New Guidance for 401(k) Plans on Missing Participants

On Tuesday, January 12, 2021, the U.S. Department of Labor (“DOL”) issued official guidance on locating missing participants in retirement plans, including 401(k) plans. The guidance appears in three separate documents: (i) “Best Practices for Pension Plans;” (ii) “Compliance Assistance Release 2021-01;” and (iii) “Field Assistance Bulletin 2021-01” . This latest guidance expands upon and updates previous DOL guidance, and is separate from guidance issued previously by the Internal Revenue Service (“IRS”) on the same topic.

Background. Participants in 401(k) and other retirement plans frequently terminate employment and become entitled to distributions, but sometimes they neglect to apprise the plan administrator of their new forwarding addresses. For example, they may simply forget, or they may believe they have received everything to which they are due under the plan, whereas there may in fact be a small remaining balance after final account adjustments have been made.

ERISA and the Internal Revenue Code require that participants receive the monies to which they are entitled under retirement plans, which are generally not permitted to be forfeited or used for any other purpose. There is no “de minimus” exception to this general rule – which, absent special rules, could result in plan administrators having to maintain numerous small account balances in the names of participants or beneficiaries they cannot easily locate.

Under longstanding DOL and IRS guidance that has evolved over the years, it has become generally permissible for plan administrators to forfeit a missing participant’s or beneficiary’s vested accrued benefit, due to an inability to find the participant or beneficiary — provided that the plan provides for reinstatement of the benefit if a proper claim is later made for the forfeited benefit. Both the DOL and the IRS have periodically updated their guidance in this regard, including suggesting acceptable methods for attempts to locate missing payees.

For example: the IRS opened up its letter forwarding program to retirement plan administrators seeking to locate missing participants in 2012 (see [Microsoft Word – rp-2012-35.doc (irs.gov)]), and released minor updates to its missing participants guidance late last year [Rev. Proc. 2020-46 (irs.gov)], [Rev. Rul. 2020-24 (irs.gov)]. Prior to January 2021, the DOL had last released a significant Field Assistance Bulletin [Field Assistance Bulletin No. 2014-01 | U.S. Department of Labor (dol.gov)] addressing locating missing participants in 2014.

IMPORTANT NOTE: This article is intended to highlight the major points covered in the most recent DOL guidance issued on January 12, 2021. This article is not intended as an exhaustive overview of the subject of locating missing retirement plan participants generally, or to summarize the history of prior DOL and IRS guidance on the subject. Plan administrators are urged to consult with their own legal counsel or ERISA advisors with any specific questions or situations.

I. Best Practices for Pension Plans. The first piece of guidance takes the form of a summary list of examples of steps that fiduciaries should consider taking to help reduce missing participant issues and to ensure that plan participants receive the retirement benefits they are promised under the plan. The examples are broken down into four categories, reproduced below, along with a few representative samples of the numerous methods included in the guidance:

Maintaining accurate census information for the plan’s participant population:

• Contacting participants and beneficiaries periodically to confirm, or request updates to, their address information;
• Including contact information change requests in all routine plan communications;
• Maintaining an online platform that participants can use to update contact information ;for themselves and their beneficiaries; and
• Regularly auditing census information and correcting any known data errors.

Implementing effective communication strategies:

• Use of plain, easy-to-understand language and offering non-English assistance;
• Encouraging participant contact through plan websites and/or toll-free numbers;
• Building steps into the plan enrollment process for new employees, and the exit process for separating or retiring employees, to confirm or update contact information; and
• Clearly marking envelopes and correspondence with the original plan or plan sponsor name for the benefit of participants who may have separated before the plan or plan sponsor name was changed.

Missing participant searches:

• Checking plan and employer records for participant, beneficiary, and next-of-kin contact information;
• Using free online search engines, public record databases, and/or social media;
• Using commercial locator services, credit reporting agencies, and/or proprietary internet search tools; and
• Reaching out to the colleagues of missing participants by, for example, contacting employees who worked in the same office, or by posting a list of missing participants on the company’s intranet.

Documenting procedures and actions

• Reducing all plan policies and procedures to writing;
• Documenting all key decisions, and the steps taken to implement those decisions; and
• Working with the plan’s recordkeeper or third-party administrator to identify and correct shortcomings in the plan’s recordkeeping and communication practices, including establishing procedures for obtaining participant contact information that is held by the employer.

The guidance notes that not every example is necessarily appropriate for every plan, and that the examples are not listed by priority or in any other particular order. Conscientious plan fiduciaries should always consider which practices might yield the best results for their plan’s particular participant population in a cost-effective manner.

II. Compliance Assistance Release 2021-01. The second document functions as a guide for the DOL’s Employee Benefits Security Administration (“EBSA”)’s auditors when conducting investigations under the agency’s Terminated Vested Participant Project (“TVPP”), which generally seeks to identify missing participants in pension plans. Accordingly, the information is a useful tool for 401(k) plan fiduciaries in identifying “red flags,” and/or providing insights as to ways which might help avoid potential problems. The guidance addresses the following areas:

Circumstances That Might Trigger an Investigation. When reviewing plans for potential audit TVPP activity, EBSA investigators are instructed to look for signs of the following:

• Reports on the plan’s latest Form 5500 filing of a large number of terminated vested participants who are entitled to benefits;
• Evidence that the plan sponsor is facing bankruptcy, or that the plan is terminating; and
• Evidence that plan participants have contacted EBSA on their own initiative regarding benefits to which they believe they may be entitled, but have not been given the opportunity to claim.

Information Likely to Be Requested. If a plan is selected for a TVPP audit, the EBSA investigators are likely to request the following information:

• The plan document (including any recent amendments) and summary plan description (“SPD”);
• Participant census records, including current employment status and contact information;
• Actuarial or similar reports that may shed light on the plan’s demographics;
• The plan’s procedures for communicating with its active and terminated vested participants and beneficiaries who may be entitled to benefits;
• Information to determine whether the plan takes sufficient steps to address missing participant situations when they occur; and
• Other types of documents or information, depending on the facts and circumstances in individual cases.

EBSA will generally ask plans, plan fiduciaries, and plan sponsors to voluntarily produce requested documents by no later than a specified response date. However, if such efforts are not successful or could result in undue delay, EBSA has the power to issue subpoenas to compel production of requested documents.

Errors EBSA Typically Looks For. While investigations are case-specific, generally, EBSA will be on the alert for the following:

• Systemic errors in plan recordkeeping and/or administration that may create a risk of loss associated with the failure of a terminated vested participant;
• Inadequate procedures for identifying and locating missing participants and beneficiaries;
• Inadequate procedures for contacting terminated vested participants nearing normal retirement age, to inform them of their right to commence payment of their benefits;
• Inadequate procedures for contacting terminated vested participants and their beneficiaries who are not in pay status regarding required taking of minimum distributions; and
• Inadequate procedures for addressing any uncashed distribution checks.

The guidance also identifies “red flags” such as missing dates of birth and social security numbers, placeholder “John Doe” names, evidence of repeated attempts to deliver to “bad” addresses, letters to terminated vested participants not written in “plain English,” and recent company name changes that might lead to participants to believe that mail was misdirected.

How Cases Are Closed. Following receipt of all requested information, auditors typically inform the plan fiduciaries of the agency’s findings, and invite them to discuss how best to remedy any identified problems. The goal is to help the plan find as many adversely affected participants and beneficiaries as possible, and to help the plan form an appropriate remedy for each affected individual.

Once all issues are successfully resolved, EBSA will issue a voluntary compliance (“VC”) letter to the plan. The EBSA VC letter will address any potential ERISA violations — but, absent especially substantial errors or widespread fiduciary breaches, will not cite individual plan fiduciaries with specific ERISA violations.

EBSA will give plan fiduciaries a reasonable amount of time to respond to a VC letter. Upon receipt of a timely response, EBSA will negotiate with plan fiduciaries on legal and factual issues related to the existence of a violation, and the appropriate means of correcting any problems addressed in the VC letter.

III. Field Assistance Bulletin 2021-01. The third piece of guidance takes the form of a bulletin which outlines the DOL’s temporary enforcement policy concerning terminating 401(k) plans’ use of the federal Pension Benefit Guaranty Corporation’s (“PBGC”) Defined Contribution Missing Participants Program. Established in 2017, the program generally holds assets belonging to missing participants and beneficiaries in terminating 401(k) plans until such time as such individuals can be located. The program’s many benefits include:

• Account balances of any size can be transferred to the PBGC;
• Periodic active searches by the PBGC increase the likelihood of locating missing participants;
• Benefits are not diminished by ongoing maintenance fees or distribution charges;
• Transferred amounts are credited with earnings at the applicable federal rate; and
• Lifetime income options are available for balance transfers over $5,000.

According to the January 2021 Field Assistance Bulletin, the DOL acknowledges that the global COVID-19 pandemic could likely result in some disruption of a plan’s recordkeeping and search activities, resulting in the inability to transfer missing participants’ account balances to the PBGC upon plan termination. This in turn could decrease the likelihood that missing participants can be united with their benefits.

Accordingly, pending further guidance, the DOL will not pursue violations under ERISA against responsible plan fiduciaries who, acting in good faith, transfer missing participants’ or beneficiaries’ account balances to the PBGC program. Such transfer will be treated in the same manner as a safe-harbor transfer under applicable DOL regulations that permit similar transfers to certain IRAs, bank accounts, or to a state unclaimed property fund.

NOTE: This temporary enforcement policy does not preclude the DOLf rom pursuing violations for failures to diligently search for participants and beneficiaries prior to the transfer of their account balances to the PBGC, or from pursuing violations for general failures to maintain plan and employer records.

Furthermore, all other applicable DOL and PBGC requirements (including payment of all relevant PBGC fees) must be met.

The information and content contained in this blog post are for general informational purposes only, and does not, and is not intended to, constitute legal advice. As always, for specific questions concerning your 401(k) retirement plan, or for help in operating your plan during the current COVID-19 crisis, please consult your own ERISA attorney or professional advisor.