Compliance December 7, 2020

Guidance on Missing Participants Listed on IRS Priority Guidance Plan

Guidance about how to deal with missing participants and uncashed checks has been issued piecemeal over the years.

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On November 17, the Department of the Treasury issued its 2020-2021 Priority Guidance Plan.

The 2020-2021 Priority Guidance Plan contains guidance projects that will be the focus of efforts during the 12-month period from July 1, 2020, through June 30, 2021. Under the section for retirement benefits, it lists “Guidance on missing participants, including guidance on uncashed checks.” Such guidance would be welcomed by retirement plan sponsors.

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In 2018, the Plan Sponsor Council of America (PSCA), a part of the American Retirement Association (ARA), requested additional guidance on how retirement plan sponsors should handle missing participants. The request was in response to increased Department of Labor (DOL) enforcement activity.

In a statement, the PSCA explained that it first requested in April 2017 additional guidance from the IRS and DOL regarding various Internal Revenue Code and Employee Retirement Income Security Act (ERISA) compliance issues that arise when there is a missing or nonresponsive participant and proposed a sample safe harbor plan. “Since this request, there have been numerous reports of aggressive DOL enforcement activity, and sometimes inconsistent positions taken by DOL auditors, regarding how plan sponsors are handling missing participants,” the statement said. “We have heard concerns from our plan sponsor members that they have been or may be subjected to enforcement actions even though the DOL and IRS have not issued comprehensive guidance on missing participants that provide a clear roadmap for compliance.”

Guidance from regulators about missing participants and uncashed checks has been piecemeal. Recently, the IRS issued two pieces of guidance related to the transfer of retirement plan accounts to state unclaimed property funds. However, no guidance has stated that transferring retirement plan assets to state unclaimed property funds is permissible in the first place.

In a 2017 memorandum for Employee Plans (EP) examination employees, the IRS listed actions plan sponsors should take to locate missing participants in order to avoid being challenged on violating required minimum distribution (RMD) rules.

In 2014, the DOL issued a Field Assistance Bulletin addressing ways fiduciaries of terminated defined contribution (DC) plans could fulfill their obligations under ERISA to locate missing participants and properly distribute the participants’ account balances. The FAB eliminated the requirement in FAB 2004-02 to use the discontinued IRS letter-forwarding service or the Social Security Administration (SSA) letter-forwarding service.  In their place, the required search steps have been expanded to include the use of electronic search tools that do not charge a fee.

The retirement plan industry will have to stay tuned to see if more comprehensive and consolidated guidance is issued by the IRS.

Compliance December 7, 2020

Lawsuit Alleges Fiduciaries Allowed Excessive Fees in Cognizant 401(k)

Fiduciaries are accused of failing to switch to and investigate the availability of lower-cost versions of funds offered in the plan.

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Law firm Capozzi Adler has filed a lawsuit on behalf of a group of participants in the 401(k) plan of Cognizant Technology Solutions U.S. Corporation.

The suit alleges that the company, its Board of Directors and its 401(k)-investment committee breached its fiduciary duties under the Employee Retirement Income Security Act (ERISA). Cognizant has not yet responded to a request for comment.

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The complaint says that at the end of 2017 and 2018, the plan had more than $1 billion and $1.1 billion dollars, respectively, in assets under management that qualified it as a large plan in the defined contribution (DC) plan marketplace. It alleges that the plan had substantial bargaining power regarding the fees and expenses that were charged against participants’ investments; however, the defendants did not try to reduce the plan’s expenses or exercise appropriate judgment to scrutinize each investment option that was offered in the plan to ensure it was prudent. The defendants are also accused of failing to control the plan’s recordkeeping costs.

The lawsuit specifically alleges that there were MassMutual-branded mutual funds offered in the plan for which there were rebranded separate investment accounts (SIAs) that were identical but lower cost. “Because the underlying funds are otherwise identical to the MassMutual version, but with lower fees, a prudent fiduciary would know immediately that a switch is necessary,” the complaint states.

The defendants are also accused of failing to investigate the availability of lower-cost collective investment trust (CITs) for the plan’s investment menu. For example, the lawsuit says, the plan had nine MassMutual Target Date CIT funds and had more than $560 million dollars invested in these funds—”sufficient assets under management during the class period to qualify for the lower cost American Century collective trusts with the only difference being they lacked the MassMutual branding.”

The lawsuit also alleges that many of the actively managed funds in the plan had lower-cost, better performing actively managed alternatives.

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