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Understanding Legal Risks with Retirement Plan Missing Participants

In addition to being an administrative headache, the inability to locate terminated participants of qualified retirement plans can result in heightened legal risks, a recent blog post reminds readers.

The law firm of Bond, Schoeneck & King in its post, “Legal Risks Associated with a Retirement Plan’s ‘Missing Participants,'” explains that a plan’s inability to locate terminated participants can result in a breach of fiduciary duty under ERISA — as well as plan disqualification — despite well-intentioned efforts by plan sponsors.

The firm reviews the Department of Labor’s (DOL) 2014 Field Assistance Bulletin regarding efforts that must be made to locate missing participants; it further warns that the agency, more recently, has reportedly become more aggressive in contesting administrators’ actions regarding missing participants.

The post cites a 2017 letter by the American Benefits Council alleging that DOL regional offices have been taking more aggressive positions, asserting, among other things, that a plan administrator’s failure to locate a missing participant is a fiduciary breach, even when the procedures have been followed.

RMD Failure

Moreover, the firm emphasizes that the inability to locate a participant “does not necessarily excuse” a plan’s failure to complete a requirement minimum distribution and could jeopardize the plan’s qualified status.

It points to an October 2017 IRS Employee Plans Examinations memorandum directing examiners not to challenge the qualified status of a plan for violating RMD requirements based on an inability to locate a terminated participant if the plan had taken certain steps, such as searching records of other employer plans, using a commercial locator service and attempting to contact by certified mail.

“Given the recent DOL and IRS focus on enforcement of this issue, retirement plan administrators should review their systems and procedures for maintaining and correcting participant and beneficiary contact information, and determine if they are adequate,” the firm advises.

PSCA Urges Action

Similarly, the Plan Sponsor Council of America (PSCA), a part of the American Retirement Association, recently urged the DOL, Treasury Department and IRS to issue guidance on missing participants. PSCA’s comments were in response to recent DOL enforcement activity, as well as a Government Accountability Office (GAO) request.

The organization reiterated recommendations it had proposed in April 2017, outlining 10 steps for locating missing participants for certain plans while continuing to meet fiduciary obligations and not putting a plan’s qualified status in jeopardy.

“Although the DOL and IRS have, separately, issued guidance regarding the proper steps for plan sponsors to take to locate missing participants for certain plans, there is no guidance on missing participants that provides comprehensive, consistent guidance to plan sponsors,” PSCA states. “As such, plan sponsors, especially small plan sponsors, are left to cobble together, and attempt to harmonize, the guidance issued by the two agencies.”

PSCA also joined a letter to the DOL regarding this issue sent by a group of concerned trade organizations.