Winston Churchill, once referring to the intentions of the former Soviet Union, stated: “it is a riddle, wrapped in a mystery, inside an enigma.” For 401(k) plan sponsors, that’s an apt description for the problem of missing participants.
Unfortunately, “missing participants” is a label for a problem that’s ill-defined and poorly understood, and where fundamental misunderstandings exist, inadequate solutions – paired with the prospect of unwanted regulatory attention or audits – can persist.
Here’s how you can better understand the missing participant problem and free yourself from the missing participant treadmill.
A Working Definition of Missing Participants
Simply stated, a missing participant has had their linkage to a plan account broken.
This breakage can occur as a result of:
- Errors or omissions in recording mailing addresses (ex. – missing or incorrect apartment numbers) or other personal data
- Participants who relocate but fail to update their mailing address
- Participants who are unaware they have a 401(k) account or, in some cases, a small residual balance
- Participants who are deceased
If proactive measures are not taken, evidence of missing participants spontaneously arises when:
- Routine mailings (ex. – SPDs, annual statements) are returned as undeliverable
- Required minimum distributions (RMDs) are not taken
- Distribution checks go uncashed or are simply returned
Sources of Confusion & Clarity
Common sources of confusion surrounding the topic missing participants include:
1. Uncashed distribution checks are not necessarily indicative of a “missing” participant.
Data from a large plan sponsor suggests that over 10% of requested distribution checks, for whatever reason, go uncashed, despite confirmation of a correct mailing address. People, to no one’s surprise, can be fickle, and being unresponsive does not necessarily equate to going missing. By contrast, when distribution checks are not requested, such as forced cashouts of balances under $1,000, a much larger percentage of these checks will go uncashed, and the bulk of those uncashed items are due to an incorrect mailing address.
2. “Forgotten” accounts, while they exist, are not as widespread as sometimes asserted.
In its broadest possible definition, forgotten accounts consist of all 401(k) accounts left behind by terminated participants and could be construed as missing. While terminated participants constitute the largest potential reservoir of missing participants, asserting that 100% of them are “forgotten” is hyperbolic.
However, it is a safe bet that there are millions of participants whose accounts have been subject to a company merger, to a change of recordkeeper, or both. These events can easily contribute to participants losing track of their balances, and ultimately, going missing.
A 2018 survey of 1,000 participants provided some much-needed clarity to the problem of missing participants, when it found that:
- 11% of all terminated account records had a stale address. Of these, low-income households were twice as likely to be missing compared with high-income households. Millennials were more likely to have stale address records when compared with Gen Xers and Baby Boomers.
- 1 out of every 5 job changer relocations resulted in a missing participant.
- A whopping one third of respondents had learned of a retirement account with a previous employer they did not realize they had. This was true of 50% of Millennial respondents.
Based on the data, missing participants represent a large, persistent problem in our defined contribution system.
Approaching the Problem
With these realities in mind, it’s clear that passively waiting for large volumes of returned mail, uncashed checks or missed RMDs to materialize is a sure-fire way to attract unwanted regulatory attention, often coming in the form of a DOL audit, which can entail expenses, fines and fiduciary risk.
Being proactive is a much better approach.
Proactive search strategies include:
- Periodic Data Scrubs: Perform low-cost, annual electronic searches (“e-searches”) for all terminated plan participants and apply updates. E-searches, when they access multiple online databases and apply back-end algorithms to aggregate information and compile the best result, can be surprisingly effective, and in a controlled study have been demonstrated to yield a correct address over 90% of the time.
- Increased Intensity: For participants whose current address cannot be located via an e-search, or are otherwise revealed to be deceased, follow up with additional, more-intensive searches to obtain an updated address or to locate a beneficiary.
- Targeted Searches: Conduct targeted searches for selected participants in advance of key dates, such as the attainment of age 72.
- Distributable Events: When issuing distribution checks (whether requested or not), ensure that participant addresses are scrubbed and, to the extent possible, verified.
- Avoiding Involuntary Cashouts: Ditch involuntary cashouts for balances less than $1,000, in favor of incorporating them into an automatic rollover program.
The most-effective long-term strategy for reducing the incidence of missing participants is to facilitate retirement savings portability. Enabling portability means facilitating consolidation both into and out of the plan, which in turn dramatically reduces the number of terminated participants – the fertile ground from which missing participants arise.
Three discrete portability programs work together to facilitate consolidation, including:
- For new participants, a facilitated roll-in program.
- For terminated participants with balances under $5,000, an automatic rollover program, paired with auto portability.
- For terminated participants with balances over $5,000, an assisted roll-out program.
Getting Off the Missing Participant Treadmill
Clearly understanding the nature of the missing participant problem, taking proactive steps to conduct searches, and turning on plan features that promote retirement savings portability are the key steps required to getting off the missing participant treadmill.
When missing participants are reduced, everyone stands to benefit.