A recent complaint (Dylan Handy v. Paychex, Inc.) highlights the potential for plan administrators, and their delegates, to continue monitoring distributions after being made. In this particular situation, the participant requested a distribution from his 401(k) account administered by Paychex in April 2023 to rollover to another financial institution. Consistent with the plan’s process, he received his account in two checks totaling over $100,000, which he forwarded to a financial institution. About a month later, he noticed that the checks had not been deposited into his account and reached out to Paychex about the checks. Paychex indicated they would investigate, but did not respond to him until November 2023. The complaint alleges that the checks had been intercepted in the mail after the participant sent them to the new financial institution, and he is seeking reimbursement for the stolen amounts, taxes, and other damages.
Setting aside the procedural considerations in the case, it highlights that plan administration can continue beyond just issuing the distribution to participants. Fiduciaries have a duty to act prudently and in the best interests of participants, which includes taking adequate steps to protect plan assets. Some actions plan administrators can take to manage potential risks include:
- Respond to participant inquiries on a timely basis and provide frequent updates, especially for missing checks. While a point can be made that the alleged theft occurred after the participant received the checks, and the participant could have taken other actions if they were concerned (e.g., visiting the financial institution’s office in person to deposit the checks), the alleged delay in responding to the issue when initially raised with the plan’s representative was likely a contributing factor for the lawsuit being filed.
- Consider reviewing distribution processes to mitigate potential risks. Allowing distributions by wire could reduce the risk of mail fraud, although it has risks of its own. For all distribution methods, plans should ensure adequate controls are established.
- Continue educating participants on the distribution and rollover process, including potential risks and ways to avoid them.
In this case, the participant timely notified the recordkeeper of the issue, but in many cases, distribution checks can be issued and outstanding for significant lengths of time. Administrators should also have appropriate policies and procedures in place to track and monitor the status of paper checks that have been issued, including with respect to checks that remain uncashed. The Department of Labor has noted that insufficient policies and procedures for handling uncashed checks are often an indication that a retirement plan may have a higher number of missing or unresponsive participants. To minimize missing participants:
- Annually or more frequently review the uncashed check list. Reach out to participants to inform them of any outstanding uncashed checks issued to them.
- Run missing participant searches for participants with uncashed checks who do not respond or whose correspondence is returned to the plan as undeliverable.
- Consider additional steps to confirm participant addresses for significant distributions. Along these lines, consider a quarterly (or more frequent) review of any uncashed check over a significant amount (e.g., $100,000), as well as additional follow-up within a week after those checks have been issued to the participant to confirm receipt. A plan may also want to consider sending large checks via certified mail, return receipt requested (or similar manner by private delivery) to evidence actual delivery.
- Review with the trustee the period of time the check can be cashed, and consider if that time should be changed.
Take a moment to review your plan’s practices and procedures to monitor distributions and locate missing participants. Our Employee Benefits and Executive Compensation attorneys can provide guidance on establishing comprehensive practices and procedures and implementing best practices.
