Closed Courts, Missing 401(k) Participants Confront DOL Agency: GAO

The COVID-19 pandemic created "immediate and long-term challenges" for the Labor Department's Employee Benefits Security Administration, which enforces Title 1 of the Employee Retirement Income Security Act, or ERISA — namely, closed courts temporarily slowing criminal cases, as well as difficulty locating "missing participants" who have left retirement funds behind when exiting jobs.

Those are just some of the findings in a new report by the Government Accountability Office. The GAO found that as virtual hearings increased, litigation resumed, but finding missing participants would remain a long-term challenge and may require more investigative resources.

EBSA has also refocused its enforcement efforts on "major cases," GAO found.

EBSA is charged with protecting the rights of participants in employer-sponsored benefit plans and enforcing Title 1 of ERISA. As of fiscal 2020, GAO said, this included about 154 million participants in 722,000 retirement plans and 2.5 million health plans with combined assets of over $10.7 trillion.

The architect of the fiduciary prohibited transaction exemption, EBSA shares responsibility for administering provisions within ERISA with the Internal Revenue Service and the Pension Benefit Guaranty Corp.

The Labor Department arm generally focuses its enforcement efforts under ERISA in three broad categories of requirements that apply to both retirement and health plans and their service providers, attorneys at Eversheds Sutherland wrote in a recent brief on the GAO report. Those areas of focus relate to disclosure of plan information to participants, reporting to relevant agencies and fiduciary responsibilities.

"In providing effective oversight and enforcement for the vast array of private sector employee benefit plans and the more that 154 million participants that rely on them, EBSA's job is enormous," said Phyllis Borzi, who led EBSA during the Obama administration. "The report is balanced and comprehensive and recognizes both the opportunities and challenges that EBSA faces.

"I am encouraged, but not surprised, that the GAO found much to commend, but the most important service that the GAO Performance Audit report provides is in its description of the impressive range of strategies used by the agency to fulfill its protective mission. Most policymakers, taxpayers, and plan participants may not know just how extensive and critical the work of this relatively small agency is, but now, thanks to this GAO report, they know and they can begin to appreciate EBSA's efforts on their behalf," Borzi said.

The Eversheds attorneys stated that "EBSA has always been a smaller federal agency, with fewer than 1,000 employees, and its full-time investigative staff is quite modest relative to its regulated community — which currently includes over 700,000 retirement plans, about 2.5 million health plans, and countless service providers."

EBSA's full-time regional office enforcement staff started at 506 employees in fiscal 2011, peaked in fiscal 2014 at 569, and ended in fiscal 2020 at 492 — 97% of where it started, the Eversheds lawyers state. By comparison, the Securities and Exchange Commission "has a staff of over 2,400 personnel engaged in comparable functions."

The GAO report also includes details about the enforcement priorities of EBSA at both the national and regional level.

Focus on 'Major Cases'

EBSA argued in a 2012 paper, the Eversheds attorneys state, "that it would best leverage its resources and maximize recoveries for plans and participants if it focused its investigations on 'major cases' involving service providers to many plans or plans with systemic compliance problems."

The agency has since steered its enforcement efforts toward these major cases.

"The GAO report attributes a 62% decrease in the enforcement cases closed annually over the 10-year period, accompanied by a 126% increase in the annual dollar amount of recoveries, primarily to the major case emphasis," the Eversheds attorneys said.

Major cases may include investigations of service providers with many plans and plan participants or systemic problems in the plan that may require significant asset management or administrative reforms, the attorneys state. Total monetary recoveries for participants more than doubled from fiscal years 2011 through 2020, according to the GAO report.

"The focus on major cases, which began in 2013, accounts for much of that growth, with nearly 80% of total recoveries from all sources coming from major cases in 2020," the Eversheds attorneys said.

According to EBSA officials, major cases are more resource-intensive; therefore, in that same period, the total number of investigations that were closed dropped by more than 62%.

"The DOL's more selective and targeted enforcement activity in recent years is in marked contrast to the explosion of private litigation that is engulfing pension and health plans over all manner of issues — fees, disclosures, conflicts, investment performance, benefits administration," said Brian Boyle, a partner at O'Melveny & Myers LLP in Washington who specializes in ERISA, in an email to Investment Advisor. "If one assumes that DOL has less institutional interest in targeting plans that the ERISA plaintiffs' bar is already swarming, then the list of available investigation targets is going to continue to narrow."

Labor Department actions against registered investment advisors, Boyle continued, "have historically been less common than other DOL enforcement activity, and that hasn't changed in my estimation. Consistent with the overall trend in ERISA litigation, though, some of the actions DOL has commenced more recently rest on increasingly audacious theories that put big numbers in play."

More 'Missing' Participants Investigations

The GAO report notes that while an increase in job loss may lead to an increase in missing retirement plan participants, "failing businesses may struggle to keep updated records for participants vested in company retirement plans."

EBSA officials told GAO that the agency focuses on the participants "who may face financial hardship if they don't receive their promised retirement benefits on time and without excessive fees, especially during economic downturns." As a result, GAO said, "the increase in missing participants may lead to a greater need for related enforcement investigations."

Retirement plan administrators "have an obligation to keep accurate and up-to-date records on plan participants and take appropriate actions to find missing former employees, so the plan can pay promised benefits when they come due," GAO said.

EBSA officials told the GAO that "many missing participants are not aware of their benefits and, without the plan's diligent efforts, may never receive their benefits," the report states.

"Several stakeholders mentioned the challenge of locating missing participants, which existed prior to COVID-19, and their desire for additional guidance about the steps plans must take to locate them," the GAO said.

These stakeholders expected the increase in job loss due to the pandemic to lead to more missing participants, which would make finding them even more difficult, the GAO said. In early January, EBSA issued missing participants guidance that set out a range of best practices fiduciaries of retirement plans, such as 401(k) plans, should consider as steps their plan could take to help reduce missing participant issues and ensure that plan participants receive promised benefits when they reach retirement age.

In fiscal 2020, EBSA reports that its investigators helped missing and nonresponsive participants recover benefits with a present value in excess of $1.4 billion.