When employees leave their jobs, financial advisors typically encourage them to roll over their 401(k) plans into a new employer’s plan or perhaps an IRA. Many people follow this advice, but not everyone.
As you may be able to attest, many employers that sponsor 401(k)s or other qualified plans end up with account holders who are former employees with out-of-date contact information. In benefits parlance, these individuals are “missing participants.”
The situation can create administrative hassles for you at first and, later, turn into a major problem when the accounts in question must start making distributions. Here are some best practices to consider when you find yourself with a missing participant.
Getting started
When a participant is unresponsive or you reasonably believe your contact information is inaccurate, first consider taking four basic steps:
- Use certified mail to reach out to the person or, if more cost-effective, a private delivery service with similar tracking features,
- Review your employment records and all your benefits plans for up-to-date information,
- Attempt to identify and contact the individual’s designated beneficiaries under those plans for information, and
- Use free electronic tools such as internet search engines, public record databases and social media accounts.
You might also reach out to a participant’s colleagues or union, as well as register the person’s name on public or private pension registries. According to guidance issued by the U.S. Department of Labor, privacy concerns regarding such actions can be alleviated if your retirement plan fiduciary asks the missing participant’s current employer, other plan fiduciary or beneficiary to have the missing participant contact your retirement plan.
Escalating your efforts
If initial search steps are unsuccessful and the account balance is large enough to justify the expense, paying for a professional search may be appropriate. This could mean using fee-based internet search engines, commercial locator services, credit-reporting agencies, information brokers, investigation databases and other similar premium services.
You might be able to charge the fee against the account if it’s reasonable and the allocation method is consistent with your plan’s terms and the Employee Retirement Income Security Act.
Giving up
Some plan documents describe how to handle account balances of missing participants when search efforts fail. Others may authorize administrative committees to adopt policies for this situation. Following written policies and procedures for handling missing participants — and documenting actions taken — helps ensure consistency and lower the risk of legal liability.
Some plan provisions or policies direct fiduciaries to allocate the funds in the account among the accounts of the remaining participants, subject to restoration if the individual should reappear. Under IRS regulations, such an allocation may be a permissible forfeiture so long as the plan is obligated to restore the missing individual’s account balance in the event the person is eventually found.
Preventing the issue
Perhaps obviously, the best practice of all is to establish strong administrative procedures that minimize the likelihood of missing participants. These include:
- Proactively maintaining an accurate plan census,
- Periodically prompting participants and beneficiaries to reconfirm their contact info, and
- Regularly auditing census data, paying special attention to contact info in business transactions or when recordkeepers change.
Even changing the way plan communications are written and designed can increase the chances that participants will recognize and engage with them.
Addressing the challenges
Sponsoring a 401(k) plan can help attract strong job candidates, retain employees and boost morale. But plan administration has its challenges — and one of them is missing participants. Work with your benefits advisors to address the matter. Meanwhile, we can help you assess the costs and financial impact of your plan.