In the past year, the Department of Labor (DOL) has drastically increased audits of retirement plans with participants – or beneficiaries – who cannot be located in conjunction with the distribution of owed benefits. The DOL has directed its attention to Form 5500 filings disclosing high numbers of terminated vested participants who are not receiving benefit payments. In these audits, the DOL has aggressively focused on what steps plan administrators have taken to locate these participants. In addition to the DOL, the Internal Revenue Service (IRS), Pension Benefit Guaranty Corporation (PBGC), and Congress have also recently focused on developing minimum appropriate search procedures and missing participant protection programs. On March 5, the Government Accountability Office called on the DOL to issue further guidance for plan sponsors attempting to search for missing plan participants.
This blog post summarizes a plan’s duty to search for missing participants. Part 2 compares each agency’s minimum search requirements as well as the proposed search requirements in the Retirement Savings Lost and Found Act of 2018, and highlights steps plan administrators may take to minimize audit liability.
The Duty to Search for Missing Participants
The duty to locate missing plan participants or their beneficiaries is required under both ERISA’s fiduciary standards and the Internal Revenue Code’s (Code) required minimum distribution requirements. Under Section 404(a) of ERISA, a fiduciary of a plan has a duty to act prudently and solely in the interest of the plan’s participants and beneficiaries. In Field Assistance Bulletin 2014-01, the Department of Labor interpreted this duty of prudence and loyalty to require plan fiduciaries to make reasonable efforts to locate missing participants or beneficiaries in connection with a plan termination so that the plan may implement directions by these individuals regarding distribution of plan benefits. The DOL opined that a failure to take minimal steps outlined in the Bulletin would amount to a violation of fiduciary obligations, even if plan procedures were otherwise followed, and perhaps more concerning, that forfeiture of retirement plan benefits owed to missing participants could amount to a prohibited transaction.
Plans subject to the Code’s required minimum distribution requirements under Section 401(a)(9) have historically been vulnerable to plan disqualification when missing participants and beneficiaries cannot be located by the required distribution beginning date (retirement or age 70 ½). Recently, however, the IRS issued guidance to its agents outlining steps a plan may take to avoid a qualification challenge by the IRS based on required minimum distribution failures related to missing participants. In late February, Lauson Green, acting special counsel in the IRS Office of Chief Counsel, indicated further guidance on the search for missing participants is on the horizon.
In 1994, the Retirement Protection Act created a program administered by the PBGC for single-employer defined benefit plans with missing participants. The program holds retirement benefits for missing participants and beneficiaries in a terminated retirement plan and assists these individuals in locating benefits. In late 2017, pursuant to Congressional authorization, the PBGC issued final regulations expanding the program to most defined contribution plans, multiemployer plans, and defined benefit plans not previously covered by the program. Part of this program requires plan administrators to “diligently search” for missing participants and beneficiaries prior to the close-out of a plan.
Looking forward, plans and fiduciaries may expect additional – or modified – obligations mandated by a bipartisan bill re-introduced in the Senate last week titled the “Retirement Savings Lost and Found Act of 2018.” The Act would establish a national online registry that would allow individuals to locate the plan administrator of any plan with respect to which the individual is a participant or beneficiary, would enhance certain plan reporting requirements, and would create a safe harbor providing relief from both fiduciary and required minimum distribution obligations for plans that cannot locate missing participants or beneficiaries after taking certain minimum steps to locate these individuals.