Fall’s in the air, and that means homework’s spread out on the kitchen table. If you are a retirement plan sponsor, you’ve got homework too. Now’s the time to tune into details that might be in the way of greater success for the plan, and yourself, given your ERISA fiduciary obligations. Specifically, study up on missing participants and plan forfeitures: related efforts can make a big difference.
Small Details Matter
Though most retirement plan sponsors outsource administration to third party providers, it’s imperative to continue monitoring the health of the plan, and to that end, be aware of how even small details either contribute to a thriving plan, or cause trouble. As ERISA fiduciaries, plan sponsors are wise to understand that outsourcing services does not eliminate the risk of being held personally liable for errors and oversights. At Pension Plan Specialists, Joseph Burt recommends digging into details, and suggests three areas of attention that many retirement plan sponsors overlook: “As a business leader, you know that small details matter. They can directly impact operational costs, reduce audit exposure, and strengthen overall plan health. Three key areas—forfeitures, missing participants, and force-outs—are often missed but can make a big difference.”
Indeed, missing retirement plan participants–and the payments owed them–has been a hot button issue for the Department of Labor for years, with plan sponsors urged to put more attention into location efforts, by following guidance from the Employee Benefits Security Administration (EBSA), which instructs retirement plan fiduciaries to: “Maintain complete and accurate census information; Communicate with participants and beneficiaries about their benefit eligibility; and, Implement effective policies and procedures to locate missing participants and beneficiaries.” Plan sponsors will find it helpful to review EBSA’s guidance in three parts on missing participants: Best Practices; Compliance Assistance; and, Field Assistance Bulletin. While checking the retirement plan for missing participants and tightening protocols, plan sponsors should also brush up on EBSA’s Field Assistance Bulletin 2025-01, which at least temporarily, allows for the removal of accounts with less than $1,000 from the plan. As Burt points out, failure to attend to missing participants adds up, and has real consequences:
Missing participants are former employees who still have money in the plan, but their contact information is outdated or unknown. Even though they’re no longer active, they still count toward total plan participants….Here’s why it matters:
- Plans with 100+ account balances require an annual audit
- You may continue sending costly required notices
- You expose the plan to fiduciary and regulatory risk
It’s best practice to update participation regularly, and remember to clearly document all related actions, as Thomas Hawkins at the Retirement Plan Clearinghouse counsels: “If a search for a missing participant is not properly documented, is it a diligent search? To regulatory authorities who may scrutinize a plan sponsor’s search efforts, the answer is decidedly “no.” For a regulator to consider a search to be diligent, it must be well-documented, and to do otherwise can result in audits, penalties and increased fiduciary risk.”
What’s The Plan For Forfeitures?
If you sponsor a retirement plan and provide an employer match, it’s essential to be absolutely clear on what your plan document says about forfeitures (aka the employer contributions left behind when an employee leaves before becoming fully vested), and to make sure administration of these funds aligns to the document. Since 2023, a wave of ERISA lawsuits against retirement plan fiduciaries, such as sponsors, has been calling long accepted practices related to the handling of plan forfeitures into question.
Attorneys at Winston & Strawn offer this advice for limiting risk exposure related to the use of forfeitures:
The first step to mitigating risk is understanding whether the plan documents contain discretionary language permitting the use of forfeitures for plan expenses or future employer contributions. If so, consider:
- Narrowing the acceptable uses of the plan’s forfeiture account to one category of expenses (g., employer contributions only or plan expenses paid by the employer only), or
- Identifying one category of expenses to always be paid first.
- If the employer determines that it is comfortable losing flexibility in utilizing funds as they see fit, non-discretionary language can be added through a plan amendment, so that there would no longer be a choice for the fiduciary to make, which decreases liability…..
- If a pre-approved plan includes non-tailorable discretionary language, the employer may be stuck or risk loss of protection of the pre-approved plan design.
- An alternative solution could be adopting a separate policy selecting non-discretionary uses of forfeitures that fit within the existing pre-approved plan terms.
Fiduciary Liability Insurance?
Yes, given their ERISA fiduciary role, obtaining fiduciary liability insurance is essential for retirement plan sponsors. Unforeseen challenges arise all the time, and seemingly small oversights trigger costly regulatory action and litigation. In fact, the average ERISA claim costs ordinary businesses over $1.2 million in legal fees. That’s why Colonial Surety Company makes protection affordable for retirement plan sponsors and their businesses. Armed with our Fiduciary Liability coverage, for a few dollars a day, you’ll have defense costs and penalty limits up to $1,000,000, if faced with alleged or actual breaches of duty in connection with the employee retirement plan. Cyber liability coverage is included at no extra cost, providing additional protection–for the plan and company–against regulatory actions related to data and privacy, as well as expert response services.
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Protection for Retirement Plan Sponsors
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