In 2016, the Department of Labor (DOL) began a pilot program in one regional office to review how large defined benefit pension plans notified and paid benefits to terminated vested participants, particularly to those participants that are considered “lost” or “missing.” The DOL found that many plans were not taking adequate steps to locate lost or missing participants, and the pilot program quickly went national. For fiscal 2017, the DOL reported that it recovered $326.7 million in benefits for plan participants resulting from this program.
While the DOL is continuing its program with defined benefit plans, recent DOL audit inquiries clearly demonstrate that it is expanding its efforts to include defined contribution (DC) plans. DOL information requests are targeting DC plans’ policies and procedures to locate lost and missing participants and pay benefits due. This is a particularly important issue for multiemployer (Taft-Hartley) defined contribution funds. Maintaining accurate participant records for basic information like home addresses and dates of birth is difficult due to the transient nature of the workforce participating in these plans. Additional information often maintained by single employer plans that can be used to contact participants, such as personal email address or cell phone numbers, is rarely obtained. In addition, many multiemployer funds receive contributions on behalf of “travelers,” employees who leave the jurisdiction of their home local union to work on projects for their employer. Under the typical “money follows the man” contribution rules, employers make fringe benefit contributions to the local union where the work is performed. Often, participants fail to request reciprocity to transfer those contributions back to the benefit plans sponsored by the employee’s home local, or the participant doesn’t realize or forgets they have a defined contribution account through other locals. It is extremely difficult for the administrators of multiemployer funds to maintain accurate information for these participants.
While single employer plans often have vesting rules that exclude short-term employees, or have plan provisions to pay out small balances, these rules are not common in multiemployer plans. Participants often vest in employer contributions to multiemployer defined contribution plans from the first hour worked. While single employer plans don’t want the expense involved in maintaining small account balances, a dirty little secret of multiemployer DC plans is that they like those balances to cover expenses that otherwise would have to be paid by their local members. Multiemployer DC plans frequently have a management fee of $10-20 per participant per quarter to pay for plan expenses. This charge is not proportional to account balances. Therefore, small balances and balances from missing participants help absorb costs that would otherwise be charged to the home local’s members.
So why is the missing participant issue such a big deal now? The DOL’s mission to is ensure that participants are treated fairly in accordance with plan provisions and receive the benefits to which they are entitled. The fiduciary obligations under the Employee Retirement Income Security Act include the administrative duty to pay all benefits due. The failure to actively search for lost or missing participants that may be due a benefit could be considered a potential violation of the duties of prudence and loyalty, the duty to follow plan provisions and the duty to maintain adequate records. The potential for the personal liabilities being assessed to plan fiduciaries is an effective enforcement tool for the DOL.
Internal Revenue Service regulations are another reason that locating missing participants is important. Required minimum distributions must be applied by April 1 of the year following when a participant turns 70 1/2. Failure to begin benefit payments in a timely fashion could cause qualification issues for the plan and incur stiff tax penalties for participants.
The DOL has not provided clear guidance for plans regarding responsibilities for lost or missing participants. The DOL likely does not want to give the appearance of a safe harbor one-size-fits-all approach to this situation. However, there are some steps that all plans should implement to protect themselves and better serve their participants.
Develop policies and procedures related to paying terminated vested participants, including:
- Determine when a participant is considered terminated vested (e.g., no contributions received for a period of time).
- Define when a participant is considered lost or missing.
- Develop guidelines to identify when participant searches should be conducted.
Utilize a systematic approach:
- Follow up on all mail correspondence returned as undeliverable.
- Use free electronic search tools, such as the Social Security Death Index or the National Change of Address database.
- Periodically use paid search services.
- Use the telephone, union contacts or social media to locate participants (e.g., people often maintain the same cell phone number even though they have moved several times).
- Keep accurate records of all efforts made to locate missing participants.
The steps listed above are not intended to be comprehensive, but provide a general framework. Developing and maintaining an effective and efficient approach to improving the management of participant data will be a significant undertaking for many multiemployer funds. However, the DOL’s current focus on locating terminated vested participants is a reminder to plan administrators and trustees of their fiduciary responsibility to protect the benefits earned by their participants.