April 5, 2002 (PLANSPONSOR.com) - The month of March
is said to come in like a lion - and participant transfer
activity certainly perked up during the month, according to
the Hewitt 401(k) Index.
Not only did activity pick up significantly from the
prior month, equity investments regained their luster in
what Hewitt described as the ‘most bullish transfer month
since January 2000.’ Transfers favored equities on a
net basis on 65% of the trading days in March (13 out of
20), compared with 70% in January 2000. A month ago
transfers favored fixed income investments on 14 of 19
trading days (see
Participants Still
Seeing Shadows in February
).
Average daily net transfers were 0.08% of total
balances, slightly above the typical 0.07% pace for the
Index, which tracks some $1.5 billion in plan assets.
Hewitt notes that daily net transfer activity has trended
to a below average 0.06% of total balances since the
terrorist attacks last September.
There were five above-normal net transfer activity
days. Particularly notable were March 7 and 15, where
activity was roughly three times the normal level – and
March 28, the last trading day of the quarter, where
activity was 3.87 times normal. Somewhat ironically
in view of the rest of the month’s activity, on those three
days net trading activity favored fixed income
investments. In fact, on March 28, 85% of the net
transfer flow came from company stock – and 88% went toward
GIC/Stable Value.
Company stock continued to suffer a loss of investment –
almost half (47.60%) of the fund outflows during the month
came from that sector – though that was down from the 60%+
that fled the investment last month. Specialty/sector
funds made up another 28% of the outflow, and bond funds
were close behind with nearly 22%.
In Flux
Those funds largely flowed to large US equity funds
(28.13%). In fact, according to Hewitt, March was the
first month since November when that sector of the index
saw a net inflow. GIC/Stable Value attracted nearly
24% and small US equity drew more than 21%.
International funds, which had made up 11% of February’s
outflow, drew nearly 10% of the inflowing funds in
March.
At month end, however, company stock still comprised
more than 28% of the total balances in the index – roughly
the same as a month earlier (some part of that is not under
participant direction). Large US equity retained its
second-place weighting, with roughly 24%, both likely
boosted as much by a recovering stock market as by
contribution flows. GIC/Stable Value actually slipped
a bit, comprising just 20% of the overall asset allocation
in the index at month end.
‘Lost participants are not something that the government
has really addressed. After a plan sponsor does address
searches through various channels, what are they doing with
the money of those still lost?’
We noted that the PBGC offers a solution for DB plans
(if you’re not familiar with the program, check out
their website
), but as for those defined contribution
participants…
‘My favorite remedy for lost
participants in a DC plan is
100% federal tax withholding.
However, my Compliance
Department won’t let me do it.’
Well, one reader summed up the sense of most respondents
– ‘Unfortunately we continue to carry them as participants.
I’m very anxious to see what others are doing. This was a
great question.’
Still, as usual, we got some great responses. Several
noted existing services available through the IRS, DOL and
Social Security. As one noted,
‘ We try searching through the IRS first because it is
free. Then we try searching through the DOL, which charges.
Meanwhile, the account accrues interest. Our plan does
allow for a default into forfeitures if we can’t find the
person in over 5 years, but the default has never been
needed. The disclosure office will send your letter on if
they have an address and it is up to the participant to
contact you. Also, there is a website that I check to see
if they are dead,www.ancestry.com’
Another was kind enough to outline the IRS procedure in
more detail,
‘Send a letter to the IRS explaining that you are
trying to find lost participants who have benefits
available to them. You will need to include the
participants’ names and social security numbers in the
letter to the IRS. You should include letters addressed to
the participants that the IRS can forward to the address
that they have on file. The address that you would need to
send the letters to is: Internal Revenue Service,
Disclosure Office, P.O. Box 1818, Room 7019, Cincinnati, OH
45202-3222.’
And then, of course, there is this week’s
Editor’s Choice
:
‘My favorite remedy for lost participants in a DC plan
is 100% federal tax withholding. However, my Compliance
Department won’t let me do it.’
Thanks so much to everyone who took the time to share
your experience and ideas. We’ll do a follow-up on this
issue in the weeks ahead – and if there are other
suggestions, ideas or questions – please let me know.
The question was: Lost participants are not
something that the government has really addressed. After
a plan sponsor does address searches through various
channels, what are they doing with the money of those
still lost?
There are 2 things that we have done in the past to get rid
of balances in a dc plan. Probably the most popular way
is for us to withhold 100% as federal withholding payable to
the IRS. We all know that the IRS is generous and will give
back most of the funds when the participant files their tax
return. In a few instances, we have also escheated the
funds to the state in which the participant lived.
We try searching through the IRS first because it is
free. Then we try searching through the DOL which
charges. Meanwhile, the account accrues interest.
Our plan does allow for a default into forfeitures if we
can't find the person in over 5 years, but the default has
never been needed.
The disclosure office will send your letter on if they
have an address and it is up to the participant to contact
you.
Also, there is a website that I check to see if they are
dead,
www.ancestry.com
The money is either redeposited in the plan in a separate
account, sent to the new trustee or sent to the company if
they have left. The company is notified before hand.
Our defined contribution plan calls for unclaimed (3 year
unsuccessful search of the participant) assets to be
distributed to the remaining plan participants. Our plan is
over 10 years old and I don't know that we've ever had to do
this.
Our prototype document dictates that the Plan Administrator
will use one or more specifically-named methods for locating
a lost participant, including use of the IRS
letter-forwarding program under Rev. Proc. 94-22, use of the
Social Security Administration System search program or other
commercial locator service. If a participant remains
unlocated for 6 months following the date of the Plan
Administrator's first attempts to locate, the participant's
balance is forfeited. If the participant later makes a
claim for the account, the balance has to be restored.
In real practice, we use the commercial locator service,
which is significantly faster than the other options.
However, plan sponsors are hesitant to forfeit anything other
than a very minor dollar balance due to the possibility that
a future forfeiture restoration may come out of their
pockets. The document provisions create
additional work by requiring us to maintain a record of these
forfeited balances and why they were forfeited.
This technique had fantastic results. Send a letter to
the IRS explaining that you are trying to find lost
participants who have benefits available to them. You will
need to include the participants' names and social security
numbers in the letter to the IRS. You should include letters
addressed to the participants that the IRS can forward to the
address that they have on file. The address that you would
need to send the letters to is: Internal Revenue Service,
Disclosure Office, P.O. Box 1818, Room 7019, Cincinnati, OH
45202-3222.
Our 401(k) investment and administrative provider did a lost
participant search for us and was able to get checks out to
all lost participants except 6. I then took over and
did a quick internet search and located only 1.
For the remaining 5 I called the IRS' EP Customer Account
Services at 877-829-5500 to ask about Rev Proc 94-22 (lost
participant letter forwarding service). The IRS
indicated I should send a cover letter to a local IRS
Disclosure Office (and they gave me that
address) to describe the situation and enclose the letters I
wished to forward. I did that on March 14th of this
year and have not yet heard from the IRS or any of the
participants. I was going to give it 8 weeks before
calling the local Disclosure Office as a
followup. If the benefits do not get paid at that
point our plan allows the Committee to forfeit the benefits
(forfeitures are used to offset future employer
contributions) but if the participant ever shows up with a
valid claim, then we must reinstate an account balance for
them (using the current year forfeiture account) equal to the
amount originally forfeited with no investment gain/loss
calculated for the "lost" period of time.
Our auditors gave me information on locating "lost"
employees. Write a letter to the "lost" person and
place it in an open envelope. Send the letter, along
with another letter to the SSA with the person's SSN, and the
SSN will find the person and forward the letter to
them. You have to leave the envelope open so the SSA
can review what is being sent; making sure it's indeed
related to locating someone in order to notify them that they
have money available in the plan. If you have a large
volume there is a charge for the service. The SSA
should be able to supply information on charges for excess
searches.
After the 6 month period when the check can no longer be
cashed, we have the plan trustee move the uncashed check
amount into a special "holding account" within our own DC
Plan. We keep a list of name, social security number,
the date and amount of the uncashed check. If the
participant ever contacts us in the future, we simply pull
the appropriate amount from this holding account and reissue
the check. No tax record is created when the check is
reissued, because a 1099-R was created when the original
check was issued. The holding account allows our plan to
realize the earnings from this account, rather than the
service provider. We use our stable value fund as the
investment vehicle for these assets. We search every
possible avenue to locate the participant (last place worked
HR rep. to check local phone directory for a listing,
internet search sites, medical benefits dept., and so
forth). On an annual basis we go through the IRS to try
to contact these individuals.
L ost members on DC plans, after exhausting all available
resources to locate them, are eventually turned over to the
State of last known residence. Each state has a process
for advertising names of current or former residents who have
funds due them and available for claiming.
Fortunately, I've only seen a few "lost" participants over
time. With most cases, the 401(k) committee has been
too nervous to do anything but let those accounts do anything
but sit - just in case someone came back to claim the
account. Some type of standard needs to be set - for
example, if you cannot make contact with a participant after
reasonable attempts for "x" number of years, their account
will be distributed to a forfeiture account. . . If the
MIA participant suddenly reappears, some standard should be
set to make him whole without causing an
actuarial/administrative nightmare.
I have found lost participants through the Social Security
Administration. It took 7 months for them to follow
through and I thought it was a lost cause, but it turned up
more than half of those who were lost at that time.
My question is somewhat different......for lost funds (for ex
outstanding benefit disbursments, uncashed benefit checks,
etc.) do plan sponsors ultimately escheat the $ to the states
(based on their Abandoned Property Laws) or does ERISA take
over, and the $ is returned to the plan, or Other?