It’s surprisingly easy for defined benefit (DB) and defined contribution (DC) plans to lose track of participants who no longer are employed by the company. At the individual level, people move to new homes and change their email address and neglect to notify the plan. Participants die and their estate administrators or heirs lack information about a vested benefit.
At the organizational level, merger and acquisition (M&A) activity leads to plans being combined. Plans get renamed and a participant’s original plan could undergo multiple consolidations and name changes. A change of recordkeeper can result in the new one receiving only summary information that lacks a robust history of address tracking efforts by the prior plan.
Why It Matters
It’s tempting to think that a small, vested balance probably won’t make much difference in a participant’s financial life so why worry if a small-balance participant drops off the radar? That approach is problematic, however, because plans have both fiduciary requirements and practical motivations to make timely delivery of vested benefits. On the fiduciary side, ERISA regulations require plans to act in participants’ interest for the purpose of delivering benefits and the Department of Labor requires accurate tracking of participants to enable those benefit payments.
In an April 14 webinar, Faegre Drinker partner Monica Novak discussed several administrative reasons why plans need effective tracking programs, including:
- The ability to make required distributions
- Reducing plan costs for maintaining accounts
- Avoiding potential delays to plan terminations
Participants can lose track of their vested benefits and that also can create problems for sponsors. Gayle Skolnik, a partner in Faegre Drinker’s Indianapolis office, cites instances in which former participants or their beneficiaries contact a plan inquiring about benefits to which they believe they’re entitled but never received. These inquiries are often prompted by the receipt of a Social Security Administration notice, Potential Private Retirement Benefit Information, which reminds the retiree about “private employer retirement benefits that you have earned, also called ‘deferred vested benefits.’”
“You remember that you worked for XYZ company, but you don't remember getting the pension,” Skolnik explains. “You don't remember getting the account balance. And so, you reach out to the administrator of the plan that your plan merged into four (M&A) transactions ago and they have no record that you ever had a benefit in their plan.”
Updated DOL Guidance
In January the DOL’s Employee Benefits Security Administration published several documents to help plan sponsors with the missing participant problem:
- Field Assistance Bulletin No. 2021-01
- Compliance Assistance Release No. 2021-01
- Missing Participants—Best Practices for Pension Plans
The Field Assistance Bulletin deals with terminating DC plans, but the Compliance Assistance Release and Best Practices Document apply more broadly. The release highlights the missing-participant red flags that the EBSA looks for in its plan reviews. These include:
- Systemic errors in plan recordkeeping and administration that create a risk of loss associated with the failure of a terminated vested participant (TVP) or their beneficiary to enter pay status before death or the imposition of excise taxes on RMD (required minimum distribution) amounts.
- Inadequate procedures for identifying and locating missing participants and beneficiaries.
- Inadequate procedures for contacting TVPs nearing normal retirement age to inform them of their right to commence payment of their benefits.
- Inadequate procedures for contacting TVPs and the beneficiaries of deceased TVPs who are not in pay status at or near the date that they must commence RMDs to inform them of actions the plan will take and what they must do to enter pay status and avoid RMD excise taxes.
- Inadequate procedures for addressing uncashed distribution checks.
- Examples of Best Practices
Examples of Best PracticesSkolnik explains that the Best Practices document provides examples of what the DOL considers to be the best practices implemented by plans that are successful in managing the missing-participant problem. The guidance is not intended to be a one-size-fits-all approach, she notes, and the DOL points out that some practices won’t be appropriate for every plan, but overall, the document provides a useful set of examples for your plan-clients to consider.
The Best Practices document groups its suggestions into four main practices expanded by more specific examples. The primary practices include:
- Maintaining accurate census information for the plan’s participant population
- Implementing effective communication strategies
- Missing participant searches
- Documenting procedures and actions
Skolnik identified several areas where she routinely sees problems. One is failing to keep regular contact with terminated employees. “That's one of the things that the department really stresses—you can't just set it and forget it,” she says. “If you're not periodically reaching out to participants and having contact with them, it’s much easier to lose track.”
Another potential problem area: Because plan administration is frequently outsourced to recordkeepers, it’s important for consultants and sponsors to monitor those organizations’ tracking programs. For instance, how does the recordkeeper deal with invalid email addresses when the participant has opted for electronic communications?
Additionally, if a plan changes recordkeepers during M&A activity, what degree of contact details and tracking history does the previous recordkeeper transfer to its successor? “That's a real trouble spot because oftentimes the records received from the acquired plan are minimal,” says Skolnik. “They're not very robust (so) you have fewer resources to find people, to keep in touch with them, to be able to identify where their benefit came from.”