Program. A copy of FAB 2021-01 is available here.

The recent DOL guidance provides a lot of information for plan sponsors and fiduciaries to consider. Please contact your Seyfarth Employee Benefits Attorney with any questions you may have about this guidance and its application to your plan.