The US Department of Labor (DOL) provided three long-awaited pieces of sub-regulatory guidance on January 12 on the issues of missing participants and uncashed checks.
This is an area that has been the subject of a focused DOL enforcement program over the last few years, but plan fiduciaries have long sought clearer guidance on the obligations in this area. While the new guidance lacks the force of regulation, it provides guideposts and clarity (at least as to the DOL’s position) in some particularly vexing areas.
Under ERISA, plan administrators often encounter challenges with respect to missing participants primarily in three respects: (1) locating terminated vested participants that do not update their personal information with the plan; (2) encouraging terminated vested participants to commence benefits on time (namely by the plan’s normal retirement age or required beginning date); and (3) ensuring retirement benefit payments are received and cashed by participants. Incomplete or inaccurate records—often from retirement plans acquired through mergers decades ago—and operational challenges with legacy recordkeeping systems compound these challenges.
Through its Terminated Vested Participant Project (TVPP) audits, the DOL’s Employee Benefits Security Administration engaged in a nationwide effort to understand plan administration in these areas, identify problems and encourage plan fiduciaries—often through findings of fiduciary breaches or potential breaches—to modify (and, in some cases, establish) plan procedures concerning missing participants and uncashed checks. In the course of the TVPP audits, plan fiduciaries and service providers often found themselves defending existing practices and procedures (and legacy systems limitations) despite the absence of clear, up-to-date guidance on their obligations beyond ERISA’s overarching fiduciary duty to administer a plan solely for the benefit of its participants.[1]
The DOL has now issued three sets of sub-regulatory guidance that provide some clarity:
The Retirement Plan Best Practices Release summarizes what the DOL views as “best practices” for retirement plan fiduciaries navigating issues around missing participants, and “red flags” that the DOL views as indicators of retirement plan fiduciaries who have a problem with missing or nonresponsive participants. As such, the Retirement Plan Best Practices Release provides a framework for fiduciaries to consider in meeting their obligations to attempt to locate missing participants or obtain instructions from nonresponsive participants.
The TVPP Audit Release guidance outlines practices that the DOL views as appropriate for the TVPP audits. The guidance notes that that these investigations are focused on plans “that appear to have systemic issues with plan administration, particularly issues related to keeping track of terminated vested participants and beneficiaries, and timely distributing benefits.” Fiduciaries may wish to review both the list of requested information and an explanation of the investigation process when preparing for or facing a DOL investigation. Additionally, the DOL makes note of certain practices that it views as insufficient.
The FAB Temporary Enforcement Policy establishes a nonenforcement policy for fiduciaries and administrators of terminating defined contribution plans and abandoned individual account plans (abandoned plans) that use the Pension Benefit Guaranty Corporation’s (PBGC) expanded Missing Participants Program and transfer account balances of missing or nonresponsive participants to the PBGC rather than to an IRA, bank account or state unclaimed property fund. However, the nonenforcement policy does not preclude the DOL from pursuing violations under Section 404 or 406 of ERISA for a failure to diligently search for participants and beneficiaries prior to the transfer or for a failure to maintain plan and employer records.
The sub-regulatory guidance provides a potential roadmap for ERISA fiduciaries seeking to navigate the challenges of missing and unresponsive participants and the related challenges of participants that have not commenced on time or who have uncashed checks. In addition, for plans that are preparing for or undergoing a TVPP investigation, the guidance offers insight that can help navigate the DOL’s inquiries, including importantly what the DOL may require in order to avoid fiduciary breach findings and to close the investigation.
While the DOL acknowledged that “[n]ot every practice . . . is necessarily appropriate for every plan,” and that fiduciaries “should consider what practices will yield the best results in a cost effective manner,” there is a concern that the DOL, or private litigants, may attempt to frame the DOL guidance as a baseline of expected practices. We encourage plan fiduciaries, administrators and service providers to consult the new guidance and consider whether to modify existing practices or procedures.
The Retirement Plan Best Practices Release—which has perhaps the broadest implications for everyone involved in plan administration—provides specific examples on the following practices:
There are a few additional notable points about the DOL’s interpretations of a retirement plan fiduciary’s duties that are worth highlighting:
Observations: This is important because DOL’s TVPP audits have focused on defined benefit plans. This signals that the DOL is also concerned about missing participant search and outreach efforts for defined contribution plan participants.
Observations: This recognizes that plan fiduciaries can balance the costs and benefits when considering different approaches to attempting to communicate with missing and nonresponsive participants.
Observations: We note that the use of social media to conduct missing participant searches may be difficult for service providers and may raise concerns around identity theft. As such, there may be challenges in implementing such searches with appropriate safeguards.
Observations: Although this means that the DOL is not disputing the ability of plan’s to forfeit benefits as a matter of law (the DOL has been known to take contrary positions during TVPP audits), it also means that the DOL believes that ERISA’s fiduciary duties require continued searches even after a benefit is permissively forfeited under the IRS rules. The DOL includes a reminder in the FAB Temporary Enforcement Policy that the PBGC believes that a claim to conditionally forfeited benefits is not lost on a plan’s termination, underscoring, as a practical matter, that plans may still need to conduct searches and outreach even for forfeited benefits.
Observations: This acknowledgment is helpful because in the past DOL investigators have made citations against individual fiduciaries, even in circumstances where there were no facts that even approached “substantial errors.”
Observations: We note that reliance on the DOL’s electronic disclosure safe harbor may assist fiduciaries and relieve some of the burdens associated with the missing participant obligations. Our blog post provides an overview of this new option.
More generally, the DOL guidance still leaves unanswered questions and also creates some new ones. For example, the DOL guidance does not materially address how plans should handle participants that are the least likely to be locatable and/or still due a benefit, such as participants that are very old, long missing, long deceased or have material data gaps (such as incorrect social security numbers). Another issue unaddressed by the guidance is how plans should address issues such as identity theft or plan resource limits, which may hinder search and outreach efforts. Finally, there is no acknowledgement in the DOL guidance of the challenges of participant inaction (such as participants that are not missing but voluntarily do not commence benefits or do not cash checks).
Observations: Because of these gaps, the DOL guidance may be a starting point but will not eliminate the continuing challenges presented by missing participants. Unfortunately, we expect that these issues will continue to hinder efforts by plan fiduciaries to locate participants and resolve unpaid benefits.
We encourage plan fiduciaries, administrators, and service providers to consult the new guidance and consider whether to modify existing practices or procedures and to consider where additional guidance may be needed.
We are available to fiduciaries and administrators as they work through these unanswered questions and continue to address open DOL investigations. If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:
Boston
Lisa Barton
Chicago
Marla Kreindler
Dan Salemi
Julie Stapel
New York
Craig Bitman
Philadelphia
Bob Abramowitz
Amy Kelly
Mark Simons
Pittsburgh
John Ferreira
Matt Hawes
Elizabeth Goldberg
Randall C. McGeorge
R. Randall Tracht
Washington, DC
Rosina Barker
Althea Day
Michael Gorman
Lindsay Jackson
Daniel Kleinman
Greg Needles
Michael Richman
Natalie Wengroff
Jonathan Zimmerman
[1] Prior to this new guidance, the DOL’s guidance was limited to a 2014 DOL Field Assistance Bulletin (FAB 2014-01) addressing searches in connection with defined contribution plan terminations.