In previous blog posts, we discussed the concept of “missing” participants in a 401(k) Plan. These are participants that have assets in your Plan, but they have terminated employment with your company. If these individuals don’t move the money out of your Plan into either another Plan, an Individual Retirement Account (IRA) or take the funds as a cash withdrawal, you may lose touch with them over time. It’s your fiduciary responsibility to the Plan and its participants to make a good faith effort to ensure all participants have access to their funds and that eventually the money is paid out to them or their beneficiaries as they direct.
Key Takeaways:
- Plan sponsors have a fiduciary responsibility to ensure all participants, even terminated ones, have access to their funds
- Taking preventative and preparatory measures to maintain contact with Plan participants by working with them to either move their funds to another Plan or have them take cash withdrawals before their exit to avoid this scenario The Department of Labor has been monitoring the issue and is currently seeking a remedy through Congress
Department of Labor Taking Steps to Address Issue
The Department of Labor (DOL) has been trying to find a way to help employers with missing participant. They don’t like the situation in which an employee has saved money into a 401(k) Plan but then cannot get access to it when they are ready to retire or may need the funds in the case of an emergency. The DOL’s most current strategy is to request funds from Congress in their 2024 budget request for 22 full-time employees (and $5 million) to work on this issue. The goal is to set up a dedicated team to help participants locate their missing funds.
Vulnerable Plan Participants Increase Urgency for a Solution
During 2021, the Employee Benefits Security Administration (EBSA) located $1.5 billion in lost benefits for more than 16,000 participants. This shows the extent of the problem. Many of these impacted individuals were elderly and living on very small incomes without knowing or understanding that they had retirement income sitting in an account that they could access. EBSA would like the project team to identify industries in which this problem may be most acute.
One area EBSA is especially concerned about is non-English speaking participants. Most notices and forms are provided in English and may be ignored if the participant does not speak English or does not understand the terminology used. They suggest employers ask their service providers for forms and booklets in other languages to assist in plan administration for all participants. Also, work with the service providers to provide clear instruction on how to assist employees in consolidating accounts from previous employers.
Listed below are actionable steps a Plan sponsor or administrator can take to ensure participants have continued access to their benefit funds, even if they terminate employment, move or change phone numbers.
Take Preventative Measures
We have discussed ways to avoid this problem by working with terminating employees to have their money moved as soon as possible into another Plan. One way to avoid this situation is to provide information to all employees as they are exiting and follow up with them to ensure they take steps to move the money.
Update or Add Plan Provisions to your Plan Document
Consider including a Plan provision in your Plan Document so that you can move funds to an individual account without requiring the participant’s consent after termination of employment if the funds are smaller (for example less than $1,000 or less than $5,000).
Doing so will allow you to move the funds to another account or Plan while you still have the participant’s address and you can let them know of the transaction for their action in the future. This relieves you of the responsibility of trying to reach terminated employees years into the future.
Consider Implementing These EBSA Suggestions
In the meantime, EBSA suggests establishing a better mechanism inside your company to maintain the address and other contact information for participants that no longer work with your company. This includes retired individuals that have not yet begun any distributions out of their account.
This can be a time-consuming effort, but it is a part of the plan administration responsibilities. EBSA also suggested reviewing any returned checks with your service provider as this indicates that funds were requested to be distributed to a participant, but they did not actually receive the money. This was probably due to a bad address in the service provider file.
Utilize All Available Tools to Ensure Compliance
Lastly, there are databases searchable online to assist in locating missing participants. In the case of a deceased participant, it is important to make sure you have current beneficiary information in the participant file. Most often, service providers ask that employers maintain this information and update it periodically.
We recommend Plan Sponsors implement a practice to have their employees and terminated or retired participants review the beneficiary information on a periodic basis to ensure it is current and that there will not be issues in the event of the death of a participant.
For more information on how our 401(k) audit team can help, request a free consultation below or contact Kim Moore at (260) 918-8824 to discuss your unique 401(k) audit needs.
