DOL Addresses Fiduciary Duty to Locate Missing Participants

Practical Law Legal Update 6-578-4106 (Approx. 7 pages)

DOL Addresses Fiduciary Duty to Locate Missing Participants

by Practical Law Employee Benefits & Executive Compensation

Plan Administrators' Duties

The Internal Revenue Code requires a plan administrator to distribute a terminated plan's assets as soon as administratively feasible after the termination. Before making a distribution, the administrator must contact all plan participants, regardless of their length of service or the size of their account balances, for directions on how to distribute their account balances. Occasionally, some participants do not respond to the administrator's notices or mail sent to their address is returned. The administrator has a duty to search for these unresponsive participants.

FAB 2014-01 Replaces FAB 2004-02

The DOL last provided guidance on locating missing plan participants in FAB 2004-02. FAB 2014-01 replaces FAB 2004-02 and reflects important changes that have occurred since 2004, which include:

The discontinuation of the IRS and Social Security Administration's (SSA's) letter-forwarding services for locating missing plan participants.
The improvement in Internet search technologies.
The DOL's codification of its enforcement safe harbor for distributing missing participant benefits to individual retirement accounts or annuities (IRAs).

FAB 2014-01 also includes suggestions from the 2013 ERISA Advisory Council.

Fiduciary Duty to Notify Participants of Plan Termination

Although the decision to terminate a defined contribution plan is a settlor decision rather than a fiduciary decision, the fiduciary responsibility provisions of ERISA govern the steps taken to implement this settlor decision, including steps to locate missing participants. ERISA's fiduciary duties of prudence and loyalty (see Practice Note, ERISA Fiduciary Duties: Overview) require plan fiduciaries to make reasonable efforts to locate missing participants or beneficiaries, so that they can implement the participants' or beneficiaries' directions on plan distributions.

If a plan fiduciary reasonably determines, in accordance with FAB 2014-01, that a participant or beneficiary cannot be located, the fiduciary may distribute the missing participant’s or beneficiary’s benefits in the manner described in FAB 2014-01 (see IRA Rollovers: The Preferred Distribution Option and Alternative Distribution Options). As a result:

The distribution ends the individual’s status as a participant covered under the plan,
The distributed assets are no longer plan assets under ERISA (see Practice Note, ERISA Plan Asset Rules).

However, the DOL notes that if the distributed benefit is reduced due to a fiduciary breach, the individual would still have standing to file suit against the breaching fiduciary under ERISA Section 502(a)(2) (29 U.S.C. § 1132(a)(2)).

A plan fiduciary may charge missing participants’ accounts reasonable expenses for efforts to find them. The amount charged to a participant’s account must be reasonable and the method of allocating the expense must be consistent with the terms of the plan and the plan fiduciary’s duties under ERISA (see Practice Note, Paying Employee Benefit Plan Expenses and Paying Employee Benefit Plan Expenses Chart).

Required Search Steps

If a plan administrator uses a routine method of notification (for example, first class mail or electronic notification) and a participant or beneficiary does not respond with the information necessary to make a distribution, the fiduciary must take steps to locate the individual.

FAB 2014-01 notes that certain search procedures involve so little cost and such high potential for success that a fiduciary should always take them before abandoning efforts to find a missing participant, regardless of the size of the participant's account balance. The required search steps include:

Using certified mail. The DOL has provided a model notice that could be used for such mailings as part of the regulatory safe harbor for plan distributions (see IRA Rollovers: The Preferred Distribution Option). This notice is not required and other notices could satisfy the safe harbor.
Checking related plan and employer records. Fiduciaries of the terminated plan must ask both the employer and administrators of related plans (such as group health plans) to search their records for a more current address for the missing participant. The DOL notes that if there are privacy concerns, the plan fiduciary can ask the employer or fiduciary of the related plan to directly contact or forward a letter to the missing participant or beneficiary and request that he contact the searching plan fiduciary (see HIPAA Privacy, Security, and Breach Notification Toolkit).
Checking with the designated plan beneficiary. The administrator can look for beneficiaries in the terminated plan's records or the records of related plans. If there are privacy concerns, the plan fiduciary can ask the designated beneficiary to contact or forward a letter for the terminated plan to the missing participant or beneficiary (see HIPAA Privacy, Security, and Breach Notification Toolkit).
Using free electronic search tools. The administrator must search for a missing participant or beneficiary, including Internet search engines (such as Google), public record databases (such as those for licenses, mortgages and real estate taxes), obituaries and social media. These replace FAB 2004-02's requirement that administrators use the IRS letter-forwarding service or the SSA letter-forwarding service.

Failing to take these steps would violate the fiduciary's obligations of prudence and loyalty under ERISA Section 404(a) (see Practice Note, ERISA Fiduciary Duties: Overview).

Additional Steps

If a plan administrator follows the required search steps, but does not find the missing participant or beneficiary, the fiduciary must consider if additional search steps are appropriate, based on facts and circumstances (such as the size of the participant's account balance and the cost of further search efforts).

Possible additional search steps include the use of:

Internet search tools. Presumably, the DOL is referencing paid Internet search tools as the use of free Internet search tools is already required.
Commercial locator services.
Credit reporting agencies.
Information brokers.
Investigation databases.
Similar paid search services.

Selecting a Distribution Option

If a plan fiduciary reasonably determines, in accordance with FAB 2014-01, that a participant or beneficiary cannot be located, the fiduciary may distribute the missing participant's or beneficiary's benefits under FAB 2014-01. A plan fiduciary's choice of a distribution option for a missing participant's account balance is a fiduciary decision under ERISA.

IRA Rollovers: The Preferred Distribution Option

ERISA Section 404(a) (29 U.S.C. § 1104(a)) requires plan fiduciaries to consider distributing missing participants' benefits into IRAs (as defined in IRC Sections 408(a)-(b)).The choice of an IRA also requires fiduciary judgment in choosing:

The IRA trustee, custodian or issuer.
The initial IRA investment.

FAB 2014-01 explains that in the DOL's view, the best approach in most cases when selecting among IRAs will be to distribute the missing participant's account balance into an IRA under the DOL's regulatory safe harbor for terminated defined contribution plans (29 C.F.R. §2550.404a-3). This regulation allows plan fiduciaries to satisfy their fiduciary responsibilities under ERISA Section 404(a) for distributions from a terminated defined contribution plan on behalf of a missing participant relating to:

The distribution of benefits.
The selection of an IRA provider.
The investment of the distributed funds.

The conditions of the safe harbor include ensuring that the IRA uses investment products designed to preserve principal and has reasonable fees and expenses compared to other IRAs offered by the provider.

The DOL intends to reevaluate the guidance provided in FAB 2014-01 on preferred distribution options for missing participants after the PBGC publishes final regulations permitting a distribution from a missing participant's account in a terminated defined contribution plan to the PBGC's missing participants program.

Alternative Distribution Options

FAB 2014-01 provides that if a plan fiduciary cannot find an IRA provider to accept a direct rollover distribution for a missing participant or determines not to make a rollover distribution for some other compelling reason based on the particular facts and circumstances, the fiduciary may consider:

Opening an interest-bearing federally insured bank account in the name of the missing participant or beneficiary.
Transferring the account balance to a state unclaimed property fund.

Before making this decision, the fiduciary must prudently conclude that this distribution is appropriate despite the potential considerable adverse tax consequences to the plan participant. In most cases, a fiduciary would violate his obligations of prudence and loyalty under ERISA Section 404(a) (29 U.S.C. § 1104(a)) by causing such negative tax consequences rather than making an IRA rollover distribution.

When deciding between distribution to a federally insured bank account or a state unclaimed property fund, the plan fiduciary should consider the features of each option:

For a bank account, these include:
- any bank fees, such as charges for establishing or maintaining the account; and
- any interest payable on the account's funds.
For a state unclaimed property fund, these include:
- the availability of a searchable database maintained by the state, which may help participants find their retirement funds; and
- any interest payable by the state.

FAB 2014-01 also provides guidance on establishing IRAs or bank accounts for missing participants in light of perceived conflicts with the USA PATRIOT Act.

Unacceptable Distribution Option

FAB 2014-01 instructs plan fiduciaries that they should not use 100% income tax withholding as a way of distributing benefits to missing plan participants and beneficiaries. Doing so would violate ERISA's fiduciary requirements because it would effectively transfer the benefits to the IRS, and missing participants might not receive the full benefit to which they are entitled. The DOL expressed the same position in FAB 2004-02.

Practical Implications

Defined contribution plan fiduciaries must change the methods they currently use to locate missing participants in the event the plan terminates based on the guidance provided in FAB 2014-01. Fiduciaries of terminating defined contribution plans should:

Consider developing plan procedures for locating missing participants based on the required search steps in FAB 2014-01 and document compliance with these procedures.
Review the requirements for the DOL safe harbor for distributing missing participant accounts to IRAs and determine how to comply with the safe harbor, including researching available IRA providers and investments.

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