The assets left behind when a retirement plan participant dies must be properly administered. This requires remaining abreast of the “life status” of participants and connecting with beneficiaries accordingly. Though monitoring death is no one’s favorite duty, it’s an essential fiduciary responsibility for plan sponsors. Here is help.
Just as vigilance is needed regarding missing participants, proactive efforts are also important when retirement plan participants die. In both cases, the bottom line for plan sponsors is the fiduciary obligation to properly distribute the funds. As 401k Specialist observes:
Whereas plan participants are typically more concerned about securing a comfortable retirement income that lasts for life, plan sponsors must deal with deceased participants who will leave behind residual plan benefits requiring proper administration. The cost of not knowing participants’ life status, or worse, in getting it wrong—can be significant—for the participants, for their beneficiaries and for the plan itself. Determining plan participants’ life status has similarities to searching for missing participants, but for obvious reasons, death is different. While an address change can be transient, death is final and irrevocable, and triggers important obligations for plan sponsors….Death is a relatively common and predictable statistical event. According to actuarial tables, about 16% of plan participants will die between the age of 40 and 65, and one of six participants will die prior to normal retirement age. After attaining retirement age, participants’ mortality levels increase more rapidly.
It is dangerous for a plan not to know about a deceased participant. Beneficiaries do not always know about the benefits and as experts point out: “Plan balances could languish in perpetuity after being escheated to the state of residence on record. The stakes are higher for defined benefit (DB) plans, which often include lifetime income provisions for participants and their surviving spouses.” Of course incorrectly recording the death of a plan participant who remains alive is also a terrible mistake: “When living participants are falsely recorded as deceased, benefits may be prematurely discontinued, or worse, never paid….When deceased participants are falsely believed to be alive, benefit streams might not be discontinued or adjusted for survivors, which can adversely impact the plan’s funding status.”
In addition to the these problems related to errors in the administration of benefits based on life status, plan sponsors also need to keep in mind that poor administration can trigger audits and other regulatory actions. Retirement plan experts encourage plan sponsors to be proactive about the protocols for death notices and certificates, including monitoring the diligence of third party service providers. It is also important to note that sadly, “dying alone and intestate” is not uncommon. “Silent deaths” necessitate proactive search strategies that include both periodic, routine e-searches and ongoing death monitoring:
Routine, periodic e-searches, so long as they include a life status check, may first flag a participant as deceased. In the highest quality commercial e-searches, an indication of death may automatically trigger the subsequent capture of the names and addresses of close relatives, which can help in locating beneficiaries. E-searches are flexible and may be used for purposes ranging from periodic data “scrubbing” to targeted searches to establish life status. Whether by accident or through intention, they can quickly and effectively serve as a “first pass” for establishing life status….When there is a population of participants with excessive mortality risk, paired with a higher frequency of benefit payments, plan sponsors can engage a commercial search provider to perform ongoing “death monitoring.”Death monitoring periodically queries high-quality data sources to determine if a status of “deceased” is returned. Ideally, death monitoring should poll more than one data source so that any new finding of “deceased” is timelier and more reliable.
Diligence and Protection Too
Given the many and growing areas of responsibility and the high standards of ERISA law, even the most diligent plan sponsor, following all regulations and best practices, can never fully eliminate the personal risks associated with their duties. That’s why obtaining fiduciary liability insurance is fundamental.Colonial Surety is here to help. As a longstanding and trusted national provider of ERISA fidelity bonds, we’re committed to ensuring that plan sponsors from small and mid-size businesses can afford the protections larger companies put in place. Colonial’s annual premium for fiduciary liability insurance costs less than just one hour with an ERISA lawyer and arms plan sponsors with defense costs and penalty limits up to $1,000,000 in the event of covered lawsuits and regulatory actions. We even include 50,000 of basic cyber liability insurance, lock in multi-year rates and offer installation payments.
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