DOL Updates Missing Participant Guidance

How can the fiduciaries of terminated DC plans fulfill their obligations under ERISA to locate missing participants and properly distribute the participants’ account balances?

It’s a question the Department of Labor answered in a Field Assistance Bulletin released Aug. 14, while replacing prior instructions (Field Assistance Bulletin 2004-02) on the issue. The newly issued Field Assistance Bulletin No. 2014-01 reflects changes resulting from the discontinuance of letter-forwarding services by both the IRS and the Social Security Administration, and from the expansion of Internet search capabilities. 

Additionally, not only has the DOL codified its enforcement safe harbor for distributing missing participant benefits to individual retirement plans, but the new FAB also reflects some suggestions from the 2013 ERISA Advisory Council, which made a broad set of recommendations for retirement plans and lost or missing participants and beneficiaries.

Required Search Steps

The FAB cites four “required search steps” (not in any particular order, although it says that all should be tried):
• Use certified mail
• Check related plan and employer records 
• Check with the designated plan beneficiary 
• Use free electronic search tools, including Internet search engines, public record databases (such as those for licenses, mortgages and real estate taxes), obituaries and social media. 

The FAB says that if the foregoing doesn’t bear fruit, the plan fiduciary “should consider the size of a participant’s account balance and the cost of further search efforts in deciding if any additional search steps are appropriate.” This, of course, means that the specific additional steps — steps that could include the use of Internet search tools, commercial locator services, credit reporting agencies, information brokers, and investigation databases that may involve charges — might vary depending on the circumstances.

Costs of the Search

It’s worth noting that the FAB, intended to serve as guidance for DOL field offices, says that a plan fiduciary may charge missing participants’ accounts reasonable expenses for efforts to find them, though the amount charged to a participant’s account must be reasonable and the method of allocating the expense consistent with the terms of the plan and the plan fiduciary’s duties under ERISA. It also cautions that plan fiduciaries must be able to demonstrate compliance with ERISA’s fiduciary standards for all decisions made to locate missing participants and distribute benefits on their behalf. 

In the FAB, the DOL notes that while it generally views the decision to terminate a plan as a “settlor,” rather than a fiduciary decision, the fiduciary responsibility provisions of ERISA govern the steps taken to implement this “settlor” decision, including steps to locate missing participants. The FAB also notes that the plan fiduciary’s choice of a distribution option for a missing participant’s account balance also is a fiduciary decision subject to the general fiduciary responsibility provisions of ERISA.

The FAB goes on to explain that, consistent with their obligations of prudence and loyalty, plan fiduciaries must make reasonable efforts to locate missing participants or beneficiaries, so that they can implement directions on plan distributions from the participants or beneficiaries. However, after a plan fiduciary reasonably determines, in accordance with this guidance, that a participant or beneficiary cannot be located, the fiduciary may distribute the missing participant’s or beneficiary’s benefits as described above. 

Once a plan fiduciary properly distributes the entire benefit to which a missing participant is entitled, the distribution ends the individual’s status as a participant covered under the plan and the distributed assets are no longer plan assets under ERISA. The FAB notes, however, that if the distributed benefit is reduced due to a fiduciary breach, the individual would still have standing to file suit against the breaching fiduciary under Section 502(a)(2) of ERISA.

What Not To Do

The FAB, which also covers how to deal with rollovers in determining a preferred distribution option and specifically notes that the approach of using 100% income tax withholding for missing participant benefits — which, in effect, transfers the benefits to the IRS — “is not in the best interest of participants and beneficiaries and would violate ERISA’s fiduciary requirements.”