Employer-sponsored retirement plans have long contended with issues related to missing and lost plan participants.
What’s a Missing Plan Participant?
Former employees with a retirement balance who can’t be located to deliver distributions or paperwork, or who don’t respond to communications or checks that are delivered to them.
Studies suggest there may be millions of them, and increasing employment mobility makes it even harder to keep track of former employees. Over time, a plan’s missing participants can add up and cause serious problems:
- Major administrative headaches around uncashed checks
- Compliance issues around plan notices and other communications
- Tax complications associated with failing to distribute required minimum distributions
- Fiduciary risk associated with stewarding the participant’s retirement savings
But “more than a small number” of nonresponsive or missing participants can be a red flag to regulatory authorities. And the longer a participant has been missing, the harder it gets to find them.
In this article, we’ll cover what you need to know about missing participants:
- Guidance and well-advised practices for minimizing missing participants
- Advice for executing and documenting missing participant searches
- Documenting fiduciary loyalty and administrative compliance
A Lost-and-Found for Retirement Accounts
It may be hard to believe that people walk away from hard-earned retirement accounts, but they do. Retirement plans with a delay period between end of service and distribution payments are particularly vulnerable.
Plus, most ESOP participants don’t make cash contributions to their accounts; without effective ESOP communication, the benefit may be out of sight and out of mind. In the case of a deceased participant, the employee’s beneficiary may be missing.
How serious is the issue? Well, the SECURE 2.0 Act creates a searchable database for participants or beneficiaries to search for plan administrators’ contact information, to reach out directly to plans where they may have left behind a retirement account.
Starting in 2025, plans will be required to share the information with the Department of Labor for use in the database. But the establishment of that database doesn’t eliminate the need to follow available DOL guidance and implement recommended best practices.
Should an ESOP Apply DOL’s Pension Best Practices?
In 2021, DOL released guidance on missing participants. While the language of the guidance specifically referenced pension plans, it also stated:
“This document outlines best practices that the fiduciaries of defined benefit and defined contribution plans, such as 401(k) plans, can follow to ensure that plan participants and beneficiaries receive promised benefits when they reach retirement age.”
The guidance lists warning signals of a plan that has a problem with missing and non-responsive participants, such as:
- More than a small number of missing or nonresponsive participants
- More than a small number of terminated vested participants who have reached normal retirement age but have not started receiving benefits
- Missing, inaccurate, or incomplete contact information, plan census data, or both
- Absence of sound policies and procedures for handling returned/undeliverable mail and uncashed checks
Among the best practices identified for pension plans by the Employee Benefits Security Administration, plenty of the basics are easily applied to ESOP recordkeeping:
- Proactively maintain accurate census information
- Communicate effectively with plan participants
- Search for missing participants using recommended sources
- Document procedures and actions
What Can Plans Do About Lost Participants?
The risks and challenges missing participants pose to a plan include fiduciary responsibilities, compliance failures, tax reporting issues, and the question of what to do about checks that go uncashed.
Department of Labor guidance issued in 2014 identified a rollover to an IRA as the “preferred method” for plan participants who couldn’t be located, even stating that a plan fiduciary choosing another distribution option for missing participants would in most cases violate their duties of prudence and loyalty.
The guidance acknowledges other options, but suggests a plan administrator would need a compelling reason to choose a non-rollover option, given the potential tax consequences to the participant. Unlike other options, a rollover can preserve the account’s tax-deferred status. If your plan determines an IRA rollover is its final step for missing and nonresponsive participants, that should be recorded in plan documents.
Plan documents encourage consistent practice by including policies and procedures for handling missing and lost participants. And take a similar approach to third-party partners like TPAs or recordkeepers by getting every party’s responsibilities and expectations in writing.
Disciplined recordkeeping, clear communication, and documented policies can minimize the impact of missing and lost participants on any retirement plan. And plan practices, even if they’re not documented, can create a policy precedent for your ESOP. A best practice is to thoughtfully develop and document all key policies — including your distribution policy — as part of your ESOP plan document. Get started with our free ebook by clicking the link below.