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How advisers can help 401(k) plans manage the risk of missing participants

The DOL hasn't issued concrete guidance on the issue, but there are hints on how to avoid trouble

Dec 18, 2018 @ 11:07 am

By Fred Reish

The Department of Labor is aggressively investigating plan sponsors and asserting fiduciary breaches for failure to perform rigorous and ongoing searches for missing participants. Advisers who work with retirement plans should be educating plan sponsors about those investigations and about how to avoid claims that they breached their fiduciary duties.

In my experience, when plan sponsors learn about their responsibilities for missing participants, their reaction is that they believed their service providers were taking care of those requirements. But in most cases, they are not.

Advisers should help plan sponsors avoid the surprise and frustration of a DOL assertion of fiduciary malfeasance. They can do "well" — protect themselves — by doing "good"— educating plan sponsors and committees about their fiduciary responsibilities.

As explained by the American Benefits Council, an organization consisting of plan sponsors, its members have been challenged by DOL investigators for their lack of rigorous searches for missing and unresponsive participants. The ABC sent a letter to the DOL that, among other things, reported on statements made by its investigators. The letter explains:

• DOL auditors have asserted that a plan administrator's (e.g., plan committee's) failure to locate a missing participant is a breach of fiduciary duty, even when the plan's procedures have been followed.

• DOL auditors have threatened to refer plan sponsors to the DOL's Office of the Solicitor if the plan fails to take specific actions. In some instances, the actions suggested are impermissible under other regulatory regimes.

• DOL auditors have asserted that "reasonable search steps" require plan sponsors to perform a search for missing participants every year, to use a different search method every year or to contact current and former employees who may have worked for the employer at the same time as a missing participant. DOL auditors have also informed plan sponsors that they must "do whatever it takes" to locate missing participants or to get participants to respond.

• DOL auditors have asserted that a plan should not just search every year, but to keep searching for the same missing participant indefinitely, despite the fact that conducting unlimited searches for the same participant is not an efficient use of plan resources.

I do not agree with much of that. However, I list those points so that plan sponsors and advisers can understand the strident approach taken by DOL investigations.

But that begs the question of what should employers do to comply. Unfortunately, there is not any guidance directly on point. However, there is analogous guidance.

From a compliance perspective, the most important guidance is a memorandum from the Internal Revenue Service. While the IRS does not have jurisdiction over fiduciary responsibility, it does oversee plan qualification. (Missing participants can become a qualification issue if a plan fails to make required minimum distributions when a participant with an account balance attains age 70½. Missing or not, those RMDs must be made to the participant to maintain plan qualification.)

Fortunately, the IRS has recognized the practical problems presented by missing participants. In October 2017, the agency issued a memorandum that says its examiners will not disqualify plans if the fiduciaries have taken appropriate steps to search for those participants. More specifically, the memo directs examiners not to challenge a qualified plan for its failure to make an RMD to a missing participant if the plan has taken the following steps:

• Searched the plan and related plan, sponsor, and publicly available records or directories for alternative contact information;

• Used any of these search methods: a commercial locator service; a credit reporting agency; or a proprietary internet search tool for locating individuals; and

• Attempted contact via U. S. Postal Service certified mail to the last known mailing address, as well as through any other available address or contact information (including email addresses and telephone numbers).

If a plan hasn't completed those steps, IRS examiners may challenge a plan's qualified status for failure to make a distribution to a participant to whom an RMD payment is due.

The other analogous guidance — from the DOL in this case — is about dealing with missing participants when terminating defined contribution (e.g., 401(k)) plans. In that guidance, Field Assistance Bulletin 2014-01, the DOL said that, at a minimum, plans should use certified mail to the last known address, check other plan and employer records (for example, the medical or life insurance programs), check with designated plan beneficiaries and use free electronic search tools. If that doesn't work, plans must consider using other options, such as commercial locator services. The cost of those types of services can be charged to the account of the missing participant.

The guidance is helpful because it provides insights into what the DOL thinks plan sponsors should do to find missing participants when a plan terminates. However, it's not controlling for plans that are not terminating and therefore don't need to find participants immediately. Plan sponsors could use the suggested methods if they want to avoid the possibility of the DOL asserting that they weren't doing enough to find missing participants.

For example, while there isn't a specific legal requirement that plans regularly search for missing participants, the safest approach could be to use the procedures described in the DOL guidance to conduct searches every year or two.

Fred Reish is a partner at the law firm Drinker Biddle & Reath.

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