Plan sponsors have a fiduciary obligation to track terminated participants with balances in the plan. This task, much to the chagrin of many a plan sponsor, is easier said than done. People are transitory by nature, and over the years move many times, often without updating their new information with each move, leaving the onus on the plan sponsor to track these individuals when they are not notified of any change. This shouldn’t be news to plan sponsors.
There are a few solutions available to deal with the lost participant. If the account is under $1,000 in assets, the plan sponsor can force participants out of the plan via a cash payment — with appropriate notice. If the account contains anywhere from $1,000-$5,000, the plan sponsor can still force the participant out of the plan, but only via an automatic rollover to an IRA established for the participant’s benefit — again with appropriate notice. The forced rollover, however, must place the assets in a money market instrument. With current money market rates coupled with the typical account of maintenance fees that accompany these IRAs, the account holder could see the assets whittled away slowly over time.
Recent regulatory proposals may be a step in the right direction to help mitigate plan sponsor liability when it comes to lost participants. The Pension Benefit Guaranty Corporation has proposed expanding the existing Missing Participants Program to include “most” terminated defined contribution plans. Currently, the program is only available for lost participants of terminated single-employer defined benefit plans. Under this proposal, plan sponsors could transfer lost assets to the PBGC as opposed to a rollover IRA or inform the PBGC of a rollover IRA’s location so that the information could go into a database that a participant later on could search, but only in the event of a plan’s termination.
However, the PBGC is notably underfunded, making any transfer of assets a questionable one. Plan sponsors, as a fiduciary, do have an obligation to review the solvency of the organization that would hold these assets.
In June of 2016, members of Congress proposed the Bipartisan Retirement Savings Lost and Found Act, which would create a depository of information on active 401(k) plans and allow for lost participant assets to be transferred to the government myRA program if under $1,000 in assets and invested in Treasury securities. It also increases the force out cap from $5,000 to $6,000; and makes it easier to invest lost assets in an auto-diversified investment as opposed to a money market. It also creates a public depository of plan information for lost participants to reference, should they come looking for their assets.
None of these proposals are a complete answer, but they are a step in the right direction — not only for plan sponsors but also for participants. And the onus still remains with plan sponsors to track their terminated participants. From a fiduciary point of view, however, the current options available to plan sponsors are frankly inadequate, and change is necessary. We can hope it comes soon.
This information was developed as a general guide to educate plan sponsors, but is not intended as authoritative guidance or tax or legal advice. Each plan has unique requirements, and you should consult your attorney or tax adviser for guidance on your specific situation. In no way does adviser assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations.
Securities and Advisory services offered through LPL Financial, a Registered Investment Advisor. Member FINRA/SIPC.
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