The U.S. Department of Labor ("DOL") recently issued Field Assistance Bulletin 2014-01 (the "FAB"), which provides guidance about how fiduciaries of terminated defined contribution retirement plans can fulfill their ERISA obligations to locate missing participants and properly distribute their account balances. The FAB replaces Field Assistance Bulletin 2004-02. This alert summarizes the FAB.
Before making a distribution in connection with a terminating defined contribution plan, the DOL notes that the plan administrator must contact the plan's participants for directions on how to distribute their account balances. If a participant does not respond with the information necessary for a 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.
Required Search Steps
At a minimum, the DOL states that fiduciaries should take all of the following steps before abandoning efforts to find a missing participant and obtain distribution instructions:
- Use Certified Mail.
- Check Related Plan and Employer Records. Plan fiduciaries of the terminated plan must ask both the employer and administrator(s) of related plans to search their records for a more current address for the missing participant.
- Check With Designated Plan Beneficiary. Plan fiduciaries must try to identify and contact any individual that the missing participant has designated as a beneficiary to find updated contact information for the missing participant.
- Use Free Electronic Search Tools. Plan fiduciaries must make reasonable use of Internet search tools that do not charge a fee to search for missing participants. Such online services include Internet search engines, public record databases (such as those for licenses, mortgages and real estate taxes), obituaries and social media.
Additional Search Steps
If a plan administrator follows the required search steps, but does not find the missing participant or beneficiary, the DOL states that the fiduciary is required to consider if additional search steps are appropriate, such as the use of Internet search tools, commercial locator services, credit reporting agencies, information brokers, investigation databases, and analogous services that may involve charges. 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.
Where, despite their use of the search steps described above, the fiduciaries of terminated defined contribution plans are unable to locate missing participants or obtain distribution directions, the DOL notes that the fiduciaries will have no choice but to select an appropriate distribution option to complete the plan's termination.
Individual Retirement Plan Rollovers — Preferred Distribution Option
The DOL states that section 404(a) of ERISA requires plan fiduciaries to consider distributing missing participant benefits into individual retirement plans.
The DOL has published a safe harbor regulation for plan fiduciaries to satisfy their fiduciary responsibilities under section 404(a) of ERISA when making certain mandatory rollover distributions to individual retirement plans.
In addition, the DOL has published a similar safe harbor regulation covering distributions from a terminated defined contribution plan on behalf of a missing participant or beneficiary into an individual retirement plan or inherited individual retirement plan. When they comply with the conditions of the safe harbor, fiduciaries satisfy their ERISA section 404(a) duties in connection with the distribution of benefits, the selection of an individual retirement plan provider and the investment of the distributed funds.
In the DOL's view, the best approach in selecting among individual retirement plans in most cases will be to distribute the missing participant's account balance into an individual retirement plan in accordance with the DOL's regulatory safe harbor for terminated defined contribution plans.
Alternative Distribution Options
If a plan fiduciary cannot find an individual retirement plan provider to accept a direct rollover distribution for a missing participant or determines not to make a rollover distribution for some other compelling reason based on the particular facts and circumstances, the DOL states that the fiduciary may consider two other options: 1) opening an interest-bearing federally insured bank account in the name of the missing participant or beneficiary, or 2) transferring the account balance to a state unclaimed property fund.
Before making such a decision, however, the fiduciary must prudently conclude that such a distribution is appropriate despite the potential adverse tax consequences to the plan participant. The DOL warns that a prudent and loyal fiduciary would not voluntarily subject a missing participant's funds to such negative consequences in the absence of compelling offsetting considerations, and, in most cases, that a fiduciary would violate ERISA section 404(a)'s obligations of prudence and loyalty by causing such negative consequences rather than making an individual retirement plan rollover distribution.
100% Income Tax Withholding Is Not An Option. The DOL states that using 100% income tax withholding for missing participant benefits, which would in effect transfer the benefits to the IRS, would violate ERISA's fiduciary requirements.
Scope of FAB
The DOL notes that the FAB applies only in the context of terminated defined contribution plans. Thus, the FAB does not apply to ongoing defined contribution plans or to defined benefit plans. The Pension Benefit Guaranty Corporation ("PBGC") has a missing participants program for searching for and distributing benefits on behalf of missing participants in terminated defined benefit plans. The DOL states in the FAB that Congress has directed the PBGC to expand its defined benefit missing participants program to include distributions from terminated defined contribution plans, but that no PBGC regulations have been proposed. The DOL states that it intends to reevaluate the guidance in the FAB after the PBGC publishes such regulations in final form.