Administering an employee stock ownership plan (ESOP) has its challenges and one that can be particularly frustrating is managing the accounts for missing participants. Missing participants, defined as individuals entitled to plan benefits who can no longer be located, create fiduciary concerns for plan sponsors. Unlike 401(k) plans that typically provide immediate distributions after termination, in general, ESOPs delay payouts for “terminated” employees, i.e., those who don’t meet the plan’s definition of disability, death, or normal retirement age. This delay can extend six years after termination, and in some cases even longer (up to 20 or 30 years) if an internal ESOP loan remains outstanding and participant contact information becomes outdated. This article will go over the primary challenges of missing participants in ESOPs and best practices and strategies to consider.
Key Challenges of Missing Participant Accounts
Accounts for missing participants can create a variety of both compliance issues and administrative struggles, including the following factors:
- Missing participants are no longer able to track their account balances.
- Accumulated balances increase administrative costs and may expose sponsors to fiduciary risk.
- Required plan notices and updates cannot be delivered.
- Required minimum distributions (RMDs) may be missed, resulting in penalties.
- Uncashed checks and stale account balances create operational inefficiencies.
The increasing mobility of the workforce has aggravated the issue. Historically, there was little guidance from the U.S. Department of Labor (DOL) on this topic, so companies often ended up developing procedures on their own. Since then, the DOL has issued three separate Field Assistance Bulletins (FABs) with guidance related to missing participants.
Regulatory Developments
- FAB 2004-02: Provided initial guidance for locating missing participants, but applied only to terminated plans.
- FAB 2021-01: Provided more detailed guidance than FAB 2004-02. Also released in 2021 by the DOL was the “Missing Participants – Best Practices for Pension Plans” document, which focused on prevention rather than the resolution of existing missing accounts. The examples in the best practices document were intended as guidance rather than strict requirements, giving plan fiduciaries and sponsors the flexibility to determine the most appropriate steps for locating a missing participant based on the specific facts and circumstances of the plan and the individual participant.
- FAB 2025-01: Established a temporary enforcement policy allowing fiduciaries to transfer vested balances of $1,000 or less, including uncashed checks, to state unclaimed property funds, provided five specific conditions are met and the plan document is amended accordingly.
In addition, under the Setting Every Community Up for Retirement Enhancement 2.0 Act of 2022 (SECURE 2.0 Act), the DOL has created a national “Retirement Savings Lost and Found Database.” This registry will eventually require plan sponsors to report missing participants in order to help reconnect former employees with their benefits.
DOL Best Practices for Pension Plans
In the DOL’s best practices for pension plans guide noted above, the DOL noted that plan sponsors should consider approaching missing participant accounts in the following ways:
1. Maintain Accurate Contact Information With Regular Updates
Plan sponsors can keep up with contact information by periodically requesting contact information updates from participants (both current and terminated) and beneficiaries, regularly auditing current census data and correcting data errors like incorrect or out-of-date mailing addresses, partial Social Security numbers, missing birthdates, missing beneficiary information, and flagging undeliverable mail and uncashed checks for additional follow-up.
2. Enhance Communication Strategies
Bolstering communications can head off challenges before they occur, including by using clear, plain language and offering non-English language assistance, providing accessible contact channels such as websites and toll-free numbers, clearly labeling correspondence with the plan or sponsor name, and adding steps in the exit process to confirm contact and alternative contact information.
3. Use Multiple Search Methods
Having various ways to find missing participants can help, including by reviewing internal records and emergency contacts for more recent information; contacting designated beneficiaries; using online search tools, social media, and public databases; utilizing commercial locator services; sending certified mail or using tracked delivery services; attempting contact via email, phone, or other channels; searching for death notices or obituaries; reaching out to colleagues of the missing participants; and registering participants with public or private pension registries.
4. Document Procedures & Actions
Your organization can help handle missing participant accounts by formalizing and consistently applying written policies (the DOL will request a copy of your procedures should your plan be selected for an audit). Also include documenting key decisions, actions completed, and resulting outcomes during any follow-up steps. For plans using communications with participants via third-party record-keepers or mail services, maintain compliance with the agreed-upon services and the effectiveness of such services.
Action Steps for ESOP Plan Sponsors
To help improve outcomes and lessen risks when handling accounts for missing participants, ESOP plan sponsors should consider the following strategies:
- Develop and continually update an official missing participant policy.
- Create separate procedures for non-U.S. participants if applicable.
- Establish a policy on how to handle mail that is returned as undeliverable.
- Formulate a policy for handling uncashed checks.
- Roll out a timeline for conducting participant searches, e.g., quarterly, or post-plan administration.
- Document each of your search efforts and outcomes.
- Review the plan document to determine permissible actions if participants remain missing after exhaustive efforts to locate them.
How Forvis Mazars Can Help
Forvis Mazars understands how intricately woven an ESOP is with the strategic and financial plans of a company, and how critical it is to consider various ESOP matters when developing plans for the future. Our skilled professionals are committed to delivering an Unmatched Client Experience® and helping you prepare for what’s next. To learn more about best practices for missing ESOP participants or if you have any questions or need assistance, please contact our ESOP team at Forvis Mazars.