Last week, the DOL released Field Assistance Bulletin 2014-01 which updated its 10-year-old guidance on how to deal with the accounts of missing or unresponsive participants and beneficiaries in a terminating defined contribution plan that does not have annuity options. The 10-year-old guidance was largely rendered moot because of the discontinuance of the Social Security Administration and IRS letter forwarding programs, which were prominent features of that guidance.
The DOL takes this seriously. As the FAB notes:
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. (emphasis and hyperlink supplied)
Search Free or Cheap. The required search steps in all cases (as described more fully in the FAB) are:
- Use certified mail (the DOL has a model notice available for this).
- Check related plan and employer records (such as the group health plan records – although query whether this works under HIPAA). The DOL does note that if there are “privacy concerns” (like the small matter of other federal laws) the fiduciary of the terminating plan can ask the other plan or the employer to forward a letter on the fiduciary’s behalf.
- Check with the designated beneficiary. This includes beneficiary designations in the employer’s other plans, such as life insurance plans. Again, letter forwarding is allowed. (The DOL does not note this, but the beneficiary could always claim the participant is dead and to send the money to them. Obtaining proof of death would be prudent in that circumstance.)
- Google the participant! The DOL says the fiduciary should use free Internet search tools, which may include search engines, public records, obituaries, and social media. So if you have an unresponsive participant, you can also tweet them or send a Facebook friend request to try and get their most current information. The DOL did not suggest a dedicated hashtag, but we recommend something like: #IHaveMoneyForYou
Going More Upscale. If the free or cheap options don’t work, fiduciaries can’t stop there. They need to consider how prudent it would be to utilize other tools, such as commercial locator services, credit reporting agencies, information brokers, investigation databases, and analogous services that charge. The fiduciary’s analysis should take into account the size of the participant’s account and the cost of those steps. Many of those services can be quite cost effective, so it’s important to research them thoroughly before dismissing them out of hand. The DOL notes that the exact steps will depend on the facts and circumstances.
What to Do for Those “Off the Grid.” Of course, there are those rare people who are still unable to be located (perhaps because they work for the CIA). In that case, the DOL notes that the fiduciaries “have no choice” but to distribute the money. In that case, they can:
- Roll the money over to an IRA directly. In doing so, fiduciaries should comply with the guidance on selecting IRAs for automatic rollovers to satisfy their ERISA fiduciary duties.
- If no IRA provider will take the money, or the fiduciary has “other compelling” reasons for not rolling the money over, the fiduciary can open an interest-bearing federally insured bank account in the name of the missing participant or beneficiary or transfer it to a state unclaimed property fund. Either such distribution is taxable to the recipient, unlike the rollover, as is any future interest earned. The fiduciary needs to take this and other factors the DOL mentions in the FAB into account.
The DOL views this as the option of last resort as it notes:
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. In fact, in most cases, 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.
Translation: expect to get fined or sued if you do this without proper justification. Of course, there are other reasons to avoid state unclaimed property funds, as we have noted previously.
The DOL also notes that “know your customer” laws that apply to banks have been interpreted by other agencies to allow IRAs or federally-insured bank accounts to be set up by plans.
What You Must Never, Ever Do. Doing a distribution where there is 100% income tax withholding “Is Not An Option.”
Other Considerations. The DOL notes the plan administrator can charge missing participants’ accounts for the reasonable expenses associated with finding them. The method for allocating those expenses has to be consistent with the terms of the plan and the administrator’s ERISA duties (as detailed in other DOL guidance). Plan fiduciaries also need to be able to show how they complied with ERISA’s fiduciary obligations for decisions made to locate missing participants.
The DOL notes that these rules do not apply to defined contribution plans that have annuity options. Additionally, if the employer has another defined contribution plan that will take a transfer of the benefit, the DOL assumes it will be transferred to that plan
Finally, the DOL also mentions that the PBGC is supposed to be setting up rules for it to take on the accounts of missing participants in terminated defined contribution plans. Expect further guidance once that program is implemented.