It’s a common problem every year. Employers discover that, when their 401(k) plans must make required minimum distributions, the addresses on file for some distributees have become invalid.
The U.S. Department of Labor (DOL) and the IRS have both offered guidance about dealing with participants and beneficiaries who are unresponsive or cannot be located — commonly referred to as “missing participants.” However, the guidance isn’t completely on point or highly detailed. The DOL’s most detailed guidance relates to terminating plans, and the IRS’s guidance relates to audits and the correction of distribution errors.
The DOL has also provided a list of best practices that sponsors of ongoing plans can employ to minimize and mitigate the problem of missing participants, but the practices are only examples of steps that plan fiduciaries should consider in light of a plan’s participant population, the size of a participant’s benefit and the cost.
Although all the guidance mentioned doesn’t offer a complete compliance roadmap, it collectively suggests the following approach to looking for missing participants of a 401(k) plan.
Initial search steps
When a participant is unresponsive or you reasonably believe your contact information is inaccurate, consider taking four steps:
- Use certified mail or, if more cost-effective, a private delivery service with similar tracking features,
- Review your employment records and all your benefits plans for up-to-date information,
- Attempt to identify and contact the individual’s designated beneficiaries under those plans for information, and
- Use free electronic tools such as internet search engines, public record databases and social media accounts.
The DOL’s best practices guidance includes other suggestions, such as reaching out to a participant’s colleagues or union, and registering the person’s name on public or private pension registries. The agency suggests that privacy concerns can be alleviated if the retirement plan fiduciary asks the employer, other plan fiduciary or beneficiary to have the missing participant contact the retirement plan administrator. Nevertheless, employer-sponsored group health plans shouldn’t use or disclose individually identifiable information unless the use or disclosure complies with HIPAA’s privacy rules.
Additional steps for larger balances
If initial search steps are unsuccessful, paying for a search may be appropriate if the account balance is large enough to justify the expense. This could mean using fee-based internet search engines, commercial locator services, credit-reporting agencies, information brokers, investigation databases and other similar premium services.
You might be able to charge the fee against the account if it’s reasonable and the allocation method is consistent with the plan’s terms and ERISA.
When search efforts fail
Some plan documents describe how to handle account balances when search efforts fail; others may authorize administrative committees to adopt policies for this situation. Following written policies and procedures for handling missing participants — and documenting actions taken — should help ensure consistency.
Some plan provisions or policies direct fiduciaries to allocate the funds in the account among the accounts of the remaining participants, subject to restoration if the individual should reappear. Under IRS regulations, such an allocation may be a permissible forfeiture so long as the plan is obligated to restore the missing individual’s account balance in the event the person is eventually found.
Ongoing practices
The DOL’s best practice guidance encourages plan sponsors to minimize future problems with missing participants by proactively maintaining an accurate census. Periodically prompt participants and beneficiaries to reconfirm their contact info. Regularly audit census data, paying special attention to contact info in business transactions or when recordkeepers change.
Even changing the way plan communications are written and designed can increase the likelihood that participants will recognize and engage with them.
Financial impact
A 401(k) is usually among the most valued benefits that employers can offer, but you’ve got to keep a close and constant eye on the details — including missing participants. We’d be happy to help you assess the financial impact of your plan.
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We highly recommend you confer with your Miller Kaplan advisor to understand your specific situation and how this may impact you.
