In horror movies, embattled humans facing a zombie apocalypse eventually realize that no one is coming to save them and must take decisive action to save themselves from oblivion.
There’s a lesson here for plan sponsors who must confront the problem of locating missing participants.
In the near-term, there’s likely nothing that will spare plan sponsors from addressing the missing participant problem head-on. In the face of uncertainty, they must take decisive action to avoid being overwhelmed, including implementing effective, common-sense search practices, and pairing those search practices with other actions that will minimize the incidence of missing participants over time.
The Inescapable Reality of Missing Participants
Missing participants are a highly predictable aspect of our defined contribution system, driven by the propensity of American workers to change jobs, to relocate and to leave their retirement savings behind.
According to the Department of Labor’s Private Pension Plan data tables, defined contribution plans house over 25 million accounts held by separated plan participants, representing almost 30% of the total number of accounts with balances. When you combine that with a finding from a 2018 survey by Boston Research Technologies and Retirement Clearinghouse (RCH) – that at least 11% of terminated participant accounts resulted in a stale address – the math suggests a sizeable problem, on the order of 3 million missing participants. Also, because the hiring, participation, job-changing and relocation treadmill never stops, new missing participants are continuously being freshly minted.
Missing Clarity
Regulatory action that relieves plan sponsors from some of the uncertainty associated with locating missing participants is a worthy goal but has always seemed like the train from Washington that’s perpetually overdue.
However, that could change if the American Benefits Council finally prevails in its ongoing quest for clarity.
With a lengthy track record of advocating for solutions to the missing participant problem, on October 12, 2023, the Council issued a strident letter to EBSA Assistant Secretary Lisa Gomez, highlighting their long-standing frustration over the absence of a bright line, safe harbor for plan sponsors who conduct missing participant searches. In essence, the letter called out the DOL as adopting “rules for thee, but not for me” by subjecting plan sponsors to multi-year missing participant audits, while seemingly turning a blind eye to 80,000 missing participants on the PBGC’s books.
While the Council's efforts are laudable, what is crystal clear for plan sponsors is that the DOL will always require plan fiduciaries to ensure that employees receive the benefits they’re owed, while the IRS will always be keen to collect when those taxable benefits become due. These agencies will insist that plan sponsors perform diligent search efforts for missing participants, even in the absence of bright line standards.
Will the Lost and Found Registry Help?
In the same letter to the DOL, the Council points to initial legislation that was introduced in both the House and Senate in 2020 for the Retirement Savings Lost and Found Registry, which included provisions for a “feasible safe harbor.” Those provisions did not survive in the SECURE 2.0 Act, which calls for the establishment of the registry by 12/29/24.
The Council notes that the registry “relies on individuals actively searching it, the registry will not address the problem for the majority of missing participants.”
Research seems to corroborate the Council’s view. In the same 2018 missing participant survey noted above, 23% of respondents indicated that they would utilize a lost and found database to locate a stranded retirement savings account, although it’s unclear how many of those separated participants would act upon that information by updating their contact information.
Where This Leaves Plan Sponsors
Regulatory relief or not, missing participants are not going away, and to the extent possible, plan sponsors need to enact effective, common-sense search practices.
All missing participants are in some way disconnected from their previous employer’s plan, as evidenced by a stale address, returned mail or uncashed/untaken distributions. Yet, all missing participants are not created equal, and a missing participant search program needs to carefully identify these situations and, when necessary, dial up the search intensity accordingly.
While the “do” is vitally important in conducting missing participant searches, so too is the “documentation”. Even if a search for a missing participant is exhaustive, if it is not properly documented, it may not be considered a diligent search in the event of an audit.
Finally, plan sponsors should consider embracing retirement savings portability, including auto portability, to assist participants in consolidating their retirement savings following a job change. Portability is the only proactive measure that directly reduces the number of separated participant accounts in plans and serves to decrease the incidence of missing participants.