Guidance on missing plan participants: What you need to know

It has long been a challenge for employers to keep track of employees once they are no longer on the payroll. People relocate, marry, divorce, change their names and ultimately pass on. Couple that with the mobility of the 21st Century workforce and the increased use of auto-enrollment programs, and employers find themselves with an ever-increasing population of missing or unresponsive former employees; many of whom are not even aware that they have a balance in their former employer's retirement plan. These missing former employees are considered plan participants under the law, posing a serious challenge for employers.

The DOL and missing participants

The Department of Labor estimates that tens of thousands of participants lose track of an estimated $850 million in 401(k), 403(b), 457 and other defined contribution assets each year. These missing former employees are still considered plan participants under the law. The Internal Revenue Service (IRS), DOL, and the Pension Benefit Guaranty Corporation (PBGC) have made it clear that it is the employer's responsibility to find these former employees. These agencies have emphasized the importance of employers maintaining and documenting a prudent process to verify the efforts made to find missing or unresponsive former employees with an account balance in the plan.

Further, the DOL has stated that by not maintaining and documenting their process, a plan sponsor could be deemed to have breached their fiduciary duty under the plan.

The problem is there is not any clear regulatory guidance on what constitutes a prudent process. What's a plan sponsor to do?

Industry advocacy groups suggest applying regulatory guidance written for similar issues to missing participants. Below, we'll outline comparable direction from the IRS, DOL and PBGC.

IRS guidance

On October 19, 2017, the IRS issued guidance regarding the appropriate steps to locate missing participants for purposes of required minimum distributions. The memorandum states that if an employer follows the three steps outlined below, the IRS examiner will not challenge a plan for failure to make a required minimum distribution to a missing participant or beneficiary to whom the payment is due. The section below is taken from the IRS Guidance Memorandum.

1. Search the plan and related plan, sponsor, and publicly available records or directories for alternative contact information;

2. Use any of the following methods:

A commercial locator service;
A credit reporting agency; or
A proprietary internet search tool for locating individuals; and

3. Attempt to contact via United States Postal Service (USPS) certified mail to the last known mailing address and through appropriate means for any address or contact information (including email addresses and telephone numbers).

EBSA guidance

As a result of the DOL's findings, the Employee Benefits Security Administration recommends following four steps in locating missing participants with a vested account balance until further guidance is issued by the DOL:

1. Send missing participants a certified letter using their last known address

2. Keep documentation of the efforts used to reach missing participants

3. Contact co-workers of missing participants to see if they know how to contact the individual

4. Try contacting the missing participant using their cell phone number or personal email addresses, as most individuals keep their cell phone numbers and personal email address when they relocate

In addition, employers should check other benefit plans and try to contact the participant's beneficiary. Employers can also try using a commercial locator service, a credit reporting agency or other internet search options.

During its pilot program, the DOL demonstrated that sometimes a simple Google search will find the employee in a matter of minutes, thereby negating an employers' excuse for not locating lost employees.

PBGC guidance

The PBGC has expanded its missing participant program for defined benefit plans to include terminating defined contribution plans. DC plans that are terminating and have lost participants with account balances may now transfer those benefits to the PBGC instead of opening an IRA account at a financial institution. This option only applies to terminating plans.

Other guidance

Because uncashed DC or DB plan benefit checks may be considered plan assets, employers need to have procedures in place for handling uncashed checks as part of their search for missing participants. These uncashed funds may continue earning income for the plan's service provider, which may add to the plan sponsor's fiduciary concerns.

Consider anchoring the process to an event such as the annual force-out program (where participants with balances between $1,000 and $5,000 may be rolled over to an IRA), or to the annual solicitation of required minimum distributions. Tying the process to an event will help make sure the process is followed every year.

Due to the increased scrutiny by the IRS and DOL to find missing participants, plan administrators and plan sponsors need to be sure they have ongoing processes and procedures in place for locating missing participants with account balances. As always, be sure to document, document, document.

Marianne Marvez is a Vice President and Director at Innovest. She has more than 30 years of experience in the retirement plan sector. She is a member of Innovest's Retirement Plan Practice Group, a specialized team that identifies best practices and implements process improvements to maximize efficiencies for our retirement plan clients. Marianne holds the Certified Employee Benefits Specialist (CEBS) and the Retirement Plan Associate (RPA) designations from the International Foundation of Employee Benefit Plans and the Wharton School of the University of Pennsylvania. She also holds the Series 65 License (Registered Investment Adviser Representative) though FINRA. Prior to joining Innovest, Marianne was a director with Empower Retirement, a senior consultant at Strategies, LLC, a vice president and senior relationship manager at Bank of America Merrill Lynch and spent 15 years with Invesco Retirement Plan Services as an associate partner and senior client relationship manager.

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