PLANADVISER - January/February 2019 - 50

compliance consult
Lost Participants
It is sponsors' duty to locate their terminated 'missing persons'
A CHALLENGE that all plan fiduciaries and their advisers
face is how to deal with " lost " participants. When investigating
a plan, the Department of Labor (DOL) will focus
on how the plan addresses that. Indeed, the DOL recently
challenged practices thought by plan fiduciaries and their
advisers to be appropriate under the Employee Retirement
Income Security Act (ERISA). Given this scrutiny, plan sponsors
and their advisers should examine how their plan and
service providers resolve the issues involved.
The first challenge that plan sponsors and their service
providers face when dealing with lost participant issues is
identifying who is lost. Plan fiduciaries generally find that
participants fall into two categories: 1) participants to
whom the plan sends a written communication and the
communication is returned as undeliverable, and 2) participants
to whom the plan sends a communication requiring
an affirmative response or an action by the participant-e.g.,
to cash a benefit payment check-and no such response is
received or action taken. In the case of the former, the plan
knows it has a bad address and, thus, may characterize the
participant as lost or missing.
However, in regard to the latter, the plan has no reason
to believe it has a bad address or that the participant is
otherwise lost. Such participants are better characterized
as " unresponsive. "
The second challenge that plans and their service
providers face is how to handle benefit payments due to
participants pursuant to the terms of the plan when the
plan has a bad address or the person is unresponsive. In
many cases, plans provide for the " cash-out " distributions
of vested benefits that do not exceed certain dollar thresholds-e.g.,
$1,000-established under Section 401(a) of the
Internal Revenue Code (IRC). Additionally, the plan may be
required to pay benefits under the IRC's required minimum
distribution rules after the participant reaches a certain age
and then process such payments in accordance with the IRC
and the plan's terms.
ERISA does not specifically impose a duty on plan fiduciaries
to locate lost participants or resolve outstanding benefit
payments. However, the DOL's Field Assistance Bulletin
(FAB) 2014-01 and its predecessor clearly have established
that the DOL believes such a duty exists. Importantly,
however, the FAB addresses how to resolve these issues only
in the context of a plan termination. Neither the FAB nor
any other DOL guidance addresses the practical realities of
resolving these issues in the context of an ongoing plan.
Many plan fiduciaries and plan service providers have
implemented practices and procedures to address lost
participants and resolve outstanding benefit payments in
accordance with the FAB. Unfortunately, the DOL during its
investigations often objects to some of these practices.
One major area of the DOL's focus has been pension
plans. For example, many pension plans permit the payment
of benefits upon the participant reaching his normal retirement
date. However, the participant often may defer the
receipt of benefits until his " required beginning date. " The
IRC permits these provisions, yet the DOL appears to question
their validity in general. The DOL also appears to be
requiring extraordinary steps to locate lost participants,
particularly when, in its view, the vested accrued benefit is
considered large.
Another example of the DOL's focus is the resolution
of outstanding benefit payments to lost or unresponsive
participants. In a defined contribution (DC) plan, plan
fiduciaries, after providing notice to the participant, often
return the payment to an unallocated account within the
plan; the plan will pay such amount-unadjusted for earnings-to
the participant if he later notifies the plan sponsor
of his desire to receive the payment. The plan may use the
returned amount for any purpose permitted under ERISA
until paid to the participant. There is support under the IRC
for this approach. Yet the DOL's investigators now appear to
challenge this practice.
In light of the above, the big question is what plan fiduciaries
and plan service providers should do. Ideally, the
DOL will
issue regulatory guidance-including a regulatory
safe harbor-or subregulatory guidance that specifically
applies to addressing lost participant and outstanding
benefit payment issues involving ongoing defined contribution
and defined benefit (DB) plans.
In the meantime, plan fiduciaries should consider
what steps they might take to defend against an enforcement
action by the DOL. First, a plan fiduciary should
understand and document what procedures it has in
place, either directly or through a plan service provider, to
address these issues. Second, the fiduciary should review
those procedures in light of the FAB and the DOL's enforcement
efforts.
David Kaleda is a principal
in the fiduciary responsibility practice
group at Groom Law Group, Chartered, in Washington, D.C. He has
an extensive background in the financial services sector. His range of
experience includes handling fiduciary matters affecting investment
managers, advisers,
broker/dealers,
insurers, banks and service
providers. He served on the DOL's ERISA Advisory Council from 2012
through 2014.
48 | planadviser.com January-February 2019
Art by Tim Bower
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