Is it fair to charge a participant $30 a year for a locator service she did not request?

A recordkeeper offers a new service it designed to help a retirement plan find a participant classified as one likely to be “missing” or unresponsive.

In form, the plan’s administrator or other responsible plan fiduciary sets the factors on who is treated as an individual this service applies to. But in practical reality, the plan’s fiduciary does this by adopting the criteria the recordkeeper wants the administrator to instruct.

For example, one of those classes is that a participant’s account is more than $200 and has a mail hold. Another is that a distributee did not deposit or negotiate a payment more than $75. From what I’ve read, there is no age condition such as the individual’s applicable age for a § 401(a)(9)-required distribution; Social Security early, normal, or late retirement age; or the plan’s normal or early retirement age.

If a plan’s responsible plan fiduciary authorizes the service, the recordkeeper uses a series of steps meant to find the individual, find a good address, and communicate with the individual with a hope of persuading the individual to attend to her account (or accept a payment if a distribution was provided).

The fee is $30 a year while the individual is not yet satisfactorily located. The fee is charged against each individual’s account. (Assume that the recordkeeper does not offer another way, or that the employer is unwilling or unable to pay a plan-administration expense.)

The recordkeeper requires the plan’s administrator to confirm that this fee is sufficiently disclosed, whether in a rule 404a-5 disclosure or another communication.

My worry is that a participant might feel unfairly burdened by a few years’ or even one year’s $30 charge when the individual feels the service is one she did not request, and that the service did not benefit her.

How should I think about this?

Do you think this $30-a-year charge is fair to a to-be-located participant?

If an individual is not yet nearing an involuntary distribution (whether a cash-out, or a § 401(a)(9)-required distribution), should a plan’s fiduciary unburden such a participant from the $30-a-year charge by omitting the individual from the to-be-located class?

Should a plan’s fiduciary consider probabilities of success or failure? If an individual’s undistributed account is $300 and the fiduciary believes the probability of causing the individual to add a functional postal or email address to her account is no more than 10%, should a fiduciary not apply the locator service? (Assume the plan has people with small balances because the plan does not provide a $7,000 cash-out.)

A lot cheaper and fewer issues to add the $7k cash out isn’t it?

Bill Presson, thank you for aiding my thinking.

About the plan that started my thinking about this recordkeeper service and its charge on a to-be-located participant’s account:

From an employer’s perspective, a plan provision imposing a small-balance involuntary distribution would not be less expensive than any expense for a locator service if an employer pays no plan-administration expense.

From a participant’s perspective:

An involuntary distribution and default rollover could result in an IRA with similar yearly account charges and higher-expense investments. (Imagine a big employment-based plan has enough purchasing power to get investment funds with lower expenses than a nonwealthy individual’s IRA could get.)

A mail-hold might not be put on an individual’s account until all addresses—email, smartphone, and postal—have suffered bounce-backs. That means such a participant likely would not receive a notice that her failure to specify what she prefers for her involuntary distribution results in an IRA she won’t know how to communicate with. (And a participant likely will have forgotten the summary plan description that described the plan’s provisions for an involuntary distribution and default rollover. 29 C.F.R. § 2550.404a-2(c)(4) https://www.ecfr.gov/current/title-29/part-2550/section-2550.404a-2#p-2550.404a-2(c)(4).)

Even if imposing a small-balance involuntary distribution might lessen the number of people subject to a locator service, there would remain many with bigger accounts.

A participant might no longer receive quarter-yearly notices of her electronic opportunity to retrieve account statements and other information. A participant might no longer receive paper statements. But a participant still has electronic access to the plan’s website the recordkeeper maintains, and electronic access to her account. And likely has telephone access.

Some participants don’t need or want reminders. But paying for the recordkeeper’s locator service presumes the class of participants wants reminders.

I see a view that some neglectful participants might welcome being told that one should furnish at least one functional address so the plan has a way to communicate to the participant. And I recognize that meeting that purpose involves acting on a class and so burdens some people who don’t want any reminder (or at least might welcome paying for it).

Yet, questions about whether a fiduciary ought to incur an expense and who ought to bear the expense don’t always have one tidy answer about what course of action is “solely in the interest of the participants and beneficiaries . . . for the exclusive purpose of[] providing benefits to participants and their beneficiaries [while] defraying [no more than] reasonable expenses of administering the plan[.]”

BenefitsLink neighbors, more observations about this?

My first thought is this is a money-making scheme by the RK, possibly to make up for the lack of check-writing/distribution fees it does not get when there is no de minimis cash out provision. $30 per year once someone is deemed missing or unresponsive seems excessive to me, although googling the subject shows fees ranging $10-$30 and PBGC charging $35 if account > $250. 

But usually these searches are done once for a person, not annually. Maybe twice, the first time when a benefit first becomes payable and the second time approaching RBD or plan termination. I can see charging an account once or twice in those instances, but annually because I refuse to open/answer a letter? And who and how does that service get monitored to ensure the RK is effectively/efficiently attempting to find and engage participants? If your locator service doesn't find someone in year one, is it really going to have better success in year two or year three? Doubtful. And when do these fees stop, when someone is found? 

As a fiduciary, I would not engage the RK for this service. I might contract for one year and see what the success rate was, and then contract year to year for new occurrences only. The cynic in me is thinking why should the RK find and engage someone in one year when they could string out the process another year or two, doubling or tripling their take, and still claim success to their client because they found and paid the person. Do they also get a distribution processing fee at the end?

I also presume the RK is already collecting a per head charge on these idle accounts?  

I see this as a big win for the RK with marginal, if any, benefit to the participant and plan sponsor/fiduciary, and a LOT of unanswered questions/issues and potential pitfalls. Or as my avatar would exclaim, "it's a trap!"

CuseFan, thank you for helping me think about this.

The offer is to ERISA-governed and non-ERISA plans. To plans with or without a cash-out.

The $30-a-year fee ends when the individual is found. The brochure does not spell out the details of how that is determined.

Perhaps many in a to-be-located class will be found in a first year’s searches.

The steps for trying to find an individual are more than records searches and written communications. It can include, if needed, telephone calls to the individual’s spouse, children, other relatives, and named beneficiaries, whether primary or contingent.

You’re right that a responsible plan fiduciary would consider the particular fee in a context of the whole of all direct fees and indirect compensation. Yet, adding an incremental service a plan’s current service agreement does not provide might be worth some compensation (or might not). A fiduciary must consider what’s reasonable in light of all the facts and surrounding circumstances. And different plans might have different answers to those questions.

The recordkeeper’s offer is a new launch. In my work for my client, I’m not yet evaluating the service. If my client dislikes charging someone for a service she didn’t request, it might be wasteful to look into the service.

In the current environment of online enrollment/automatic enrollment and estatement delivery, getting employee addresses for mailing purposes can be like pulling teeth. Years ago, we requested W-2s for plan testing purposes and could get addresses from those. Today, everything is done electronically, and address information is not necessarily provided.

I know that this question is specifically with regard to participant distributions. However, with the upcoming regulations about once a year paper statements coming into effect, that is going to add an additional burden on someone (PA or outsourced to the RK) to keep track of missing participants. If statements get returned by the post office with no forwarding address, what is the regulation going to specify about lost participants and their paper statement delivery? 

If the participant is active, a request is going to need to go to the employer for an address update and there should not be a fee for that. RKs should be asking employers to update addresses to prepare for the paper statement rules.

If the participant is terminated and the employer does not have a good address, an address search will need to be conducted and $30 to cover that cost is probably reasonable, considering all the possible steps that need to be followed, including any locator search fee. 

Add another voice that is objecting to the annual part of this idea.  We look for or advise our clients to look for people when it is relevant.  

Although places like Inspira people send a lot of forced out to IRAs to them does an annual search.  Not sure if it is part of the base fee they charge those IRAs or an add on  

What I do know is that a few hundred in an Inspira IRA needs to have an incredible rate of return to not have the balance go down annually.