Locating lost participants for terminating defined contribution plans

Plan fiduciaries who are terminating profit sharing, money purchase, 401(k), and similar retirement plans must take specific and documented steps to contact participants and have them respond prior to concluding that the participants could not be located and are “missing.” Options to distribute plan benefits in order to complete the plan’s termination are only available to plan sponsors after taking these important steps.

The facts surrounding every plan sponsor’s plan termination and the associated search for missing participants are always unique; so, each circumstance and the appropriate level of fiduciary due diligence regarding locating lost participants should be analyzed based on each individual plan sponsor’s underlying facts and circumstances.

The Internal Revenue Service (IRS) requires all retirement plan assets be distributed as soon as feasible following a plan’s termination date. Plan sponsors are also required to receive affirmative direction from plan participants with respect to amounts to be distributed (e.g., cash, Individual Retirement Account, an eligible trust-to-trust transfer, etc.). In cases where participants are silent, unresponsive, or otherwise do not provide the plan sponsor with direction, the plan sponsor is allowed to direct the distribution amounts on behalf of the participants if certain conditions are met. This discretion poses a potential fiduciary issue from the perspective of the Employee Retirement Income Security Act (ERISA) as plan sponsors retain fiduciary responsibilities with respect to plan assets until the assets are ultimately distributed. 

Last year, the Department of Labor (DOL) issued Field Assistance Bulletin 2014-01 that updates and replaces prior guidance issued under Field Assistance Bulletin 2004-02.  The 2014 bulletin is a great resource for plan sponsors to ensure that they are performing the required participant search steps necessary to fulfill their fiduciary duties. 

When a plan sponsor terminates a defined contribution plan, one of the plan fiduciary’s most important responsibilities is to notify participants that the plan is being terminated and that benefits will be distributed. Most of the time, routine methods of delivering notice to participants, such as first class mail or electronic notification, will be adequate. But if the participant does not respond with the information necessary for the distribution, or the plan fiduciary reasonably believes that a participant has not informed the plan of a new address, the fiduciary needs to take steps to locate the participant or a beneficiary.

Some search steps involve so little cost and such high potential for success that a fiduciary should always take them before abandoning efforts to find a missing participant, regardless of the size of the participant’s account balance. The failure to take such steps would violate the fiduciary obligations of prudence and loyalty, as set forth in section 404(a) of ERISA. However, other more expensive approaches may be required when the account balance is large enough to justify an additional plan expense and other efforts have failed. 

In general, plan sponsors, as fiduciaries of terminating defined contribution plans, are required to go through the following steps before considering a participant missing:

• Send certified mail to the last known address.
• Check related plan and plan sponsor records for up-to-date information on participant's/beneficiaries' contact information.
• Contact designated beneficiary
• Use other options such as internet search engines, public record databases, obituaries, and social media, as well as professional locator services, credit reporting agencies, etc.

There may be other requirements for locating participants, which are typically not free.

Once a plan sponsor is satisfied that all the reasonable steps necessary to locate participants have been taken, then the missing participants’ accounts can be distributed. The distribution options outlined by the DOL include:

• Rollover to an Individual Retirement Account, which is the DOL’s preferred distribution option
• Distributing amounts to an interest bearing, federally insured bank account
• Escheat amounts to the state under the applicable state escheat laws

The 2014 bulletin clarifies that withholding 100 percent of the distribution as income tax would be an unacceptable distribution method.

The fiduciary responsibility provisions of ERISA govern actions taken by plan administrators to implement a plan sponsor’s decision to terminate a plan. These actions include the search for missing participants and, if search efforts fail, the selection of a distribution option for the benefits of missing participants. Field Assistance Bulletin 2014-01 is the best resource on the minimum fiduciary requirements for locating missing participants and the distribution options when a participant is unable to be located – the bulletin goes through the requirements in great detail. 

Please contact Plante Moran’s Employee Benefits Consultants with any questions.