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DOL Updates Procedures for Locating Missing Participants in Defined Contribution Plans

    Client Alerts
  • August 29, 2014
The U.S. Department of Labor recently released Field Assistance Bulletin 2014-01 (the “FAB”), which updates DOL’s guidance on locating missing participants when a defined contribution plan, such as a 401(k) plan, is terminated. While the Internal Revenue Service and Social Security Administration have recently discontinued their letter-forwarding services, Internet search technologies have improved.

Plan fiduciaries must take reasonable steps to locate participants or beneficiaries in order to distribute benefits when a plan is terminated. If initial efforts to locate participants are not successful, the following search steps are required:
  • Certified mail – Communications to a participant who does not initially respond should be by certified mail.
  • Related plan and employer records – Even though the records of a terminated plan may not contain current address information, the employer or another plan, such as a group health plan, may have more up-to-date information. If there are privacy concerns, the employer or other plan may forward a letter requesting that the participant contact the fiduciaries of the terminated plan.
  • Check with designated beneficiary – For example, the fiduciaries must try to identify and contact any individual, such as a spouse or child, named as beneficiary by a missing participant in order to obtain updated contact information.
  • Use free electronic search tools – Plan fiduciaries must make reasonable use of Internet search tools that do not charge a fee, such as search engines, public record databases, obituaries and social media.
If plan fiduciaries are unable to locate a participant after following all of the required steps, then they must consider whether additional search steps are appropriate based on the size of the participant’s account balance and the cost of further search efforts. These steps may include additional Internet search tools, commercial locator services, credit reporting agencies and similar services. If consistent with plan provisions, reasonable costs of these steps may be charged to the participant’s account.

If a participant cannot be located after following all required steps and appropriate optional steps, the plan fiduciaries must determine how to distribute the participant’s account. The preferred method is a direct rollover to an individual retirement account or annuity (“IRA”). This method defers income taxes and allows assets to grow tax-free until funds are withdrawn. However, it may be difficult to find an IRA provider that will accept a direct rollover for a missing participant. In this case, two other options are available: opening an interest-bearing federally insured bank account in the participant’s name or transferring the account to a state unclaimed property fund. The fiduciaries must prudently conclude that one of these options is appropriate despite adverse tax consequences to the participant and possible reduction of the amount available for retirement. DOL specifically states that 100% income tax withholding, which effectively transfers a missing participant’s entire account to the IRS, is not an acceptable option.

While the FAB technically applies only to terminated defined contribution plans, it is instructive for fiduciaries in other situations, such as missing participants in an ongoing defined contribution plan or in an ongoing or terminated defined benefit plan (although PBGC rules for locating missing participants also must be followed when a defined benefit plan is terminated). Plan fiduciaries should keep in mind that their decisions on methods used to locate participants and on distributing the benefits of missing participants are subject to the fiduciary responsibility provisions of ERISA. Therefore, fiduciaries should make prudent decisions and should keep supporting documentation of their decisions.