DOL's rapid move to include DC plans has sponsors feeling more than a little nervous
After recovering more than $1.1 billion for thousands of missing participants in pension plans, the Labor Department is directing its regulatory firepower on defined contribution plans, a development that has many plan sponsors on edge.
"This is one of those enforcement policies that jumped up fairly quickly," said Bradford Campbell, a partner with law firm Drinker Biddle & Reath LLP in Washington. "It was borne out of DOL looking at defined benefit plans and now it's morphed over into defined contribution plans."
Mr. Campbell noted that questions about missing participants have come up in every investigation his clients have experienced over the past year — questions that weren't asked in the past.
While there are no publicly available statistics, lawyers and trade groups for plan sponsors have noted a marked uptick in the DOL's enforcement efforts regarding missing DC participants and much tougher rulings that sponsors claim are either inconsistent or unfair.
"The department has not been uniformly consistent across regional offices as to how it responds and what corrective actions it wants to see," Mr. Campbell said.
DOL's heightened enforcement activity comes in the wake of a pilot program it started in 2017 in the Philadelphia office of the agency's Employee Benefits Security Administration to address missing participant issues in pension plans. The program was expanded nationally in 2018 and has recovered more than $1.1 billion for more than 21,000 participants to date, according to the latest data from the DOL.
"It is incumbent on all employers with benefit programs to have proper record keeping and to ensure employees receive the benefits they earned," the Department of Labor said in a statement.
Preston Rutledge, assistant secretary of labor for EBSA, told attendees at the National Institute on Retirement Security conference on Feb. 26 that the Labor Department is focused on missing participants and is working on "sub-regulatory guidance" for plan sponsors. The issue "is very much on our radar screen," Mr. Rutledge said in remarks published by BenefitsPRO.
The increased scrutiny also comes as the first generation of workers dependent on 401(k)s retires. Making sure they get their benefits out of their plans has taken on greater urgency with the DOL, said Fred Reish, a partner with Drinker Biddle in Los Angeles.
While the DOL's renewed investigatory zeal has many sponsors worried, those running ongoing plans are especially concerned because they haven't received explicit guidance as to what they must do to meet their fiduciary obligation to find missing participants or how to handle their required distributions. The DOL provided such guidance to sponsors of terminating plans in a field assistance bulletin in 2014 but has remained mum with regard to ongoing plans.
In a show of unity, plan sponsors have closed ranks and demanded that the DOL tell them what they need to do to meet their fiduciary obligations. Trade groups including American Benefits Council, Plan Sponsor Council of America and the ERISA Industry Committee have sent letters to the agency complaining about the aggressive positions taken by its field auditors and its "ad hoc" enforcement.
"The private sector intensely dislikes the government saying 'gotcha' when they haven't given clear guidance," Mr. Reish said.
Plan sponsor groups have criticized DOL auditors for rulings they claim are overly aggressive. In a 2017 letter to the DOL, the American Benefits Council complained that auditors in several instances asserted that reasonable search steps require plan sponsors to search for missing participants every year and to use different search methods each time.
"When plan sponsors hear that they're shocked because they didn't even know they were supposed to be searching at all, much less every year and using all different kinds of search methods," Mr. Reish said.
Aware of the heightened scrutiny, Anne Tyler Hall, an Atlanta attorney and founding partner of Hall Benefits Law, was careful to document all the decisions made and actions taken to help a plan sponsor client terminate a $147 million retirement plan late last year. The company spent six to eight months trying to locate some 80 missing participants who had account balances ranging from $2,500 to – in one instance – more than $1 million. The company was lucky to find the $1 million participant but even if it hadn't found him, it had sufficient guidance from the DOL to know how it would distribute the funds. The funds would have gone into an interest-bearing account, Ms. Hall said.
Sponsors of ongoing 401(k)s plans would have found themselves in a fiduciary bind if they had to make similar participant distributions. The guidance issued by the DOL applies only to terminating plans, leaving sponsors with active plans on unsteady ground, according to attorneys.
One of the biggest concerns for sponsors of ongoing plans is not being able to locate participants who have hit the age of 70½ and are required to take minimum distributions from the plan. The failure to make those distributions could jeopardize the qualification of the plan and result in sanctions from the IRS.
"If you can't account for your folks who are supposed to be receiving required minimum distributions, that's going to be a real problem with the DOL," Mr. Campbell said.
Without explicit guidance on how to distribute funds, sponsors have no clear way of avoiding potential fiduciary liability exposure. Fortunately, the IRS issued a non-enforcement policy in October 2017 directing its examiners not to challenge a qualified plan for failure to make RMDs if the sponsor has a robust internal process for finding missing participants, according to Mr. Reish.
Still, that wouldn't completely eliminate a sponsor's problems. Participants also get hit with a 50% excise tax for failing to take RMDs, an occurrence that could prompt them to sue their sponsors, said Jan Jacobson, senior counsel for American Benefits Council in Washington.
Another question for sponsors of ongoing plans revolves around their ability to forfeit amounts owed to missing participants back to the plan provided the benefits are reinstated upon the participants' return and claim for benefits. DOL auditors have asserted in multiple instances that forfeiting and reinstating benefits constitutes a breach of fiduciary duty, a position that American Benefits Council has challenged.
Plan sponsors have argued that "forfeiture and reinstatement" is an appropriate method for handling amounts that must be distributed to missing participants because it is consistent with existing Treasury regulations.
"It's kind of a disconnect between what was coming up in DOL audits vs. what was in the Treasury regulations," Ms. Jacobson said.
Attorneys said they did not know whether the DOL had imposed penalties or fines on plan sponsors for lapses in locating missing participants. The larger issue for many plan sponsors, though, is not the fine or penalty but rather the cost of working under DOL's deadlines, which Ms. Hall called a "resources drain and a time drain.
"Sometimes paying the fine or penalty and moving on is easier than the DOL coming in and saying, 'you haven't fulfilled your fiduciary duties,'" she said.
To avoid such a fate, sponsors of ongoing plans are advised to follow guidance in the DOL's field assistance bulletin for terminating plans. "It is generally accepted that the DOL's field assistance bulletin describes the important steps that plan fiduciaries should take to find participants," Mr. Reish said.
Using certified mail and checking with designated plan beneficiaries are among the steps sponsors can take to locate missing account holders, according to the bulletin. If that fails, they can consider outside providers, such as a commercial locator service, to track them down.
"Doing the best you can to make sure you address this issue is going to save you a lot of heartburn if the DOL does coming knocking," Mr. Campbell said.