Retirement Plan Products – an Unclaimed Property Perspective
Joe Lichty, Director of Marketing
June 27, 2016
June 27, 2016
More than $24 trillion in assets are currently held in retirement plans like 401k, 403b, pension, or individual retirement accounts (IRAs). A good portion of these retirement assets are shielded from state unclaimed property laws as they are governed by a Federal law called the Employee Retirement Security Act (ERISA), which preempts state laws including state unclaimed property laws.
Conversely, IRAs are not governed by ERISA and are therefore considered reportable and subject to unclaimed property statutes. Indeed, many state laws reference these products in their unclaimed property statutes. IRAs are subject to many unclaimed property compliance requirements including tracking activity and sending due diligence.
In spite of the preemption from state escheat laws of certain retirement products, administrators of these types of Plans are subject to obligations similar to those in the unclaimed property world. More specifically, they are subject to the practices of locating lost or terminated participants. Keane has observed parallels between enforcement of obligations in the retirement industry and other industries that are tasked with the complexities of compliance.
DOL FAB 2014-01 & Unclaimed Property Processes
In August 2014, the United States Department of Labor (DOL) issued Field Assistance Bulletin No. 2014-01 (FAB 2014-01). This Bulletin outlines the responsibilities of the fiduciaries of defined contribution plans when terminating the Plan itself. Specifically, FAB 2014-01 requires plan fiduciaries to exhaust the following four processes when attempting to locate lost or missing participants while terminating a defined contribution plan. Each of the four steps below correlates to existing processes in place from an unclaimed property perspective.
Use certified mail.
Similar to some state due diligence statutes (i.e., NJ, NY, OH) certified mail is an efficient method to confirm the validity of the participant’s address of record.
Check related plan records.
Plan administrators are advised to compare their records for related plans, such as group health insurance plans, for updated contact information. States adopting the NCOIL Model Act for unclaimed life insurance benefits mandate that life insurers conduct similar comparisons with information from other books of business, such as annuities.
Check with designated plan beneficiaries.
Again similar to the NCOIL Model Act for unclaimed life insurance benefits, FAB 2014-01 aims to leverage information obtained from plan beneficiaries in order to ascertain a better address.
Use free electronic search tools.
FAB 2014-01 encourages the use of Google searches, social media research, and public data sources to locate participants and/or beneficiaries. As a result of the availability of these electronic resources, the IRS and Social Security Administration have discontinued their respective letter-forwarding services that were once a staple of the 401k plan termination process.
If these four actions above do not yield a result, fiduciaries are encouraged to utilize additional resources such as commercial data sources, credit searches, and third-party locator services when deemed appropriate. The mandate to utilize a variety of methods to locate lost or missing participants is similar in nature to the requirements of SEC Rule 17Ad-17, where a combination of electronic and postal outreach to locate missing security holders and unresponsive payees is mandated.
In addition to the steps outlined above for terminated 401k and defined contribution plans, recent initiatives from the Department of Labor indicate there will be added scrutiny for defined benefit plan administrators, in the form of additional examinations of their procedures to locate and pay eligible lost participants of Plans in good standing. Plan sponsors are encouraged to perform a thorough review of their existing policies and procedures for locating missing or lost participants.
Prior Experience Predicts Plan Performance
Based on Keane’s experience in assisting life insurance carriers and financial services firms, many of whom operate retirement investment vehicles comprising the $24 trillion in assets, the retirement industry would benefit from borrowing some best practices from other industries to proactively protect their participants.
In many cases these best practices have come to light as a result of increased regulation, enforcement efforts, and the threat of audit. The activities within the insurance industry are one such example. What started as a series of examinations of life insurers by a third-party auditor on behalf of several states has resulted in more than 25 states passing or proposing legislation that requires carriers to conduct regular comparisons of the Death Master File to identify deceased insureds, and then conduct additional research to confirm the death and identify beneficiaries when benefits are due.
The third-party auditor that sparked the life insurance examinations has since leveraged this same playbook to initiate similar audits of businesses in the broker-dealer, mutual fund, oil & gas, and now the health insurance industry. If prior experience is any predictor of what’s to come, retirement plan providers would be wise to take note and begin implementing policies that identify deceased participants, verify and update addresses, and prevent participants from becoming lost. Indeed, Keane is aware of at least one state which, in the course of an audit, has even gone so far as to run the IRA population against the Death Master File.
Between the actions of the Department of Labor and those of the state unclaimed property auditors, it is evident that the administrators of all retirement assets, whether governed by ERISA or the unclaimed property law, should take proactive steps to ensure that all Plan participants are in good standing.
 While states do not include a formal exemption for ERISA governed property within their unclaimed property statutes, the pre-emption has been supported through case law as well as a line of Department of Labor Advisory Opinions.