On Aug. 14, 2014, the DOL published Field Assistance Bulletin (FAB) No. 2014-01, which replaces FAB 2004-02. As background, under the IRC, a plan administrator must distribute all plan assets as soon as administratively possible following plan termination. Before making distributions, the fiduciary is obligated to contact the plan’s participants to request direction on how to distribute the participants’ account balances. This becomes problematic when plan fiduciaries can’t locate certain plan participants.
ERISA Section 404 requires that plan fiduciaries act prudently and in the best interest of the plan’s participants and beneficiaries. Consistent with those requirements, plan fiduciaries must make reasonable efforts to locate missing participants or beneficiaries so that they may direct the distribution of their plan accounts. The FAB outlines what can be done when a plan fiduciary determines that a participant cannot be located.
In the new guidance, the DOL highlighted some of the changes that have occurred in the 10 years between FAB 2004-02 and FABA 2014-01. Specifically, the IRS and Social Security Administration (SSA) no longer offer letter-forwarding services to help employers locate missing plan participants. The DOL also acknowledged that Internet search technology has advanced tremendously since FAB 2004-02. The FAB takes those changes into account by eliminating the requirement that plan administrators use the discontinued letter-forwarding service and expanding the required search steps to include the use of electronic search tools.
The employer’s first responsibility in terminating the plan is to notify participants that the plan is being terminated and that their benefits will be distributed. This initial notification can continue to be done using certified mail or electronic notification. If the participant does not respond to this notice with instructions on the distribution, or if the plan fiduciary has a reason to believe that the plan does not have the most current address, then the fiduciary should take steps to locate the participant. The DOL laid out four steps that must be taken before abandoning efforts to locate a missing participant:
- Use Certified Mail – This step is easy and cost-effective. The DOL has even provided a model notice that could be used for such mailings. (Appendix to 29 C.F.R. § 2550.404a-3 (2006) (amended 2008))
- Check Related Plan and Employer Records – Other employer plans, such as the employer’s group health plan, may have updated address information for the participant.
- Check with Designated Plan Beneficiary – Beneficiaries of the employee may be a source of updated information and could be located easier.
- Use Free Electronic Search Tools – Plan fiduciaries must make reasonable use of free Internet search tools to search for a missing participant or beneficiary.
The DOL also identified additional search steps for employers who complete the required search steps and fail to locate a participant. When considering additional search steps, plan fiduciaries should consider the size of the participant’s account and the cost of further search efforts. Additional search steps include the use of paid Internet search tools, commercial locator services, credit reporting agencies, information brokers or investigation services.
The DOL also identified distribution options in the event that a fiduciary has exhausted all steps possible for locating a particular participant. Rolling the participant’s funds into an individual retirement account (IRA) is the DOL’s preferred option. However, other distribution options, such as opening an interest-bearing bank account or transferring the funds to a state unclaimed property fund, may be necessary if the fiduciary can’t find an IRA provider who will take the rollover funds.
In summary, terminating a defined contribution plan involves ERISA fiduciary decisions, and fiduciaries should consider the steps provided in this guidance when making decisions about the account balances of missing participants. Contact your advisor if you have any questions about the necessary steps to take in terminating a defined contribution plan.