Fiduciaries look for guidance on unclaimed benefit payouts

Plan fiduciaries would like guidance from the Department of Labor on what they should do when retirement benefit payments go uncashed by participants.

A recommendation from the Labor Department's ERISA Advisory Council will soon be made public on whether there are circumstances in which voluntary transfers of uncashed distribution checks to a state unclaimed property fund advances the department's goal of reuniting missing participants with their retirement savings.

It's a complicated issue and one that's difficult to examine in isolation, sources said.

"You can't walk into someone's house and force them to accept a check," said Kevin Walsh, a principal at Groom Law Group LLP in Washington. "So some of these solutions seem to assume you've already done everything you can for missing participants. These uncashed checks exist because people are remaining missing."

Uncashed checks occur predominately in situations where a participant has neither requested nor consented to a distribution. Checks are sent without consent either because the amount is less than $1,000 and the plan document requires those amounts to be cashed out, due to the IRS' required minimum distribution rules, or because the plan document requires distribution of benefits at normal retirement age, said William Jeffries, vice president of operations for Empower Retirement, Overland Park, Kan., during testimony before the council in August.

Currently, there are a few options plan fiduciaries have when in possession of an uncashed distribution check, including escheating, or transferring, the money to a state unclaimed property fund, which then attempts to unite the participant or his or her heir with the money; placing it in an individual retirement account or annuity; forfeiting the money; or keeping it in the plan, Mr. Walsh said. Fiduciaries of both defined benefit and defined contribution plans aren't comfortable with any of the options for varying reasons, he added.

An American Benefits Council survey of 55 plan sponsors last year found that only four had ever used the escheatment process for any retirement benefits. Moreover, it found that 67.3% had left money in the plan, 25.5% had rolled the money over to an IRA or annuity and 49.1% had forfeited the money with a right of restoration if the participant or beneficiary was later found.

"Our retirement system doesn't work if people don't get their benefits, but it also doesn't work if fiduciaries are held to an impossibly high standard of constantly having to search, use limitless resources and hunt down every participant," Mr. Walsh said.

To the frustration of the plan sponsor community, the Labor Department has not issued guidance on what exactly a sponsor must do in search of a missing participant — and for how long.

The Department of Labor's Employee Benefits Security Administration recovered $2 billion from its investigations during fiscal year 2019, up from $1.1 billion in 2018. Of the $2 billion recovered in enforcement actions, roughly $1.5 billion was from its Terminated Vested Participant Project, which encompasses missing participants.

But in 2019, the council was not examining what steps are necessary or appropriate in locating missing participants, instead focusing on state unclaimed property funds.

The Labor Department has taken the position that state laws requiring the transfer of the money to unclaimed property funds are preempted by the Employee Retirement Income Security Act. Current- ly, fiduciaries who transfer these funds to states do so voluntarily.

Aliya Robinson, senior vice president of retirement and compensation policy at the ERISA Industry Committee in Washington, said states have different waiting periods and notice requirements before funds can be transmitted so sponsors that operate in multiple states have difficulty navigating the current landscape. She said sponsors are hesitant to transfer uncashed amounts for several reasons, including questions on whether a beneficiary could claim under ERISA that the plan should not have done so because ERISA pre-empts state law.

"There is concern about escheatment because if for some reason a person is unable to get their assets from the state, there's concern they can come back to the plan sponsor and the sponsor will be held responsible and have to pay them out twice," Ms. Robinson said.

Jan Jacobson, senior counsel for retirement policy at the American Benefits Council in Washington, said there have been calls from the retirement community to establish a federal registry for unclaimed funds at the Social Security Administration or the Pensions Benefit Guaranty Corp. That would make it easier for sponsors to know where the funds in question should go and what entity is then responsible for them. For participants, there would be one central location that holds their funds.

In 2018, Sens. Elizabeth Warren, D-Mass., and Steve Daines, R-Mont., reintroduced the Retirement Savings Lost and Found Act, which would establish a national, online, lost-and-found database for retirement accounts. The bill was originally introduced in 2016, but similar legislation has not been proposed this Congress.

The National Association of Unclaimed Property Administrators, which is composed of the unclaimed property programs of all 50 states, the District of Columbia and Puerto Rico, believes that state governments already have the best solution to the problem of uncashed checks from ERISA plans.

Meaghan Aguirre, director of the unclaimed property division of the Nebraska treasurer's office, testified before the ERISA Advisory Council in June on behalf of the National Association of Unclaimed Property Administrators. She said a federal registry would be costly and unproven, while states "have been at this for years. We're ready, willing and able to reunite owners with their uncashed checks; it's what we do every day."

In fiscal year 2017-'18, Nebraska's unclaimed property division saw $18.8 million in unclaimed property reported, which came mostly from dormant checking and savings accounts and death benefits when the beneficiaries were unable to be located, and returned $13.6 million to the proper owner or heirs.

Ms. Aguirre said it makes sense for states to take a more active role in getting ERISA plan funds to the proper owner. "When you're searching for people locally is when you're going to be able to return the most money," she said. "You'd be advertising directly to the people that you're trying to find."

Nebraska's unclaimed property division, like other states, uses print, television and radio advertising to connect with people. It also has employees who research individuals with unclaimed property and reaches out to them directly.

"There's certainly a place for plans and the efforts they make, but ultimately when they are unsuccessful we feel that we can be successful in locating these owners," Ms. Aguirre said.

The ERISA Advisory Council submitted its recommendation to the Labor Department in November and its publication is expected early this year, sources said. A council spokesman did not respond to questions about the recommendation's release.

The National Association of Unclaimed Property Administrators would like the Labor Department to establish a safe harbor for state unclaimed property reporting, and believes the department should either direct the use of state programs, or indicate those factors that a plan should consider in determining whether transfer of uncashed check funds to states is appropriate, it said in written testimony to the council last year.

Ms. Jacobson is hopeful the Labor Department will issue guidance that clarifies that fiduciaries can voluntarily escheat to states and what obligations the states need to meet in order to be a recipient of those funds.

Other stakeholders are hopeful this council recommendation could bring about guidance on missing participants.

"The bigger issue is missing participants and you knock out a lot of the uncashed check problems, not all of them, but a lot of them," in providing guidance on missing participants, Ms. Robinson said.

"I think the Department of Labor is more focused on the missing participant issue, so this might just be me being more hopeful that they would address that first and then come back to any uncashed checks issues that may have been recommend by the council," Ms. Robinson said.

Mr. Walsh noted the Labor Department already asked the council in 2013 for its recommendation on missing participants. "So perhaps the DOL realized that before it issued guidance on both