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Missing participants in a retirement plan


Authored by RSM US LLP

A retirement plan is required to maintain contact information for participants and beneficiaries who are owed a benefit under the plan.

Often, former employees, terminated vested participants, or beneficiaries cannot be located by the plan sponsor after numerous attempts because the plan does not have accurate contact information on file. This may occur when participants move from the last known address or change their name, or if plan records are lost or fail to be transferred in a merger and acquisition (M&A).

Missing participants pose certain risks to the plan’s qualified status—for example, the plan may be unable to make required minimum distributions1, allow withdrawal of small amounts in accordance with plan terms or provide for eligible rollover distributions. Not only can a missing-participant problem be an administrative nightmare for the plan sponsor, it may also be costly, since many record-keepers base their fees on the number of plan participants with account balances.

The U.S. Department of Labor (DOL), Internal Revenue Service (IRS) and Pension Benefit Guaranty Corporation (PBGC) all issue policy on missing participants, but until recently have provided little guidance on a plan’s duty to locate them. Now, all three entities are more closely scrutinizing plans’ location efforts.

What is considered adequate effort?

In January 2021, the DOL issued the following guidance relating to a plan’s efforts to locate missing participants2:

  • Compliance Assistance Release 2021-01 details the DOL’s Terminated Vested Participants Project (TVPP). In a TVPP investigation, the DOL looks for red flags, including:
    • Systemic errors in plan record-keeping and administration, primarily showing a high proportion of terminated vested participants over the age of 65, or over the required minimum distribution age, who have not yet commenced a benefit
    • Inadequate policies and procedures for identifying, locating and attempting to contact missing participants, or for handling uncashed distribution checks
    The DOL may request certain documents, including the plan’s missing-participant policies and procedures and plan census data. It may identify issues and errors and then give the plan sponsor a chance to respond and correct the issues. If the sponsor and the DOL agree on a correction plan, the DOL generally issues a closing letter.
  • Field Assistance Bulletin 2021-01 provides temporary enforcement relief for plan fiduciaries of terminating defined contribution plans in transferring a missing participant’s account balance to the PBGC Missing Participant Program, rather than to an IRA, state unclaimed property fund, or certain other vehicles, provided certain requirements are met.3
  • Best Practices for Pension Plans outlines steps a plan should take in trying to locate missing participants, including:
    • Contacting current and retired employees as well as beneficiaries periodically to confirm or update contact information, including home and business addresses, telephone numbers, social media information and next-of-kin/emergency contacts
    • Flagging undeliverable mail and email and uncashed checks for follow-up4
    • Maintaining an online platform for participants to update contact information for themselves, spouses and beneficiaries; prompting participants and beneficiaries to confirm contact information when logging in; and regularly requesting updates to beneficiary contact information
    • Checking related plan and employer records, such as payroll documents and other employee benefit plans, that may have more up-to-date information, while preserving privacy protections
    • Registering missing participants on public and private pension registries with privacy and cybersecurity protections—such as the National Registry of Unclaimed Retirement Benefits—and publicizing the registries through email, newsletters and other communications to employees, union members and retirees
    • Providing a list of missing participants on the employer’s intranet, and in notices to current employees, retirees already receiving benefits, union members and former coworkers of those missing
    • Establishing clear, consistent policies and procedures for locating missing participants; documenting implementation; and maintaining logs of location attempts
    • Documenting third-party administrator (TPA) and record-keeper service agreements; working with record-keepers to identify and correct missing or inaccurate contact information; and establishing procedures for TPAs to obtain accurate information from employers
    • Arranging the transfer of appropriate plan and participant contact information in the event of a record-keeper change or an M&A by the plan sponsor
    • Using onboarding and enrollment processes to collect contact information from new employees, and exit processes to obtain updates from separating or retiring employees
    • Providing information on account consolidation with prior employer plans or rollover individual retirement accounts (IRAs)
    • Prominently labeling the purpose of a communication—e.g., payment eligibility or a request for updated contact information—on the mailing envelope; and after a sponsor name change, including the original plan or sponsor name on envelopes and communications
    • Conducting missing-participant searches using free online search engines; public record databases that compile licenses, mortgages, real estate tax information and obituaries; the Social Security Death Index; social media; credit-reporting agencies; commercial locator services; and proprietary internet search tools
    • Sending communications to the last known mailing address, using certified mail or a private delivery service with a tracking feature5
    • Using personal email addresses and telephone numbers6

What should a plan sponsor do now?

Plan sponsors should take proactive steps to:

  1. Assess the extent of the plan’s missing-participant problem before the DOL comes knocking. Plan sponsors, with their record-keepers, should compile comprehensive census data to determine the number of terminated vested participants and beneficiaries who are older than the normal retirement and required minimum distribution ages and have not yet commenced a benefit.
  2. Determine whether the plan and/or the TPA has accurate contact information for participants and beneficiaries by looking for returned mail, uncashed distribution checks and other evidence that plan communications are not being delivered, and by examining the TPA’s record-keeping system.
  3. Establish policies and procedures for locating missing participants, possibly incorporating the DOL’s “Best Practices for Pension Plans” as well as cost considerations (e.g., weighing the size of the participant’s balance against the cost of additional research).
  4. Implement steps to locate missing participants, and use the IRS Employee Plans Compliance Resolution System to promptly correct any distribution failures as they are discovered.
  5. Review the plan provisions, and establish appropriate procedures, for automatically rolling over small account balances to an IRA7 and for handling the escheat of missing-participant account balances to a state unclaimed property fund.8
  6. Establish procedures with record-keepers and TPAs to ensure they are updating and properly maintaining participant data, informing the plan sponsor of returned mail and uncashed checks, and ensuring the smooth transfer of updated census information from the plan sponsor. Examine TPA agreements for missing-participant locator and data maintenance provisions.
  7. Detail the circumstances, if any, in which the plan sponsor may provide employment, payroll and other benefit data to the plan, and detail appropriate privacy protections.
  8. Review M&A transaction documents to ensure that they provide covenants for the appropriate transfer of participant census data, as well as representations and warranties that the plan data includes accurate and complete contact information.
  9. Train human resources and other staff on missing-participant procedures and establish a system for monitoring whether the procedures are being followed.

In closing

The DOL, IRS and PBGC are focusing on missing-participant issues, and the DOL has instituted a program for actively investigating plans with missing-participant red flags. Employers should take a more proactive approach to locating missing participants—a problem that will likely continue as the workforce becomes more mobile, employers adopt the use of plan auto-enrollment features, M&A activity transfers retirement plans from one business to another, or plans are terminated in economic hard times. These factors make it increasingly likely that account balances may be forgotten and former employees may go missing. At the same time, the DOL has a higher expectation that plans will locate missing participants by making use of information technology.

Strong policies and procedures are vital for locating missing retirement plan participants, paying out their benefits on a timely basis, correcting errors and protecting plan sponsors from potential fiduciary breach claims. In addition, effective policies and procedures help to avoid unnecessary costs and administrative work related to the difficult task of locating missing participants.

1 See IRS Memorandum of Oct. 19, 2017 (later incorporated into IRM (12-17-2018)), instructing IRS auditors not to challenge a qualified plan for its failure to make a required minimum distribution if it has made sufficient attempts to locate the missing participant or beneficiary as specified in the memorandum.

2 See also DOL Field Assistance Bulletin 2014-01, revising DOL FAB 2004-02 and providing additional steps for a plan sponsor to follow in searching for missing participants.

3 See the PBGC’s Missing Participants Program for defined contribution plans, providing for the PBGC to hold retirement benefits for missing participants and maintain a searchable database of unclaimed benefits under Code of Federal Regulations (CFR) title 29, sections 4050.201-207.

4 See IRS Revenue Ruling 2019-19, requiring the taxation of plan distributions in year made, even if the distribution check remains uncashed.

5 See IRS Revenue Procedure 2012-35 (Aug. 31, 2012), canceling use of the IRS letter-forwarding program to locate missing participants.

6 See Default Electronic Disclosure by Employee Pension Benefit Plans under ERISA, 29 CFR 2520.104b-31(f)(4), providing for the electronic delivery of communications to terminated vested participants and beneficiaries, including the use of personal email addresses and text messaging.

7 See 29 CFR section 2550.404a-2, providing a safe harbor for rolling over mandatory small cash-out amounts to an IRA.

8 See IRS Revenue Ruling 2020-24 and IRS Revenue Procedure 2020-46, setting forth tax reporting and withholding treatment of distributions paid to a state unclaimed property fund and the rollover rules for a participant later claiming the amount.

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This article was written by Joni Andrioff and originally appeared on 2021-07-13.
2021 RSM US LLP. All rights reserved.

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