On January 18, we published a blog post regarding new Department of Labor ("DOL") guidance on missing plan participants. That post is available here, and describes the DOL's guidance on Missing Participants - Best Practices for Pension Plans ("Best Practices"). This blog post addresses two other pieces of guidance issued by the DOL in conjunction with its Best Practices guidance –(i) Compliance Assistance Release No. 2021-01 ("CAR 2021-01") and (ii) Field Assistance Bulletin No. 2021-01 ("FAB 2021-01").
Compliance Assistance Release No. 2021-01
The DOL issued CAR No. 2021-01 to the DOL's Regional Directors (i) to ensure consistent audit practices in the DOL's Terminated Vested Participants Project ("TVPP") for defined benefit pension plans and (ii) to encourage voluntary compliance by fiduciaries.
TVPP Objectives. The DOL embarked on the TVPP because it believes that better recordkeeping, plan communications, and participant search procedures will limit the number of missing and unresponsive pension plan participants whose retirement security may be at risk because of the failure to timely commence their pension benefits.
The TVPP has three key objectives for defined benefit pension plans. The first objective is to ensure plans maintain adequate records to identify (i) plan participants and beneficiaries and their contact information, (ii) the amount of benefits due under the plan, and (iii) when participants and beneficiaries are eligible for benefits. The second objective is to ensure plans have procedures in place to communicate to terminated vested participants ("TVPs") when they near both the plan's normal retirement age and the age to receive required minimum distributions ("RMDs"). The third objective is to ensure plans have appropriate search procedures in place if they have incorrect or incomplete contact information.
Investigations. Through the TVPP, the DOL investigates defined benefit plans that appear to have systemic plan administration issues, with a specific focus on problems relating to the tracking of TVPs and timely payment of benefits. The DOL may commence investigations if Form 5500 filings report a significant number of TVPs who are entitled to future benefits, a plan sponsor is involved in a bankruptcy, merger, acquisition, or divestiture, or if participants contact the DOL. When an investigation is opened, the DOL may request the following documents:
- plan documents, amendments, and summary plan descriptions;
- participant census records and contact information;
- actuarial reports;
- plan policies and procedures for participant communications including preparation and distribution of benefit statements, and claims procedures;
- missing participant procedures, including internal procedures and contracts with third-party administrators; and
- any other documents the DOL believes is helpful to its investigation.
The DOL typically sends out two letters requesting documents and information. The opening letter will request plan fiduciaries to produce requested documents by a response date. The follow-up letter will request targeted information based on the DOL's review of the initial documents. The DOL will (i) consider alternate document production based on costs and administrative burdens and (ii) extend response dates. However, if these efforts are unsuccessful or will unduly delay the investigation, the DOL will issue subpoenas to compel document production.
Review. During the course of a TVPP audit, the DOL will review plan documents and look for systemic issues such as record-keeping and administrative errors, and inadequate procedures for contacting TVPs as they near normal retirement age and their RMD date, identifying and locating missing TVPs, and addressing uncashed checks. The following "red flags" may lead the DOL to determine a problem exists and requires further investigation: (i) missing data in census records; (ii) returned participant communications and uncashed checks; (iii) a small number of TVPs in pay status; (iv) unclear participant communications; and (v) continued delivery of communications to known "bad addresses." The DOL also will scrutinize plans of sponsors that have been involved in bankruptcies, mergers, and acquisitions. Plan fiduciaries should use the information contained in CAR 2021-01 to review their procedures relating to TVPs and identify warning signs that will indicate missing participant issues to the DOL.
Closing Cases. After reviewing requested information, the DOL will advise plan fiduciaries of any problems they have identified and ask the fiduciaries to take appropriate corrective action. Absent substantial errors or widespread fiduciary breaches, the DOL will issue a Voluntary Compliance ("VC") letter. Plan fiduciaries will be given a reasonable amount of time to respond to the VC letter. If the plan fiduciaries provide appropriate remedies for affected participants and beneficiaries and correct flaws in recordkeeping, communications, and missing participant procedures, the DOL typically will describe the corrective actions taken by the plan to address problems in closing documents and will not cite individual plan fiduciaries for specific ERISA violations.
Through CAR 2021-01, the DOL has established standard practices and procedures relating to investigations, review, and closing cases for DOL audits in the TVPP intended to ensure consistent audit practices throughout the country. Plan fiduciaries should use the practices and procedures to identify and correct systemic issues in their administration of TVPs.
Field Assistance Bulletin No. 2021-01
FAB 2021-01 provides for a temporary enforcement policy regarding a terminating defined contribution plan's use of the Pension Benefit Guaranty Corporation's expanded Missing Participants Program.
DOL Safe Harbor. DOL regulation 29 C.F. R. 2550.404a-3 provides a safe harbor for distributions from terminating defined contribution plans and abandoned plans when a participant or beneficiary (including a missing participant or beneficiary) fails to make a timely benefit distribution election. In general, the safe harbor requires distribution to an individual retirement account or annuity ("IRA") or, in limited circumstances, to a bank account or a state unclaimed property fund.1 If the safe harbor is satisfied, a fiduciary is deemed to satisfy its fiduciary requirements under Section 404(a) of ERISA2 with respect to the distribution of accounts, selection of an IRA (or other transferee), and the investment of the accounts.
PBGC Missing Participant Program. In 2017, the Pension Benefit Guaranty Corporation ("PBGC") established the Defined Contribution Missing Participant Program to (i) hold retirement benefits for missing participants and beneficiaries and (ii) help participants and beneficiaries find and receive their benefits. To date, the DOL has not revised the safe harbor to cover the transfer of terminating defined contribution plan accounts to the PBGC's Program. The DOL recognizes that the economic disruption caused by the COVID-19 pandemic may increase the number of missing plan participants. Plans are being terminated due to the pandemic. Employers, fiduciaries, and service providers have closed their offices, making it difficult to maintain accurate, updated census data. Accordingly, the DOL wants to facilitate use of the PBGC Missing Participant Program through a temporary enforcement policy.
Temporary Enforcement Policy. Pending further guidance, the DOL will not pursue violations of the fiduciary provisions set forth in Section 404(a) of ERISA against plan fiduciaries of terminating defined contribution plans or qualified termination administrators (QTAs) of abandoned individual account plans if they (i) comply with the requirements of FAB 2021-01 and (ii) act with a good faith, reasonable interpretation of Section 404(a) with respect to matters not addressed in FAB 2021-01.
Under the temporary enforcement policy, a plan fiduciary or QTA that chooses to participate in the PBGC's Defined Contribution Missing Participants Program must comply with the safe harbor requirements of DOL regulation 29 C.F.R. 2550.404a-3, except that the notice to participants and beneficiaries must be modified to reflect that the transfer is being made to the PBGC instead of an IRA or other transferee. Specifically, the notice must state clearly that the funds are being transferred to the "Pension Benefit Guaranty Corporation's Defined Contribution Missing Participants Program" and include the PBGC's website address and contact number. The Program may be used for participants and beneficiaries who fail to make timely distribution elections and for lump sum recipients who were paid by check if the check remains uncashed after (i) the "cash by" date prescribed on the check (or described in the notice) that is at least 45 days after the check's issue date or (ii) the check's stale date if no "cash by" date is prescribed.
The PBGC may charge a fee for accounts transferred to the Missing Participant Program. Under the temporary enforcement policy, a plan fiduciary may pay the fee out of a participant's account if permitted under the plan document. A QTA may pay the fee out of an abandoned plan account regardless of whether the plan document permits payment of the expense out of plan assets.
A fiduciary that does not elect to transfer the account balances of all missing participants to the PBGC may, but is not required to, notify the PBGC about the disposition of some or all other account balances. The DOL strongly encourages plan fiduciaries to notify the PBGC of other dispositions.
Although FAB 2021-01 provides relief for plan fiduciaries and QTAs to use the PBGC Missing Participant Program, it does not preclude the DOL from pursuing violations of ERISA for a plan fiduciary's failure to (i) maintain adequate plan and employer records and (ii) diligently search for participants prior to a transfer of accounts to the PBGC. Accordingly, plan fiduciaries should establish procedures described in the DOL's Best Practices guidance and use the PBGC's Missing Participant Program for participants and beneficiaries that cannot be located only after the fiduciaries have completed diligent participant searches.
Please contact a member of our Employee Benefits & Executive Compensation Group if you have any questions regarding the DOL's guidance on missing participants.
1 Under a special rule for terminating 401(k) plans, the distribution must be rolled over into the ongoing 401(k) plan maintained by another member of the plan sponsor's controlled group (if one exists) instead of being rolled over into an IRA.
2 In general, Section 404(a) of ERISA requires plan fiduciaries (i) to act prudently and in the exclusive interests of plan participants and beneficiaries and to defray reasonable plan expenses and (ii) to diversify plan investments to avoid the risk of large losses.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.