FAB 2014-1 – Does It Go Far Enough?
In August 2014, the U.S. Dept. of Labor’s Employee Benefits Security Administration (DOL/EBSA) announced important new guidance regarding missing participants of retirement plans. This guidance, FAB 2014-1, addresses how fiduciaries of terminated defined contribution plans can fulfill their obligations under ERISA to locate missing participants and properly distribute their account balances. It also replaces the previous guidance issued 10 years earlier in FAB 2004-02.
Although FAB 2004-02 addressed the same issues, FAB 2014-1 contains some important differences regarding search steps and distribution options. As a result, plan fiduciaries now have an easier and more effective protocol for searching for missing participants, along with very clear guidance on the distribution option of choice. This guidance applies only to terminated defined contribution plans, as the Pension Benefit Guaranty Corporation (PBGC) has a missing participant’s program for terminated defined benefit plans subject to PBGC coverage.
Missing Participant Search Steps
FAB 2014-01 outlines four search steps that fiduciaries should take before abandoning efforts to locate missing participants. These search steps are in no particular order, and are numbered for ease of reference only:
- Use Certified Mail. Certified mail to the participant’s last known address offers a simple, cost-effective way to potentially locate missing participants in order to distribute benefits. The DOL provides a model notice for this step, but fiduciaries are not required to use it in order to satisfy the safe harbor.
- Check Related Plan and Employer Records. The employer or another of the employer’s plans (such as a group health plan) may have more up-to-date information on the participant. Plan fiduciaries must ask the employer and administrator(s) of related plans to search their records for a more current missing participant address. This step may involve privacy concerns, especially with medical plan information.
- Check with the Designated Plan Beneficiary. When searching the terminated plan’s records (or records of related plans), plan fiduciaries must try to identify and contact anyone designated as a beneficiary by the missing participant. If privacy concerns arise, the plan fiduciary can request that the designated beneficiary contact or forward a letter to the missing participant.
- Use Free Electronic Search Tools. Plan fiduciaries must make reasonable use of Internet search tools that do not charge a fee to search for a missing participant or beneficiary. These can include Internet search engines, public record databases – such as those for licenses, mortgages and real estate taxes – obituaries, and social media. (It’s amazing what you can find out with a quick Google search!)
Suppose you try all four steps and still can’t find the missing participant. At this point, the DOL considers the best approach (in most cases) to be distributing the missing participant’s account into an IRA per 2550.404a-3. Fiduciaries may also consider opening an interest-bearing federally insured bank account in the missing participant’s name, or transferring the account balance to a state unclaimed property fund. Sounds reasonable, but we see a real downside to these last two approaches.
Unlike tax-free rollovers into an individual retirement plan, funds transferred to a bank account or state unclaimed property fund are subject to income taxation, mandatory income tax withholding, and a possible additional tax for premature distributions. Also, any interest that accrues after the transfer would normally be subject to income taxation upon accrual.
As the DOL states in its updated guidance, these tax consequences can significantly reduce the amount of money available for retirement. A prudent and loyal fiduciary would not voluntarily subject a missing participant’s funds to such negative consequences in the absence of compelling offsetting considerations. In fact, in most cases a fiduciary would violate ERISA section 404(a)’s obligations of prudence and loyalty by causing such negative consequences rather than making an individual retirement plan rollover distribution.
In the presence of such strong language, we believe the rollover IRA offers the best distribution option, as any others will almost always constitute a breach of fiduciary duty under ERISA. We have long supported this approach at PenChecks, and encourage all fiduciaries to embrace it as well. Moreover, the rollover IRA can also be used by certain types of defined benefit plans not subject to PBGC guidelines, as well as non-terminating defined benefit plans that must report to the PBGC.
Overall, we see FAB 2014-1 as good updated guidance that provides some much-needed clarity for managing missing participant retirement funds. While not a complete solution, we applaud the DOL for taking these important steps in the right direction.
Field Assistance Bulletin 2014-01 on TPAs and Plan Sponsors Quick Overview
Click here for our article summarizing the impact of Field Assistance Bulletin 2014-01 on TPAs and Plan Sponsors. This quick overview makes a great value-added piece to share with colleagues and clients.
Tom Drosky, PenChecks Regional Vice President
Mike McWherter, JD, PenChecks Chief Compliance Officer