How Lost and Missing Defined Contribution Plan Participants Affect Mergers and Acquisitions

During mergers and acquisitions (M&A), one important issue could be hiding in plain sight: the treatment of tax-qualified defined contribution retirement plans and plan participants. While the parties negotiate deal terms, plan sponsors must evaluate the plan’s eventual disposition and maintain compliance with ERISA and the Internal Revenue Code (IRC). Generally, the plan sponsor’s fiduciary responsibilities to participants continue throughout the transaction and beyond — including to those designated as lost or missing participants. That group comprises former employees or their beneficiaries or alternate payees who cannot be located by the plan sponsor or have failed to respond to benefit-related communications. A proactive approach to managing lost and missing participants can help reduce fiduciary, regulatory, and financial risks during an M&A. 

In 2021, the Department of Labor (DOL) issued sub-regulatory guidance related to lost and missing participants in defined contribution retirement plans. Although that guidance is not law, the DOL expects plans to follow it and includes questions about it in most enforcement actions. For more background and best practices, see our Alert: “Missing Participants: What Plan Sponsors Need to Know About the DOL’s Latest Guidance.”

This article pinpoints M&A-specific considerations and offers practical guidance to help defined contribution plan sponsors avoid common pitfalls.

How do Plan Sponsors Generally Identify and Address Lost or Missing Participants?

Before considering specific implications, it is important to understand how defined contribution plan participants become lost or missing. Communication between plan sponsors and participants can break down, often in the following common ways:

• Statements, checks, and notices sent to the participant are returned as undeliverable.
• Participants fail to respond to emails, voicemails, and other types of messages.
• Contact information has not been maintained and is no longer valid.
• The participant’s account has fallen inactive for an extended period of time.
• Benefit checks have not been cashed.

When it becomes clear that the participant is unresponsive and potentially not receiving benefits, defined contribution plan sponsors — often working with third-party administrators and recordkeepers — typically begin a structured search process. Reviewing all returned mail and uncashed checks is a starting point, but a plan sponsor’s data maintenance, regular reviews, and periodic outreach are also key to locating participants and reducing fiduciary exposure, compliance risk, and finance and accounting pitfalls. Plans should keep records of their efforts to locate missing participants, including how often the search was undertaken, what was done, and how long the search continued. The DOL guidance notes that more significant efforts should be made for higher account balances (taking a cost-benefit approach).

How can Missing Participants Affect Due Diligence During an M&A?

The buyer typically conducts due diligence to determine key factors, including the seller’s overall financial condition, regulatory compliance, liabilities, and employee benefit plans. Finding lost or missing plan participants during due diligence introduces additional concerns to be addressed, including those listed below.

• Fiduciary risk: Plan sponsors must take good faith steps to locate missing participants. When due diligence reveals a large number of missing participants, buyers might suspect there are other problems, such as weak controls, poor administration, and hidden liabilities.
• Regulatory compliance: Defined contribution retirement plans must comply with laws such as ERISA and the IRC, as well as IRS and DOL regulations. Noncompliance can result in fines, penalties, and plan disqualification.
• Plan disposition: Decisions about whether to merge, terminate, or otherwise transition a tax-qualified defined contribution retirement plan are typically part of deal negotiations. Missing participants can complicate rollover and distribution processing and could result in unexpected liabilities and costs.
• Uncashed checks and held balances: The handling of uncashed checks, forfeitures, and other participant balances can raise questions about overall plan administration.
• Deal consequences: The risks associated with lost and missing plan participants can have a significant impact on negotiations, resulting in additional costs and further due diligence activity. 

Missing participant issues can emerge during the early stages of a business transaction but they do not end once the deal is done.

What Happens with Missing Participants Post-transaction?

The strategy chosen for the retirement plan will determine the next steps for all participants, including those who are lost or missing. For example, any of the outcomes below is possible.

• Continuation: The seller’s plan remains in place for an agreed period of time to provide continuity of coverage. This might be a short-term solution put in place until the buyer provides a more permanent solution.
• Consolidation: The buyer merges the seller’s plan into its own, paying close attention to eligibility rules, participant notices, and participant vesting.
• Termination: The seller terminates its plan pre-close (typically contingent on and effective immediately before the formal deal closing date). Participants receive distributions or rollovers and then typically transition to the buyer’s plan.
• Spin-off or carve-out plan: Some portion of the seller’s plan, as well as its assets and liabilities, spins off to support a related organization. This practice might be chosen in, for example, partial acquisitions, newly formed entities, and corporate divestitures.

In each scenario, plan sponsors must continue to comply with applicable laws and satisfy their fiduciary obligations to participants. 

How can plan sponsors mitigate lost and missing participant risk?

Perhaps the best answer to this question is that plan sponsors should always be prepared for the heightened scrutiny they will experience during due diligence. The following practical steps can help: 

• Maintain accurate records: Records will be scrutinized during due diligence, audits, and regulatory investigations. Keep plan records — including participant contact information — complete, organized, and ready for review. 
• Leverage recordkeepers and third-party providers: Coordinate with all service providers to confirm the use of every available tool to locate lost and missing participants. 
• Address uncashed checks promptly: Uncashed checks could reflect delivery issues, participant confusion, outdated contact information, or the participant’s death or incapacity. Establish consistent follow-up processes, make reasonable attempts to reach out to participants, and document all actions taken.