When the decision is made to terminate a defined contribution plan subject to ERISA, an important consideration for the plan sponsor is how to locate missing participants in order to distribute their vested benefit under the plan.
Most participants will be readily locatable using personnel records currently on file. However, in the event of unresponsive or missing participants, the fiduciary provisions of ERISA require the plan sponsor to locate these participants and ensure that their account balances are distributed. The Department of Labor issued Field Assistance Bulletin 2014-01, which provides assistance to fiduciaries to properly discharge their obligations to these participants. Meaden & Moore’s employee benefits consulting helps remove the worry and fiduciary risk from managing your employee benefit plan.
How to Locate 401k Missing Participants
Below are some suggested steps for locating missing and lost participants. The failure to take such steps would violate ERISA’s rules of prudence and loyalty.
- Certified Mail
- With minimal cost and ready availability, using certified mail for locating missing participants is usually a good first option.
- Records of Related Plans and Employers
- Documentation for other employer-sponsored plans such as group health plans can be a good source of more up-to-date information since these benefits might have been more recently accessed. Inquiring of these plan administrators can sometimes lead to a more recent address.
- Designated Beneficiaries
- Fiduciaries must try to identify and make contact with any person that the missing participant has designated as a beneficiary. These individuals may be more readily available and can be a good source of contact information.
- Electronic Search Tools
- There are a variety of online tools at a plan sponsor’s disposal that are free of charge than can be helpful. These include traditional internet search engines, public record databases, and social media resources.
- Further Options
- In the event that none of the above prove successful, the plan sponsor should consider the size of the account balance and the relationship of this to the cost of further search efforts. There are investigation databases, commercial locator services, credit reporting agencies, and other tools that are available but may involve a charge for the service. However, a plan fiduciary may charge the participant’s account for reasonable expenses for efforts to find them.
Despite best efforts, it is possible that the plan fiduciary will still not be able to locate the missing participant or their beneficiary. In these cases, the plan fiduciary must distribute the assets in one of the following acceptable manners:
- IRA Rollover
- A distribution that qualifies as an “eligible rollover distribution” and is handled by a trustee-to-trustee transfer will avoid immediate taxation (i.e., 20% mandatory withholding, potential 10% early withdrawal penalty) and allows the funds to continue to enjoy tax-deferred status. There are additional fiduciary responsibilities to consider when selecting the IRA trustee, such as investment options and associated fees and expenses.
- Interest-Bearing Bank Account
- State Unclaimed Property Fund
- These options would be considered “last-resort” options after all other resources have been exhausted. This is primarily due to the fact that the benefits would lose their tax-deferred status in either situation and would be subject to immediate income taxation. Also, any interest that accrues to the account would also be subject to income taxation upon accrual.
- The “prudent and loyal” standard would likely be called in to question since utilizing such an option would voluntarily subject the participant’s funds to such negative consequences.
Plan terminations, while sometimes a necessary business decision, can lead to a myriad of other considerations, especially from a fiduciary perspective. The above suggestions can assist in alleviating some of these concerns.
Please contact Brian Dunfee at firstname.lastname@example.org if you have further questions regarding plan termination or your options for locating missing participants.
Read another post by Brian about employee benefit plans: IRS Focusing on Benefit Plan's Controls: Tips on Being Proactive