Jon is the Managing Partner at MarketSphere. He is a sought after subject matter expert and a guest speaker at conferences nationwide.
The U.S. Department of Labor (DOL) requires employers offering retirement plan benefits to operate in the best interest of plan participants. Failure to fulfill these fiduciary responsibilities can result in costly audits, fines and criminal charges. In 2022 alone, DOL enforcement generated more than 900 civil investigations, $1.4 billion in recovered employee benefits and 164 criminal investigations related to employee benefit plans.
Plan sponsors’ fiduciary responsibilities include identifying and mitigating missing or nonresponsive plan participants. In 2021, the DOL published guidance defining best practices for locating missing plan participants and red flags that suggest potential retirement plan administration problems.
With the DOL’s expectations and enforcement measures clearly defined, retirement plan sponsors must ensure they take the proper steps to reconnect plan participants with their retirement benefits. Examining the DOL’s red flags provides a good starting point for implementing effective retirement plan reunification procedures:
• “More than a small number of missing or nonresponsive participants.
• More than a small number of terminated vested participants who have reached normal retirement age but have not started receiving their pension benefits.
• Missing, inaccurate or incomplete contact information, census data or both (e.g., incorrect or out-of-date mail, email, and other contact information, partial social security numbers, birthdates, spousal information, or placeholder entries).
• Absence of sound policies and procedures for handling mail returned marked ‘return to sender,’ ‘wrong address,’ ‘addressee unknown’ or otherwise and undeliverable email.
• Absence of sound policies and procedures for handling uncashed checks (as reflected, for example, by the lack of an accounting journal or similar record of uncashed checks, a substantial number of stale uncashed distribution checks or failure to reclaim stale uncashed check funds in distribution accounts).”
These potential process gaps demonstrate the need to document procedures for communicating with plan participants and, equally essential, to complete those procedures routinely and effectively. Identifying outdated, incomplete or incorrect participant contact information is only part of the battle. Taking action to correct the stale data is equally necessary.
Plan sponsors should exercise care when deciding whether to apply force-out or involuntary rollover provisions. Correcting data before taking such actions may reduce long-term costs. Without first making corrections, sending force-out checks will often result in uncashed payments, and transferring funds to a rollover IRA provider may decrease the chances of reuniting participants with their benefits, unless the provider offers a comprehensive service after they receive the accounts. This may result in unclaimed property liability once the account reaches the required minimum distribution age and higher costs to the participant than keeping the funds in the plan.
Certain provisions of the SECURE 2.0 Act of 2022 also highlight the need to keep accounts in good standing and include changes in the treatment of required minimum distributions, overpayment corrections and ceasing benefits depending on specific timing and participant contact.
An ERISA attorney can advise plan sponsors on the appropriate frequency for examining participant files and correcting inaccurate information, ensuring consistency with plan documentation. Routine action boosts success, and sponsors may be able to charge associated fees to the missing or lost accounts as long as they are reasonable.
To help alleviate the challenges associated with nonresponsive participants, retirement plan sponsors may also seek the assistance of an outside vendor. Ensuring the vendor’s goals and activities align with the sponsor’s is essential.
For example, using an IRA rollover provider to find missing plan participants before completing account rollovers may carry an inherent conflict of interest. If the rollover provider has limited success locating participants, it will likely benefit from more rollover accounts and funds, raising questions about the quality of the search campaign. So, considering an IRA provider that uses an independent firm to identify and find participants or their heirs may be a prudent practice.
Similarly, understanding the scope of a potential vendor partner’s services is important. If retaining a vendor solely to provide data, will that truly alleviate work or, in effect, create additional work because the plan sponsor’s employees still need to analyze the data and identify legal claimants? Are fee structures based on all received data or only successful reconnection with plan participants?
Plan sponsors and fiduciaries are required to oversee retirement plans in the best interests of plan participants. These responsibilities include efficient, cost-effective plan management and ultimately, ensuring participants have access to their retirement benefits. Maintaining contact with plan participants is at the heart of many of these requirements. The DOL continues to emphasize its expectations for plan sponsors to maintain contact with plan participants and take meaningful action to reconnect with those who become unresponsive.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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