The US Department of Labor (DOL) is rolling out an initiative focused on the investigation of benefit payment practices of the defined benefit plans of a number of Fortune 500 companies. The investigations are concentrated on plan procedures in three key areas: (i) locating missing participants, (ii) informing deferred vested participants that a retirement benefit is payable, and (iii) commencing benefit payments when the participant reaches age 70½. The initiative was launched out of the Philadelphia regional office, but the DOL has indicated that it intends to expand the investigation further.
As this initiative continues to build momentum (and gain publicity), plan sponsors and administrators of defined benefit plans should consider whether a review of plan procedures for locating participants and paying benefits would be timely.
Overview of the DOL’s Initiative
The issue of benefit payments—and in particular the payment of benefits at the participant's required beginning date (that is, in connection with the participant reaching age 70½)—has long been a focus of Internal Revenue Service retirement plan audits. By contrast, the DOL's interest in this topic is fairly new. According to reports, this interest stems from the influx of inquiries that the DOL receives each month after the Social Security Administration mails Potential Private Retirement Benefit Information Notices to recipients regarding pension benefits that might be owed.
According to the DOL, it has discovered, among other things, that (i) some plans under investigation have procedures for locating missing participants, but the procedures are not being followed in practice; and (ii) at least a few of the plans seemed to have significant recordkeeping problems and could not verify the age of their participants, with the obvious consequence that the plans could not pay participant benefits when required. A representative from the DOL has said that investigators have found numerous problems with plan records, such as individuals who appear to be over 100 years old with birthdays identified by what are clearly “plug” dates. So far, the DOL has identified more than $500 million in unpaid pension benefits that are owed to participants over the age of 70½.
While it's difficult to verify the accuracy of the DOL's claims, corporate transactions, plan mergers, plant closings, and accidental loss or destruction of files are just some of the reasons that plans regularly confront the problems of missing participants/beneficiaries and inaccurate or incomplete plan records. However, as the DOL has emphasized, plan administrators have a fiduciary duty to maintain adequate records to determine plan benefits and to make a diligent effort to locate missing participants when benefits are due to be paid.
Considerations for Plan Sponsors and Administrators
In light of the DOL investigations and the increased focus on these issues, it may be a good time to revisit plan procedures for addressing both missing participants and gaps in plan records. Plan sponsors and administrators may consider conducting a high-level review of plan procedures relating to the location of missing participants and the adequacy of participant records or, more proactively, a targeted undertaking such as a missing participant search and/or a demographic data clean-up initiative.
Plan sponsors and administrators may want to consider addressing these issues as part of a more comprehensive legal audit of their plans, which could cover both administrative and fiduciary obligations (we have undertaken such audits for many clients). Regardless of the actions taken, fiduciaries should take care to memorialize their activities and document efforts to fulfill their administrative duties. Once written procedures are in place, plan fiduciaries should monitor whether they are being followed in practice.