On Thursday, the Department of Labor issued a Field Assistance Bulletin updating its prior guidance on locating missing participants. As before, the guidance technically only applies in the context of terminating defined contribution plans, though the guidance can be instructive for fiduciaries trying to locate missing or unresponsive participants in other retirement plan contexts as well. A central reason for the update from the Department is that two of the mandatory locator options noted in the now 10-year-old prior guidance are no longer available (the Social Security letter forwarding program ceased in May of this year, and the IRS letter forwarding program became unavailable for retirement plans as of August 2012).
The new guidance in FAB 2014-01 reiterates that even though a decision to termination a retirement plan may be a settlor decision, any steps a fiduciary takes to implement such a decision will administrative in nature and subject to ERISA’s fiduciary responsibility provisions. In carrying out this responsibility, the Department basically maintains its prior guidance while replacing the now-unavailable letter forwarding service steps with a requirement to free internet search tools (elevating this step from optional in the prior guidance to required in the current guidance). Accordingly, from FAB 2014-01, these are now the required steps:
- Use Certified Mail. Certified mail is an easy way to find out, at little cost, whether the participant can be located in order to distribute benefits. The Department provided a model notice that could be used for such mailings as part of a regulatory safe harbor, but its use is not required and other notices could satisfy the safe harbor.
- Check Related Plan and Employer Records. While the records of the terminated plan may not contain current address information, it is possible that the employer or another of the employer’s plans, such as a group health plan, may have more up-to-date information. For this reason, plan fiduciaries of the terminated plan must ask both the employer and administrator(s) of related plans to search their records for a more current address for the missing participant. If there are privacy concerns, the plan fiduciary engaged in the search can request that the employer or other plan fiduciary contact or forward a letter for the terminated plan to the missing participant or beneficiary. The letter would request that the missing participant or beneficiary contact the searching plan fiduciary.
- Check With Designated Plan Beneficiary. In searching the terminated plan’s records or the records of related plans, plan fiduciaries must try to identify and contact any individual that the missing participant has designated as a beneficiary (e.g., spouse, children, etc.) to find updated contact information for the missing participant. Again, if there are privacy concerns, the plan fiduciary can request that the designated beneficiary contact or forward a letter for the terminated plan to the missing participant or beneficiary.
- Use Free Electronic Search Tools. Plan fiduciaries must make reasonable use of Internet search tools that do not charge a fee to search for a missing participant or beneficiary. Such online services include Internet search engines, public record databases (such as those for licenses, mortgages and real estate taxes), obituaries and social media.
If these steps don’t yield any results, the fiduciary must still consider whether additional steps are appropriate considering account balance size for the missing participants, and cost of search. This is where paid search services come into the equation, such as “commercial locator services, credit reporting agencies, information brokers, investigation databases and analogous services that may involve charges.” On the topic of charges, the DOL maintains its position that it is permissible to charge individual participant accounts for the efforts made to find participants, provided the charges are reasonable. The reasonability of charges against participant accounts must be assessed not only in the context of actually charging participant accounts for search expenses, but also in weighing between alternative distribution options if a participant cannot be located, such as fees that would apply to a rolled-over IRA or to a deposit account. The bottom line here is that while it is permissible to charge participant accounts, fiduciaries cannot attempt to liquidate small account balances through fees and charges, if they are keeping with their fiduciary duties.
Similar to the prior guidance, the new FAB also then lays out distribution options for plan fiduciaries where all required and reasonable searches have not located missing participants. An IRA rollover remains the preferred option (following the applicable safe harbor fiduciary rules for automatic rollovers, linked above), with alternative options to open an interest-bearing federally insured bank account in the participant’s name, or to transfer the account to a state unclaimed property fund. The DOL cautions fiduciaries to keep in mind that the latter two alternatives result in tax consequences to the participant, and that this must be taken into account in determining if these options are in fact appropriate in the circumstances. Taking a clearly skeptical view of these two alternatives, the DOL goes farther that it had in previous guidance in saying ” 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.”
Lastly, the DOL also reiterated that a distribution with 100% income tax withholding (effectively transferring the entire account balance to the IRS), is NOT an acceptable option for fiduciaries in its view.
In the end, this update doesn’t provide much additional guidance for fiduciaries that wasn’t likely being utilized in practice already. If nothing else, the DOL formalized its foray into modern technology by essentially telling plan fiduciaries to “Google it.” Here’s hoping the same happens for the DOL’s electronic disclosure guidance.