Lost participants are those participants who have balances in the plan (unclaimed benefits) or have been distributed an amount from the plan (uncashed benefit checks) and cannot be located. The participant either doesn’t know or forgot they have a balance since their employment was terminated or have relocated with no forwarding address. The participant’s account could also have been distributed without the participant’s knowledge (an automatic distribution).
In the past, this issue has not been addressed by plan sponsors or independent auditors because the issue was not prevalent, and if it was, it was not “material”. In recent times, there have been trends leading to an increased risk in this area. These trends include the following
- Automatic enrollment into 401(k) plans
- Employees holding multiple jobs during their careers
- Employees leaving their accounts with previous employers
- Employers’ automatic distributions of accounts less than $1,000
As these trends continue to grow, the balances in the plans will become larger and need to be addressed. The Department of Labor (“DOL”) has yet to issue guidance on the plan sponsor’s fiduciary responsibility related to this; therefore, the plan sponsor, as a best practice, should have controls in place to address the unclaimed benefits and uncashed benefit checks. Some examples of best practices would include (but are not limited to) the following:
- Monitor and track uncashed checks with the assistance of either the custodian or the third party administrator (“TPA”).
- Monitor and track unclaimed benefits remaining in the plan, utilizing the DOL’s safe harbor plan of rolling over accounts less than $5,000 to an IRA.
- Use the various methods available to locate lost participants (i.e. commercial locator services, credit reporting agencies, internet search tools).
By Leslie Lee, CPA