Your Fiduciary Duty: Find Missing Retirement Plan Participants

Fiduciary Duty February 5, 2018 By: Mary Claire Chesshire

Does your association have more retirement plan participants than it does full-time staff? If so, you have a fiduciary duty to find former employees who are owed benefits—and the Department of Labor is paying increased attention to who is meeting it.

Each year, associations report information about their retirement plans to the federal government. That reporting includes information about plan assets, income, expenses, and the number of participants.  Many association leaders may be surprised by the total participant count—and have a lot of questions.

How is it that an association that employs no more than 20 people at any given time has more than 80 participants in its retirement plan? Who and, more important, where are these people?

In this age of job mobility, employers are more frequently left with departing employees’ account balances in their retirement plan. The plan’s fiduciaries should care about this for a variety of reasons—and the U.S. Department of Labor added a new one last fall.

In October 2017, DOL announced that it was expanding “missing participant” audits from a pilot program in a regional office to a nationwide effort. While the program appears to focus on defined-benefit plans, it could easily be applied to defined-contribution plans such as 403(b) and 401(k) plans. The audits look at the plan sponsor’s procedures for tracking down participants who are due benefit payments. Failure by plan sponsors and fiduciaries to actively look for plan participants could be construed as a breach of fiduciary duty to those individuals.

Even before DOL announced it would ramp up enforcement in this area, there were plenty of reasons why retirement plan fiduciaries should care about keeping track of plan participants. For example: 

Increased administrative fees. Administrative fees charged by retirement plan recordkeepers are frequently structured to include a “per participant” charge. The total administrative costs for operating the retirement plan correspondingly increase with the number of accounts in the plan. Furthermore, plans with 100 or more participants are required to engage an independent accountant to examine and render an opinion on the plan’s financial statements. The “100 or more participants” rule is based on the total number of participants, including former employees. Accordingly, an upward creep of the participant count adds to the costs of running a retirement plan.

Minimum distribution requirements. Administrators of retirement plans are required to begin payment to former employees who reach age 70½. Failure to pay the minimum distributions subjects the participant to a 50 percent excise tax and subjects the plan sponsor to plan qualification issues. In other words: “I couldn’t find the participant to make the payment” is not an acceptable reason for missing minimum distribution payments.

Plan termination distribution deadline. If the plan sponsor decides to terminate the retirement plan, then it must also distribute all of the plan’s assets as soon as administratively possible after the termination. This is, of course, impossible if plan participants are not located.  

Plan Audits

As DOL auditing increases, the agency is emphasizing that plan sponsors cannot simply wait for participants to come forward to claim their benefits. DOL has identified several best practices for finding missing participants:

  • Send a missing participant a certified letter advising of the availability of a benefit using the participant’s last known address in the plan sponsor’s records. Using certified mail with a return receipt provides confirmation of receipt by the participant and the accuracy of the address.
  • Ask current employees if they’re still in touch with the former coworker and whether they have up-to-date contact information. A notice stating that “we’re looking for [these missing former employees]” in an employee newsletter may yield results. 
  • Contact the participant’s designated beneficiary for updated information about the participant.
  • Call the participant, particularly if the records include a mobile phone number that they may keep longer than a landline.
  • Use a commercial locator service.  If you can provide a former employee’s date of birth, Social Security number, and last known address, the service usually can obtain remarkably reliable and current information. 

Keep records of your efforts to locate missing plan participants to defend against possible DOL claims that you did not actively search for them.

Pay Out Small Balances

Finally, keep in mind that the participant count may also be controlled by distributing small account balances without affirmative participant consent and direction. Balances of $1,000 and less may be distributed in cash, with required tax withholding, if the participant fails to provide direction to the plan sponsor as to whether he or she wants the distribution paid in a cash distribution or direct rollover.

If the account balance is between $1,000 and $5,000, the employer may establish an individual retirement account for the benefit of the participant and direct that the account balance be rolled over.  Most institutional retirement plan custodians provide the direct IRA rollover service for their clients.  

Mary Claire Chesshire

Mary Claire Chesshire is a partner at Whiteford, Taylor & Preston, LLP, in Baltimore.