What 401k Plan Sponsors Should Do About ‘Lost’ Participants

What 401k Plan Sponsors Should Do About ‘Lost’ Participants

August 29, 2023

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What 401k Plan Sponsors Should Do About ‘Lost’ Participants
by Christopher Carosa August 29, 2023

In the mutual fund world, investment companies must monitor shareholders diligently. The Securities and Exchange Commission requires them to report on an annual basis how many shareholders are “lost” or “missing.”

There’s no similar reporting requirement from the Department of Labor regarding ERISA plans. That doesn’t mean retirement plans shouldn’t make the same attempt as mutual funds.

“Retirement assets can represent an important component of an individual’s net worth,” says Michael Kazakewich, partner and advisor at Coastal Bridge Advisors in Westport, Connecticut. “Given the importance and need, employers should devote a reasonable amount of time and effort (and expense) to tracking down ‘lost’ plan participants.”

The question, though, is how far should they go?

“Employers should make all reasonable efforts to find ‘lost’ plan participants,” says Richard Bavetz, investment advisor and federal retirement consultant for Carington Financial in Westlake Village, California. “Once they’ve fulfilled their duty, no further cost should be incurred. It is incumbent upon the individual participant to maintain some level of clarity and organization with their finances.”

It’s one thing to say, “fulfill your duty.” It’s another thing to define it. As with all things, a certain amount of common sense needs to be applied.

“Making prudent choices about plan-administration expenses, especially if they’re charged—generally or particularly—against participants’ accounts, always calls for detached and deliberate thinking,” says Peter Gulia, shareholder at Fiduciary Guidance Counsel in Philadelphia, Pennsylvania. “Also, unless the plan’s administrator receives an email bounce-back (or for those who get paper statements and notices, a postal-service undeliverable), one need not assume, without further inquiry, that the participant is ‘lost.’ Many participants go years and decades with no need to communicate. A fiduciary might evaluate an expense by considering not only its cost but also the effort’s probability of getting the desired result. For example, if a participant’s account is $1,000, the search cost is $10, and the probability of reuniting the participant with her account is less than one percent, some might question whether the search is wise—if the participant is not yet near a required beginning date.”

The issue of “lost” or “orphan” plan participants isn’t always an issue, especially for smaller companies. Still, when lost participants exist, there are services you can use to find them.

“Well, we rarely have lost participants since most of them are paid out within a year of terminating, when the employer still has a good handle on where they are,” says Lawrence (Larry) Starr, VP at Cornerstone Retirement/QPC in West Springfield, Massachusetts. “When we need to find a ‘lost’ participant, it is almost always when one of our small business plan clients is terminating the plan for various reasons. We have almost a 100% success rate finding people utilizing a couple of search firms. I believe we pay $20 or $25 per search, and only if they are successful. That’s a cost the employer is very willing to pay since getting that person out of an ongoing plan saves more than that cost in the annual per participant charges to the client.”

These services entail a cost, so the question becomes at what point does the potential benefit outweigh the cost? In addition, who pays this additional cost?

“Check with the plan’s legal counsel, and review the plan document provisions, but, neither the employer nor the plan sponsor must shoulder added expenses in locating ‘lost’ or ‘missing’ participants,” says Jack Towarnicky, Of Counsel at Koehler Fitzgerald, LLC in Powell, Ohio. “Generally, any such expense incurred in locating an individual can be charged/assessed to the participant’s individual account.”

It’s natural to turn to government regulators to see what plan sponsors might find themselves required to do.

“The Department of Labor has provided some guidance as it relates to locating ‘lost’ participants,” says Susan Shoemaker, principal at CAPTRUST in Southfield Michigan. “The plan sponsor should implement a procedure that at least meets the DOL guidance. Once the plan sponsor has complied with that guidance and exhausted any resources available at their provider, they should document what they’ve done in case there is a DOL audit.”

“The Department of Labor takes the position that a plan fiduciary’s duty to locate missing participants is derived from ERISA’s duty of prudence requirement,” says Eric Gregory, a member at Dickinson Wright PLLC in Troy Michigan. “Therefore, I advise sponsors to closely follow the DOL’s list of ‘Best Practices,’ which includes both free online searches and, when necessary, commercial searches. I generally advise plan sponsors to work with their recordkeeper to ensure that there is regular communication going out to plan participants, and periodic reach-out to confirm or update contact information. The DOL Best Practices guidance notes that ‘[i]n deciding what steps are appropriate, plan fiduciaries should also consider the size of a participant’s accrued benefit and account balance as well as the cost of search efforts.’ Therefore, I advise sponsors that have participants with even moderate account balances to consider using a commercial locator service to avoid the headaches of missing participants, particularly when some of these services charge fees that only amount to a few dollars per participant.”

The trouble with following the DOL’s lead is that the information is stale and often not to the point. The last series of missing participants guidance Compliance Assistance Release came out in 2021 and focuses on defined benefit plans (although the companion best practices guide says it applies to defined contribution plans as well). Even the July 2023 IRS webpage addressing Missing Participants or Beneficiaries links only to a 2014 DOL Field Assistance Bulletin.

“Sadly, the Labor Department has yet to provide any guardrails on this, though it’s increasingly easy to track folks down, and some providers now offer free services to do so,” says Nevin Adams, industry thought leader and author from Manassas, Virginia. “Clearly costs in excess of the balance are unreasonable—beyond that, whatever measures are taken should be documented.”

The DOL’s guidance on missing plan participants appears just as effective as its weak 2012 Mutual Fund Fee Disclosure Rule. Yes, it’s there, but it has no viability. Still, that doesn’t mean 401k plan sponsors can ignore the issue, even if they have not lost participants.

“Generally, an auditor would say ‘never’ is the right answer in terms of the cost being too much for locating those ‘lost’ participants,” says Tonya Manning, principal and U.S. wealth practice leader, at Buck, a Gallagher Company headquartered in New York City. “However, the key is to determine the proper steps through a written, documented procedure and then follow those procedures each and every time before determining the participant to be truly ‘lost.’ Buck’s Specialized Administration Services team has helped develop missing participant procedures to satisfy the documentation requirement and provides support for locating these participants before determining they are indeed ‘lost.’”

As with many issues, there is no single solution. Each plan will need to determine what procedures make the most sense for its particular set of circumstances.

“Many of these questions shouldn’t be considered in the abstract,” says Gulia. “Good advice depends on finding all the facts (or at least labeling assumptions) and then considering and balancing the particular advisee’s many interests. Or as many medical doctors say, ‘prescription without diagnosis is malpractice.’”

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.