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401k Plan Sponsor Fiduciary Best Practices For Lost Or Missing Plan Participants
by Christopher Carosa June 25, 2024
When plan sponsors have lost contact with 401(k) plan participants, they must address several key questions. The DOL has recently asked for input on its proposal to deal with lost or missing plan participants. But the idea of a participant being missing or lost is less black and white than it seems.
“Consider that an absence of communication from a participant does not by itself mean the participant is ‘missing,’” says Peter Gulia, a lawyer with Fiduciary Guidance Counsel in Philadelphia, Pennsylvania. “Imagine someone who leaves an employer at age 25 (and is not then cashed-out). Imagine that individual communicates nothing for the next 50 years. That can be proper. There might have been no communication from the plan that required a response.”
Still, there may be times when it is necessary to find a plan participant. That’s when the fiduciary duty blankets the plan sponsor.
“Finding the people who are part of a plan but are lost can be very hard for those who manage the plan, but it is a very important job,” says Kraig Kleeman, founder of The New Workforce in Chicago, Illinois. “Making sure that all participants get what they have earned in the plan is not just something they must do because of laws – it’s about believing and doing what’s fair to those who have put money into the plan.”
Let’s break down how 401k plan sponsors can manage this responsibility effectively.
WHAT ARE THE CURRENT REQUIREMENTS OF THE DEPT OF LABOR (DOL) & INTERNAL REVENUE SERVICE (IRS) GUIDELINES FOR LOCATING MISSING PARTICIPANTS?
“Recognizing that more needed to be done to reunite individuals with their retirement accounts, Section 303 of the SECURE 2.0 Act added a new Section 523 of ERISA, providing for the establishment of a Retirement Savings Lost and Found, an online searchable database, effective no later than December 29, 2024,” says Michelle Capezza, Of Counsel at Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. in New York City. “The goal of the Retirement Savings Lost and Found is to allow individuals to locate their ERISA-governed defined benefit or defined contribution retirement plan, and the plan administrator, in order to make a claim for benefits owed to them under the plan. On April 16, 2024, the DOL issued notice for a proposal to collect information voluntarily from ERISA plan administrators through an attachment to the Form 5500 filing for the 2023 plan year, including names, social security numbers and addresses of participants with deferred vested benefits and those who have been paid their deferred vested benefits, in order to establish the Retirement Savings Lost and Found online searchable database and to connect missing participants and other individuals who have lost track of their retirement benefits with such benefits. For plan years after December 31, 2024, plan administrators of ERISA defined contribution and defined benefit pension plans will need to submit a long list of information to the Secretary of Labor at such time, and in the form, to be required in forthcoming regulations.”
“The IRS had recently declined to provide information from Forms 8955-SSA to the DOL for the database citing concerns related to confidentiality of returns,” adds Capezza. “Since the issuance of this notice, more concerns have been raised by industry groups surrounding data privacy and cybersecurity considerations for providing such information to the database. While the SECURE 2.0 Act, and the DOL’s April 2024 notice, acknowledge that privacy of employee data will be protected in the database, it is unclear how compliance with a patchwork of evolving state data privacy and security laws, or even international and local laws, will be attained. Plan sponsors and fiduciaries will need to consider data privacy and security implications of sharing information with the database and update their benefit plan cybersecurity procedures to incorporate applicable protocols. The privacy opt-out request will also need to be administered.”
WHAT PROCEDURES SHOULD PLAN SPONSORS PUT IN PLACE FOR HANDLING UNCLAIMED BENEFITS FOR UNREACHABLE PARTICIPANTS?
“Procedures about unclaimed benefits vary with whether a plan is a governmental plan, a church plan, or an ERISA-governed plan,” says Gulia. “For an ERISA-governed plan, ERISA supersedes States’ laws. For a non-ERISA church plan or even some governmental plans, a State’s abandoned-property law might apply if a participant, after age 73 or 75, reached one’s required beginning date and has not claimed any payment or delivery. The Internal Revenue Manual instructs IRS employees not to challenge a plan for failing to meet a minimum-distribution provision if the participant, beneficiary, or alternate payee is unlocated after the plan’s administration has completed a set of steps that Manual specifies.”
TO REDUCE THE LIKELIHOOD OF UNCLAIMED BENEFITS, WHAT STEPS DO PLAN SPONSORS NORMALLY TAKE TO LOCATE UP-TO-DATE CONTACT INFORMATION FOR THE MISSING PARTICIPANTS?
“Send two or three letters to their last known address because keeping things the same is important,” says Kleeman. If you have emails, it’s good to use them. When you send a quick message again, sometimes it can make someone reply. When possible, give them a ring. Sometimes, a personal touch works wonders. In case there’s no other choice, choose certified mail. This helps to ensure you are aware if the person has gotten it.”
Once the communications link is broken, it’s fair to say the participant is lost or missing. Plan sponsors need a second set of procedures in this case.
“When trying to track down missing participants, it’s crucial to start with the basics,” says Kleeman. “Start by looking through your own records. You can find that there are updates right in front of you, without even knowing it. Next, try contacting people you used to work with or who you know. Sometimes, just making a simple phone call can give the latest information. When you are performing searches for a database, it is helpful to use government and public databases. These can be like treasure troves for having the most recent addresses. Finally, do not be shy to call in experts. These third-party services have the necessary tools and knowledge to find people who have disappeared or are untraceable.”
WHY DO PLAN SPONSORS OFTEN USE THIRD PARTIES FOR MAINTAINING PLAN PARTICIPANT’S CONTACT DETAILS ACCURATELY AND HOW DO THOSE THIRD PARTIES REFLECT THIS DATA IN PLAN RECORDS AND DOCUMENTS?
“Plan sponsors often use third parties for maintaining plan participants’ contact details accurately because these services specialize in data management and have access to advanced tools and resources for tracking and updating information,” says Richard Bavetz, investment advisor at Carington Financial in Westlake Village, California. “Third-party services employ sophisticated databases, credit bureau information, and other proprietary search methods to locate and verify participant contact details efficiently. By outsourcing this task, plan sponsors can ensure higher accuracy and compliance with regulatory requirements while saving time and resources. Third parties update the plan records and documents by seamlessly integrating the new or corrected contact information into the sponsor’s systems. They provide regular reports and updates to the plan sponsors, ensuring that all records reflect the most current data. This integration helps maintain accurate participant records, facilitates timely communication, and supports the efficient plan administration, thereby enhancing overall plan management and participant satisfaction.”
WHAT ARE SOME EXAMPLES OF HOW PLAN SPONSORS MIGHT UTILIZE AVAILABLE RESOURCES, SUCH AS COMMERCIAL LOCATOR SERVICES, TO FIND THE PARTICIPANTS?
“Commercial locator services are very useful tools for the people who manage company plans,” says Kleeman. “These services use modern technology and big data to find lost participants. For instance, LexisNexis Risk Solutions digs deep into public records and proprietary databases. If you want the Social Security Administration to send a letter to a participant’s previous known address, you can request this service.”
“Plan sponsors might utilize commercial locator services to find missing participants by leveraging these companies’ access to extensive databases and advanced search tools,” says Bavetz. “For example, they might contract with a locator service specializing in tracking down individuals through credit bureau information, public records, and proprietary databases. These services can provide detailed reports on potential current addresses, phone numbers, and other contact details. Another resource plan sponsors might use is engaging a firm that conducts comprehensive internet and social media searches. These firms utilize algorithms and search technologies to scour online platforms, such as LinkedIn, Facebook, and other social networks, to find updated contact information.
Additionally, plan sponsors can use locator services with partnerships with governmental agencies and employ techniques like the Social Security Administration’s Letter Forwarding Service. This service can help reach participants by forwarding mail to their current address based on Social Security records. By using these commercial locator services, plan sponsors can improve their chances of finding participants and ensuring they receive their entitled benefits while also fulfilling their fiduciary responsibilities.”
Procedures for finding lost or missing participants can be cumbersome, but they are necessary. For larger plans, this is often a mere blip on the screen. For smaller plans, well, they might want to encourage ex-employees to roll out of their plans.
Christopher Carosa is an award-winning online news producer and journalist. A dynamic speaker, he’s the author of 401(k) Fiduciary Solutions, Hey! What’s My Number? How to Improve the Odds You Will Retire in Comfort, From Cradle to Retirement: The Child IRA, and several other books.