A Department of Labor (“DOL”) official recently disclosed a new DOL investigation initiative focusing on the adequacy of defined benefit plan procedures to locate and pay out benefits to terminated vested participants. The initiative serves as a reminder of the importance of having procedures in place to ensure that terminated vested participants are timely paid their benefits once they reach the date on which payments must commence
The Issue of Terminated Vested Participants
Many plans have terminated vested participants who have attained the latest age for benefit commencement under the plan (e.g., a plan-specified “normal retirement age” or the IRS required minimum distribution age of 70 1/2), but whose benefit payments have not commenced. Sometimes plans have simply not taken the appropriate steps to communicate with participants who have reached the date their benefit payments must commence, but more often, this occurs where the terminated vested participant is “missing” (i.e., has not been located).
The failure to take steps to identify, locate, and pay terminated vested participants (whether or not “missing”) can be considered a breach of fiduciary duty of prudence and/or loyalty, potentially resulting in personal liability to plan fiduciaries. For example, a plan fiduciary could potentially be held liable for any adverse tax consequences resulting from the delay in benefit payments beyond the required minimum distribution age of 70 1/2. Therefore, it is important that proper procedures are in place to ensure timely payment of plan benefits.
The Case of “Missing” Participants
A typical situation resulting in a “missing” participant is when a participant terminates employment and subsequently changes his or her residence, without informing the plan. In some cases, so many years have passed since the participant terminated employment that the participant does not even recall that he/she has a vested benefit under the plan or the participant cannot “find” the plan he/she participated in (e.g., due to plan sponsor changes and plan mergers). In other cases, the participant may have died and no beneficiary has come forward seeking payment of benefits. The typical indication that a participant is missing is when benefit statements or other required communications are returned as undeliverable, or when benefit payment checks for mandatory cash-outs of small sums or mandatory required distributions are returned or remain uncashed.
It is not entirely clear what steps a defined benefit plan must take in an attempt to locate a missing participant. DOL Field Assistance Bulletin (“FAB”) 2014-01, while issued as an advisory for terminating defined contribution plans, may be useful in the context of defined benefit plans. According to the FAB, before abandoning efforts to find a participant, the plan fiduciary must, at a minimum, (i) use certified mail, (ii) check related plan records, (iii) check with designated plan beneficiaries, and (iv) use free electronic search tools. The FAB further provides that, depending on the circumstances, to meet fiduciary duties additional search steps may be in order, such as Internet search tools, commercial locator services, credit reporting agencies, information brokers and investigation databases. The FAB also states that fiduciaries must be able to demonstrate efforts undertaken to locate missing participants (e.g., through documentation of such efforts).
It is possible that even after a diligent search is conducted, a participant still cannot be located. To address such a case, it is rather common for a plan document to contain a “forfeiture/reinstatement” provision that permits the forfeiture of the benefit of the participant, subject to reinstatement if the participant later makes a proper claim for the benefit. Before such a forfeiture occurs, plans sponsors should make sure that their efforts to locate the missing participant were, in fact, consistent with plan provisions and policies.
Plan Sponsor Action Items
- Review plan recordkeeping procedures for identifying terminated vested participants and the date benefits must commence to each.
- Ensure that the plan has implemented (and follows) a policy for locating missing participants, and that a diligent effort has been undertaken to locate missing participants. Consult any third-party administrators with such responsibilities to confirm they are following appropriate procedures.
- Keep accurate records of all efforts to locate missing participants, and document reasons for using the more expensive search services (if plan assets will be used to pay for such services).
- Monitor forfeitures, as increased forfeitures could indicate a breakdown of the plan’s procedures for locating missing participants.
- Take actions to reduce the occurrence of missing participants, such as:
- Periodically “scrubbing” data by comparing plan records to an outside database, such as the Social Security Death Index or the National Change of Address database. Significant plan events, like a change in recordkeepers or a lump sum window offer for plan de-risking, are opportune times to review and update the data in a plan’s recordkeeping system.
- Including a reminder on all plan communications (e.g., benefit statements, annual notices) for participants to update their contact information, with easy-to-follow instructions.