If pension plan de-risking is a priority for your company in 2014, you should be aware of a potential pitfall. You may have researched your options and decided on the right program for your company under the assumption that communication channels will be reasonably clear. Yet what you don’t know about your past employees may have a substantial and costly impact on your efforts.
The quality of a company’s data on retirement plan participants may not seem like a responsibility of the finance department, but the issue presents a very real threat to de-risking strategies such as lump-sum distributions or annuity buyouts.
Even worse, when plan participants have gone “missing,” the company’s out-of-date records create uncashed-check liabilities and increase the risk of fraud. As scrutiny by the U.S. Department of Labor grows, corporate finance and treasury teams can no longer ignore the issue of missing participants in their pension and other benefits plans.
Out of Sight, Not out of Mind
Lifetime employees are few and far between in today’s workplace. Younger workers are more likely to change jobs frequently, but older professionals are also much more willing today than in previous generations to change employers in order to advance their careers. And companies can easily lose touch with workers who have left. A former employee may move from state to state, or may relocate internationally to accept a new position. Workers may not remember that they’re owed pension or other retirement benefits, so they may not think of updating their records with a former employer every time they relocate.
The problem can be exacerbated in companies that go through mergers, sales, divestitures, or bankruptcy, particularly if that event results in a change in benefits providers or oversight. Meanwhile, marriage, death, name changes, and other milestone events in the lives of former employees can complicate the process of tracking down missing pension participants or their beneficiaries. The issue is more prevalent in industries with high turnover, such as retail, and young workers are especially vulnerable.
The advent of auto-enrollment in defined-contribution plans has led to a situation where even some current employees may not realize they are enrolled in benefits programs. The Plan Sponsor Council of America (PSCA) has predicted that there will be more than 20 million missing-participant accounts in defined-contribution plans by the year 2020.
Many sponsors of pension and other benefits plans rely on their recordkeepers to determine the best methods for locating and communicating with missing participants, as well as for the day-to-day management of plan data. However, recordkeepers are sometimes unaware of how many missing participants a plan may have. RCP worked with one large pension plan sponsor that was offering a lump-sum distribution to 29,000 of the company’s retirees. In advance of the offering, the organization asked its recordkeeper how accurate its data was. The recordkeeper believed it had correct contact information for more than 90 percent of the retirees, but closer analysis uncovered new addresses for 47 percent.
Despite the significant challenges, it’s imperative that companies find, and periodically communicate with, any former employees who may still be due retirement and/or healthcare benefits, either now or in the future. Losing contact with a former employee creates a number of challenges for a plan sponsor.
Caution: Confusion Ahead
Companies are tasked with maintaining annual communications with participants about retirement and healthcare benefits. For example, plan sponsors must meet regulatory disclosure requirements around annual funding notices, summary annual reports, and plan descriptions. However, the industry lacks guidelines on the specific steps necessary to comply when plan sponsors’ attempts to communicate with missing participants are unsuccessful.
The rules are no clearer for communication around pension plan de-risking or other substantial changes to benefits. An organization is required to make a “good faith effort” to locate and notify participants of benefits they’re due, yet there is no definitive rule clarifying which actions are sufficient to pass the “good faith” threshold. The stakes are high. Missing retirement or health-plan participants may prevent a company from successfully implementing programs that would improve benefits, or from changing the way benefits are delivered. For example, in a defined-contribution plan termination, all assets must be distributed for the termination to be complete—but the plan sponsor cannot finish distributing assets until every participant has communicated whether she wishes to take a cash payout or to roll over the funds.
Likewise, a company that wants to move forward with de-risking its pension plan, through a lump-sum distribution or other means, must communicate with participants and elicit a response before dispersing funds. Plan sponsors have a range of options available to fulfill this fiduciary responsibility; they often select an approach based on the advice of their Employee Retirement Income Security Act (ERISA) counsel, the company’s tolerance for risk, and its risk culture. Whatever course of action it chooses, a company’s attempts to contact plan participants may fail if it doesn’t have accurate data. At best, misdirected communications slow down the process; at worst, they may undermine the success of the program if a substantial proportion of participants fail to respond.
Although the ERISA Advisory Council recently recommended guidelines for de-risking, the U.S. Department of Labor did not take any formal action, and there is no indication that specific guidelines will be adopted in the near future. With this lack of formal regulations, the industry will likely continue to operate under a cloud of confusion, leaving corporations struggling to weigh the best options for resolution. Nevertheless, the de-risking trend is expected to continue, especially as plan funding levels have improved significantly.
Another issue, which further raises the stakes for plan sponsors, is the uncashed-check liability that missing participants can generate. When a company mails checks to plan participants, some may be returned, while others may simply not be cashed. Perhaps an individual is deceased and his beneficiary does not even open the envelope because she is not aware of the benefit. Under new federal accounting regulations, corporations must decide how to handle assets that are held outside of the plan, including uncashed checks.
Typically, when a check is returned or remains uncashed, the company will deposit the assets into a holding account. Uncashed checks will remain on the company’s balance sheet until the company locates and communicates with the intended recipients. Over time, if an organization does not deal with the issue of missing plan participants, this holding account may accrue a large balance, and it may eventually attract the attention of regulatory agencies. Uncashed checks also raise numerous other questions for corporations, including:
- Where is the cash held?
- Who is receiving the interest?
- Are the funds still considered ERISA assets?
- Are taxes withheld?
- What options does the plan sponsor have if a participant fails to deposit the check, even after a successful search and subsequent effort to communicate?
Moreover, when a company is mailing checks to the wrong address, it is creating security risks for plan participants, including the threat of identity theft. And if it fails to seek out missing pension participants, a company may be exposing its plan to risk of fraud. For example, if a participant is deceased, a relative or friend might receive and cash benefit checks in the participant’s name. Recovery of the funds in this type of situation is extremely difficult, and the effort often involves hefty legal fees.
Weighing the Options
For all of these reasons, many companies that are considering pension de-risking or other changes to their benefits programs are turning their attention to finding missing plan participants. Their options for doing so are shrinking. Some free and low-cost solutions that were once available to help locate missing participants, such as the IRS’s letter-forwarding service, have disappeared. For a small fee, the IRS used to search its database for missing and lost participants and forward communications. It discontinued that service last year. The Social Security Administration (SSA) offers a similar service, but it costs $35 per participant and can take up to 12 months. In addition, the SSA service does not include a report providing participants’ updated addresses, resulting in an incomplete audit trail.
Some plan sponsors attempt to find missing participants by researching them one at a time using phone calls, public databases, and other methods. This approach can be time-consuming. An alternative is to work with a third-party raw-data search provider, which can speed up the process. In any such search, result accuracy will vary depending on how the search process accounts for possible name variations, marriages and divorces, and other factors. Specialized firms can help plan sponsors set a course of action based on the extent of the missing-participant problem, the particulars of the organization’s benefits programs, the demographics of its participant population, and the company’s risk culture.
Organizations that embark on an initiative designed to find missing plan participants need to keep in mind that the goal isn’t just locating participants, but also getting them to act. Plan sponsors may want to work with a third party for assistance with coding undeliverable mail, confirming current addresses to update participant databases, communicating with participants in ways that convince them to take the required action, and providing audit trail reporting.
Confirming—and, if necessary, improving—contact information for participants should be the first step in any pension plan de-risking program. Data problems have the potential to undermine de-risking, and the de-risking strategy may be crucial to the organization’s financial health. By resolving up front any issues around missing participants, a plan sponsor can avoid costly delays and reduce risks as it moves forward.
Mary Steigerwalt is the chief operating officer for Risk Compliance Performance Solutions (RCP), a risk management and compliance firm with a focus on retirement plan management, specializing in customized risk mitigation and compliance, communications, and outreach programs. Mary’s 25-plus years of experience as a practitioner and solutions provider gives her a comprehensive perspective on retirement plan management.