A primary responsibility for fiduciaries is to seek out and identify the best available solutions that enable fulfillment of their responsibilities. For plan sponsors tasked with implementing and evaluating the effectiveness of their missing participant program, this can be a difficult task, particularly given the accelerating rate of technological innovation and the virtual explosion of new sources of data available online. In today’s day and age, what is considered a state-of-the-art program today could easily become obsolete tomorrow, rendering a plan’s missing-participant program vulnerable to fiduciary liability.
Think of it this way—a Ford Model T and a 2018 BMW are both automobiles. But in 2018, who would choose a Model T to commute to work? The Model T can’t go much faster than 25 miles per hour, has tires resembling those of bicycles, doesn’t have windshield wipers or power steering, and won’t start unless you manually crank up the engine. Measured in terms of safety, speed, engineering, and comfort, a 2018 BMW is an obvious choice over a Model T, even though the latter was once considered state-of-the-art.
In 2013, Retirement Clearinghouse presented testimony to the ERISA Advisory Council concerning best practices in locating missing participants for terminated plans, and much of that testimony was subsequently evidenced in the Department of Labor’s FAB 2014-1. But as we all know, the world never stops moving forward, and since 2013 the quantity of online data sources that can potentially be tapped to locate a missing participant has expanded exponentially. But, the availability of new, electronically-sourced data is both a blessing and a curse: a blessing because it increases our ability to track down missing participants, yet at the same time it’s a curse because it requires the development and implementation of new methods and technologies for assessing the quality of that data.
Sponsors may not have the time, resources, scale or expertise to perform due diligence on all of the various sources to know what data is, or is not, reliable—and that is where vendors come into play. Sponsors should carefully select a vendor—whether it’s their record-keeper or an independent provider—that will routinely test, assess, validate, and grade the efficacy of their search methods and sources for accuracy and reliability. In addition, the chosen vendor should be able to demonstrate a commitment to continuously refining, streamlining, and strengthening their missing-participant program. Finally, the vendor should be able to rank and report search results to the sponsor.
This approach to constructing a missing participant program is critical, because if the prevailing trends continue, the problem of missing participants will only increase in scope. The U.S. Census Bureau estimates that one out of every six Americans relocates each year—and the Employee Benefit Research Institute (EBRI) estimates that 14.8 million defined contribution plan participants change jobs on an annual basis. Combining these two vectors yields the possibility of more than 2.4 million new missing participants each year.
Yes, a plan may currently have a program for locating missing participants, but that doesn’t necessarily mean the sponsor is fulfilling its responsibilities as a fiduciary. With the U.S. Department of Labor enforcing missing-participant location requirements aggressively during plan audits, sponsors need to take steps to ensure their missing-participant programs are truly state-of-the-art.
A 4-Step Plan of Action to Improve Your Missing-Participant Program
1) Utilize a waterfall approach to the search process
When searching for the best available address for inactive/terminated account records, a program will, in all likelihood, not locate them all using a single source. Some addresses may be harder to confirm than others depending on a variety of factors, such as the length of time since the participant’s separation from service. This outcome necessitates the use of multiple sources. Fortunately, as mentioned above, many new sources have come online in recent years, providing more data for sponsors to use to locate missing participants. Using multiple electronic sources not only provides a wider range of information, but it also improves the reliability of the data. Running address searches for inactive/terminated accounts through multiple electronic sources can serve to either confirm data when an address is correct, or filter out inaccurate or stale address data. Vendors can help sponsors construct a data search “waterfall” in which reliable sources are arranged according to depth and cost, and information can be verified or filtered out, based on the required depth of the search.
A multi-vendor electronic search methodology is the foundation for the waterfall approach, and it involves automated address validation utilizing U.S. Postal Service records and goes further by incorporating credit rating agency data and other sources online sources, each of which has been tested and validated. Given the varying degree of reliability of electronic databases, a good service provider will combine multiple sources to optimize reliability (and should be able to demonstrate this capability).
Many sponsors assume that all searches are expensive, and therefore decide to avoid them. However, sophisticated, multi-vendor automated searches such as the electronic methodology above can be reasonably priced by some vendors at a few dollars per participant, and provide reliable addresses for more than 90% of the records submitted, leaving only the residual records to incur the cost of higher-level search tools.
For those records for which a reliable address cannot be located electronically, the waterfall adds a forensic Internet search, which requires utilizing a series of manual search engines, social media searches, etc. with the goal of building a participant profile, piece by piece, until reliable links between demographic data can be linked to a good address. Because they are manual and time-consuming, forensic searches can be expensive and will often include searches for deceased participants and their beneficiaries.
As a supplementary feature, mailings to original and updated participant addresses can be added to the electronic search above, with a request for the participant to self-validate or update their address via a vendor’s electronic and call center portals. Another supplementary feature to the forensic search might incorporate U.S. Postal Service-certified mailings.
In the event that all of the above yields an unsatisfactory result, the waterfall should include both forfeiture and escheatment options for those participants that may never be found.
A key advantage of the waterfall approach is that the cost is based on usage at each level of service, i.e. utilize the lowest-cost methods to winnow down the total number of records that will require deep searches.
2) Keep a complete audit trail of missing-participant search activities
Maintaining a robust, permanent audit trail is an essential element of a missing-participant program. With the DOL placing greater emphasis on capabilities for locating missing participants during audits, it is vital that sponsors maintain a full archive documenting all of their search efforts for each missing participant.
A complete archive of search documentation for missing participants can also shield sponsors from fiduciary liability if missing participants who can’t be found come forward in the future to claim an unpaid benefit or threaten a lawsuit.
3) Conduct an annual search for inactive and unresponsive accounts
Plans are required to send updated plan information and disclosures on an annual basis to all participants, including missing participants. But what is the definition of a missing participant? The common definition is based on returned mail, i.e. if a piece of mail is returned, then the participant is considered missing. But as it turns out, returned mail is a “house built on sand”—a highly unreliable measure of missing participants. In a large-scale test, only 53% of mail that was known to be undeliverable was returned by the U.S. Postal Service. Utilizing returned mail to classify a participant as the primary indicator of a missing participant creates a large number of “false positives,” or accounts that actually have a bad address but are not classified as such.
A more comprehensive approach would be to conduct an annual electronic search for a best available address for all inactive/terminated participant accounts. Basic electronic searches might cost a few dollars per record, but that cost is reasonable when compared to alternatives such as an extended Department of Labor audit, fines, or even forfeiture and escheatment of a participant’s retirement savings. Finally, testing of the recurring search method has demonstrated that multiple searches over consecutive years yield significantly better results than a single-year, one-and-done search program.
Taking the thoroughness concept a bit further, sponsors could readily conclude that they have a higher level of responsibility for larger accounts and older participants who are closer to a distribution event. A well-structured missing-participant program should consider utilizing a more comprehensive search for select groups of participants, such as those who are approaching a distribution event, where the risk of fiduciary exposure is clearly higher—for example, a 55-year-old who hasn’t been an employee for 10 years and has a $50,000 account balance.
Conducting annual searches for inactive/terminated accounts will bring these missing participants to sponsors’ attention, capture a new address in a timely fashion, and offer sponsors the opportunity to conduct more rigorous searches and outreach before they are due to send participant distributions.
4) Implement auto portability
Auto portability is a preventative measure for addressing the problem of missing participants. By enabling the automated transfer of a participant’s 401(k) account to an active account in their current-employer plan at the point of job-change, auto portability prevents participants from becoming missing in the first place, and reduces the total amount of inactive/terminated accounts in plans.
In addition, “The Mobile Workforce’s Missing Participant Problem,” a study conducted by Boston Research Technologies and Retirement Clearinghouse and published earlier this year, found that 67% of out-of-date address records for missing participants can be matched to an active participant record in a current employer’s plan records—and these active participant records have a very high rate of reliability (92.6%). When combined with the U.S. Postal Service’s National Change of Address (NCOA) records, that reliability jumps to above 95%.
The implication is that the same network that facilitates account consolidations for auto portability can be utilized to create a virtual database of active employee addresses that can be used to locate accurate addresses for as much as two-thirds of the missing-participant population.
What Constitutes State-of-the-Art has Changed
Just as no driver in 2018 would consider a 1925 Ford Model T a state-of-the-art automobile, no plan sponsor in 2018 should think of a missing-participant search program relying on untested, single-data-source methodologies to be a state-of-the-art program. Sponsors should seek out vendors that have conducted due diligence on today’s online information sources, and understand which ones to use to locate and match stale address records in inactive/terminated accounts.
The above-mentioned study by Boston Research Technologies and Retirement Clearinghouse found that 60% of plan participants would prefer an automated process for updating their addresses in plan records, and for consolidating their 401(k) accounts. What better way is there for sponsors to fulfill their fiduciary responsibilities of prudence and loyalty than by implementing a well-structured and well-documented missing participant program which meets today’s standards for being state-of-the-art?