By Jane Meacham, Contributing Editor

The Pension Benefit Guarantee Corporation (PBGC) in late 2017 launched another way for terminated defined contribution (DC) retirement plans to locate missing participants and make it more likely that they receive their benefits.

In a final rule published in the Federal Register on December 22, 2107, the PBGC granted access to its missing-participants database to both terminating DC plans and affected participants. The new, voluntary option is effective January 22 for plan terminations occurring in calendar-year 2018 and later, the PBGC said in a December 21, 2017 press release.

The changes provide for expansion of the PBGC’s 20-year single-employer defined benefit (DB) program to cover terminated DC plans, multiemployer pension plans, and small professional service employer plans with 25 or fewer participants not covered by Title IV of the Employee Retirement Income Savings Act (ERISA).

Unlike discontinued Internal Revenue Service (IRS) and Social Security Administration letter-forwarding programs, the new PBGC options are not available for ongoing plans, whose fiduciaries have been struggling with how to fulfill their responsibilities when participants can’t be found and need additional guidance and options.

What PBGC Will Pay Out

The PBGC will pay out benefits with interest when participants are found, and allow the terminated DC plans to stop establishing individual retirement accounts (IRAs) for the balances owed to participants who can’t be located, among other actions. The changes also should make it easier for participants to search for missing benefits accrued in a newly terminated plan and to claim them, although it will be several months before new missing-participant names are added to the existing online directory, according to the PBGC.

Under the final rule, the PBGC will charge fees for plans to transfer benefits into the program, but said the fees will not exceed agency’s costs. According to the rule’s preamble, there will be no charge for small accounts of $250 or less or for information sent to the PBGC by a notifying plan. A one-time charge of $35 will be imposed for transferring a missing participant’s account. 

The final rule—in response to public comments on the proposed version of it—also modifies the criteria for being “missing,” provides more flexibility in the diligent search rules for DB plans, and simplifies existing procedures for DB plans to determine the appropriate sum to transfer to PBGC on behalf of a missing participant or beneficiary.

‘All or Nothing’

One important aspect of the new PBGC program for DC plans to consider is that, although voluntary, the decision by a plan to transfer missing participants’ accounts is “all or nothing.” A plan may not choose to turn over the accounts of some participants and not others, the PBGC final rule states.

For example, a plan might turn over all its small accounts to the PBGC, while larger accounts that can generate larger maintenance fees for individual retirement plan providers might be turned over to private-sector institutions that charge asset-based fees.

This “anti-cherry-picking rule” does not apply to plans simply notifying the PBGC of their missing participants. However, a notifying plan must satisfy the diligent-search requirement for any participant identified as missing in its filing with the PBGC.

Whether a distributee is considered missing depends on his or her status upon closeout from the terminated plan, according to the final rule. The status is also dependent on whether a plan knows with reasonable certainty a missing distributee's whereabouts at the time of closeout. Other elements of this search process are outlined in detail in the final rule.

Previous guidance on administering benefits to missing participants in DC plans came from IRS Field Assistance Bulletin (FAB) 2014-01. To grant a safe harbor for plan sponsors or fiduciaries of terminating DC plans, it called for them to set up an IRA with a financial institution for missing participants’ plan balances, to establish an interest-bearing account in the participant’s name, or to escheat the account balance to state authorities.

In these scenarios, the participant could face IRA maintenance fees that would diminish or dissolve a smaller balance, tax liabilities, or the loss all together of retirement savings from the terminated account.

Benefits from New Rule

The new PBGC option will offer the following benefits to participants and fiduciaries associated with terminated DC plans:

• A unified unclaimed pension database of information about missing participants and their benefits from terminated DB and DC plans.
• A centralized, easy-to-use directory through which persons who may be owed retirement benefits from DB or DC plans could find out whether benefits are being held for them.
• Features to protect private information about missing participants and their beneficiaries from inadvertent disclosure.
• Periodic active searches by the PBGC for missing participants.
• Benefits gained by reuniting missing participants with their lost retirement money that outweigh the modest costs to plans and participants.
• Provision for a one-time administrative fee to be charged for plans that transfer missing participants' benefits into the program; no fee for benefits of $250 or less, no ongoing maintenance fees, and no distribution charge.
• Treating participants or beneficiaries as “missing” if they fail to make necessary benefit elections upon plan termination or fail to accept lump sum benefits, such as where there are uncashed checks.
• Fewer benefit categories and fewer sets of actuarial assumptions for DB plans determining the amount to transfer to PBGC and a free on-line calculator to do certain actuarial calculations.

The PBGC adopted the final regulation after first issuing a request for information to assess interest in an expanded program (see PBGC Wants Thoughts about Missing Participants), then obtaining public comments on a proposed regulation that was issued in September 2016 (see PBGC Proposes Expansion of Its 'Missing Participants' Program).

PBGC said it coordinated with other government agencies to ensure that the final regulation is in line with guidance from the Department of Labor (DOL) and the IRS.