The Employee Benefits Security Administration (EBSA) of the U.S. Department of Labor recently updated its guidance to retirement plan fiduciaries on due diligence and efforts to locate missing participants in the case of terminated defined contribution plans. Field Assistance Bulletin (FAB) 2014-01 http://www.dol.gov/ebsa/regs/fab2014-1.html.
Under the new FAB, the EBSA clarifies that the decision on how to handle missing participant accounts is a fiduciary decision, unlike the employer’s decision to terminate the plan. The guidance states that fiduciaries must make “reasonable efforts to locate missing participants and beneficiaries”. Once reasonable efforts have been exhausted without locating the participant, certain safe harbor distribution options are available.
Search Steps
The common methods are sending written notices by first class mail and email. The EBSA eliminated its prior reference in FAB 2004-2 to the IRS and Social Security letter forwarding services which have since been discontinued. For the first time, EBSA suggests that free or low cost Internet search services and tools should be considered as part of a fiduciary’s reasonable efforts. The FAB goes even further and states that in the absence of the IRS and Social Security letter forwarding services, required steps would include use of any electronic search tools that do not charge a fee (i.e., Google, Yahoo and other popular Internet search engines).
Minimum Required Steps
1. Use certified mail.
2. Check other personnel records including health, disability and life insurance records.
3. Contact designated plan beneficiaries who may have more current contact information for the former employee.
4. Use free electronic search tools including Internet search engines, public record data bases, including licenses, mortgages and real estate taxes, obituaries and social media (e.g. Facebook and LinkedIn).
If the above required steps are still unsuccessful, the plan fiduciary should consider if additional search steps are appropriate taking into account the size of the participant’s account balance and the cost of further search efforts. The FAB notes that the costs of locating a missing participant can be charged to the participant’s account if permitted by the plan documents and the amounts are reasonable. Additional search steps that may, depending upon the facts and circumstances, be deemed reasonable, would include low cost Internet search tools, commercial locator services, credit reporting agencies and investigation data bases.
Distribution Options
If despite the above actions and efforts, the plan fiduciary is unable to locate a participant, the EBSA indicates that the preferred distribution option is a fiduciary directed rollover into an Individual Retirement Account or Annuity (IRA) in the name of the participant. Once the involuntary rollover is accomplished, the participant’s account would no longer be considered plan assets. The selection of the IRA custodian however would be a fiduciary decision. The FAB also addresses situations where the Fiduciary cannot find an IRA provider willing to accept a direct rollover due to the value of the account or other reasons. The guidance indicates that two additional options include (1) opening an interest bearing federally insured bank account in the name of the missing participant or (2) escheating the account balance to the state of residence. These two options would have required tax withholding according to the FAB.
The FAB reconfirms the DOL position that 100% income tax withholding of the benefit is not an option to resolve missing participant issues.
Terminating defined contribution plans should follow the guidance included in the new FAB. Unfortunately the FAB only addresses these issues in the context of a plan termination. For ongoing retirement plans with missing participant issues, fiduciaries should follow the terms of the written plan document.
