Determining retirement plan participants’ life status is an important, albeit uncomfortable task for plan sponsors. Whereas plan participants are typically more concerned about securing a comfortable retirement income that lasts for life, plan sponsors must deal with deceased participants who will leave behind residual plan benefits requiring proper administration.
The cost of not knowing participants’ life status, or worse, in getting it wrong – can be significant – for the participants, for their beneficiaries and for the plan itself.
Challenges Facing Plan Sponsors
Determining plan participants’ life status has similarities to searching for missing participants, but for obvious reasons, death is different. While an address change can be transient, death is final and irrevocable, and triggers important obligations for plan sponsors.
Within retirement plans, or any sufficiently large population, death is a relatively common and predictable statistical event. According to actuarial tables, about 16% of plan participants will die between the age of 40 and 65, and one of six participants will die prior to normal retirement age. After attaining retirement age, participants’ mortality levels increase more rapidly.
The cost of an incorrect life status can be significant:
- In defined contribution (DC) plans, when deceased participants are wrongly indicated as living, their beneficiaries may be unaware of benefits to which they are entitled, and plan balances could languish in perpetuity after being escheated to the state of residence on record.
- The stakes are higher for defined benefit (DB) plans, which often include lifetime income provisions for participants and their surviving spouses. When living participants are falsely recorded as deceased, benefits may be prematurely discontinued, or worse, never paid. On the flip side, when deceased participants are falsely believed to be alive, benefit streams might not be discontinued or adjusted for survivors, which can adversely impact the plan’s funding status.
One thing’s for sure: the sloppy administration of life status will up the odds for a plan audit, which can entail significant costs, workload, and risks.
Determining Life Status
From an administrative perspective, the most straightforward life status update scenario is when a plan administrator receives timely notification of a participant's death from a beneficiary, a family member, or the participant's estate representative. The plan administrator will then request a copy of the death certificate and any necessary documentation to verify the beneficiary's identity.
Not all participant deaths are that simple to ascertain, due – at least in part – to societal and behavioral factors. Dying alone and intestate are common events, and retirement accounts left behind at former employers may be forgotten, and/or unknown to deceased participants’ survivors.
For these “silent” deaths, plan sponsors should adopt a search strategy that proactively determines participants’ life status.
Below are three proactive search strategies to ascertain the life status of participants:
1. Periodic electronic, or e-searches
Routine, periodic e-searches, so long as they include a life status check, may first flag a participant as deceased. In the highest quality commercial e-searches, an indication of death may automatically trigger the subsequent capture of the names and addresses of close relatives, which can help in locating beneficiaries. E-searches are flexible and may be used for purposes ranging from periodic data “scrubbing” to targeted searches to establish life status. Whether by accident or through intention, they can quickly and effectively serve as a “first pass” for establishing life status.
For determining life status, e-searches may be best suited for DC plans where benefits are frequently distributed as a lump sum, so timing of the death notification is not as critical. As DB plans typically pay monthly benefits, it’s important to flag deaths more quickly – thus, a monthly e-search may not be as practical, particularly for DB plans with large populations of terminated participants having vested benefits.
2. Ongoing death monitoring
When there is a population of participants with excessive mortality risk, paired with a higher frequency of benefit payments, plan sponsors can engage a commercial search provider to perform ongoing “death monitoring.”
Death monitoring periodically queries high-quality data sources to determine if a status of “deceased” is returned. Ideally, death monitoring should poll more than one data source so that any new finding of “deceased” is timelier and more reliable.
Death monitoring has the following advantages:
- Depending on the monitoring period (e.g., weekly), it will likely yield the first reliable evidence of death, allowing the plan sponsor or administrator to take additional steps as soon as practical.
- It is a “set it and forget it” approach. If the death monitoring is ongoing, a plan sponsor can be reasonably sure that they’ll detect changes in life status in a reasonably short timeframe.
- It can be cost-effective, particularly if the service’s fees are based solely upon the successful detection and reporting of a change in life status.
Death monitoring is particularly valuable tool for DB plans, where more extended and complex post-death actions may be required, often performed by actuaries. Obtaining an earlier indication of death via death monitoring can facilitate more expedient resolution for surviving beneficiaries.
3. Intensive searches
More intensive searches typically examine additional sources of data above and beyond an e-search or death monitoring, may involve participant or beneficiary outreach and can be conducted under a variety of different use cases.
With respect to life status, intensive searches represent a more diligent effort to verify life status, to determine exactly when a death occurred, and if necessary, to secure additional documentation – which is particularly important when a stream of benefits payments are involved. Intensive searches can also be used as a more rigorous process to identify beneficiaries.
See this article for more information on how and when to employ intensive participant searches.
An Uncomfortable but Important Task
By staying on top of their participants’ life status with proactive measures, retirement plan sponsors will be performing an uncomfortable but vitally important task which will better serve their participants, their beneficiaries and will help fulfill their fiduciary obligations.