Uncashed Distribution Checks: Policy Please

When you sponsor a 401k plan, it’s essential to put in place, and follow, a policy for the distribution of uncashed checks. Though third-party service providers likely handle most of the administration of the plan, you, as the sponsor, inherently retain fiduciary responsibilities. Uncashed checks signal that participants may not be receiving the benefits they are owed, posing real fiduciary and regulatory risks for sponsors. An important proactive step you can take to protect your plan’s participants—and yourself, is to establish a detailed, consistently applied, and legally vetted policy for handling uncashed distribution checks. 

Signaling Fiduciary Weakness

Does the plan have missing or outdated contact information? Are checks being mailed to wrong addresses? Are they getting lost in the mail, or by confused participants? Has the recipient died? Does the named beneficiary not know about the checks? These and more may be the reason why a retirement plan distribution check has not been cashed upon issuance. But no matter the reason, an uncashed check in and of itself is a bad thing for ERISA retirement plan sponsors, as Thomas Hawkins points out at 401k Specialist Magazine: 

Similar to the missing participant problem, plan sponsors face significant uncertainties when navigating the issue of uncashed distribution checks. On one hand, regulators increasingly view the existence of uncashed checks as a sign of fiduciary weakness—a red flag indicating that participants may not be receiving the benefits they are owed. On the other hand, plan sponsors must operate within a complex regulatory environment that provides limited direct guidance on how to handle these situations when they occur. In this environment, it is vitally important that each retirement plan maintain a formal, documented and defensible uncashed distribution check policy—one that outlines the plan’s procedures, establishes consistent practices and mitigates fiduciary risk.

A solid uncashed check policy, according to Hawkins,“starts with a clear statement of intent, creating a compliant, standardized framework for addressing uncashed checks, and ensuring consistency with ERISA, IRS, and DOL requirements.” If you do not have a policy in place for uncashed checks, or are unsure if it is sufficient, review the sample Uncashed Distribution Check Policy provided by the Retirement Clearinghouse (RCH). Note that in addition to defining key terms, a sound policy statement must detail exactly “how the plan handles different uncashed check scenarios. 

Another Red Flag: Missing Participants…

As important as it is to have a policy for uncashed checks, it is also essential to actually adhere to the policy in day-to-day operations. ERISA plan sponsors are obligated to monitor third party service providers, so be sure to periodically address how uncashed checks are attended to with your chosen service providers. While doing so, you can address an adjacent, and additionally problematic issue: missing participants.

Retirement plan sponsors are ultimately responsible for ensuring that all plan participants receive their benefits on schedule, so the Department of Labor requires proactive attention to missing participants. Specifically, the Employee Benefits Security Administration (EBSA) has instructed retirement plan fiduciaries to: “Maintain complete and accurate census information; Communicate with participants and beneficiaries about their benefit eligibility; and implement effective policies and procedures to locate missing participants and beneficiaries.” Plan sponsors will find it helpful to brush up on EBSA’s guidance in three parts, which is available here: Best Practices; Compliance Assistance; and Field Assistance Bulletin.

Are You Protected: Fraud vs Honest Mistake?

Under ERISA, the sponsor remains a fiduciary and retains serious obligations: you are legally required to properly select and oversee all of your providers (and even their cybersecurity protocols). If they make a mistake and you didn’t have a process in place to catch it, the DOL can hold you responsible—and your ERISA Bond will not cover you. 

ERISA bonds are required to protect retirement plans from “bad people” doing “bad things” (i.e acts of theft and fraud) with the savings of workers. Though it is essential to comply with the ERISA Bond requirements of the DOL, the vast majority of retirement plan sponsors have no intention of committing acts of fraud or theft. Unfortunately, what many retirement plan sponsors are impacted by is the cost of honest mistakes or oversights under ERISA. Investigations and penalties are out of pocket costs for sponsors—and they add up quickly. For example, ERISA legal defense alone can end up costing upwards of $600 per hour. 

Colonial Surety Company, a leading national expert on ERISA Fidelity Bonds offers the only integrated solution for the protection of retirement plan sponsors. Our affordable All-in-One Packages include: 

• ERISA Fidelity Bond: Provides 100% compliance with DOL bond requirements
• Fiduciary Liability Insurance: Arms you with up to $1,000,000 in coverage for defense and penalties in the event of allegations related to errors and oversights.
• Cyber Liability Insurance: $50,000 of coverage included at no extra cost to address the DOL’s strict standards for response and notification services following cybersecurity incidents. (Colonial Surety Company’s Cyber Liability Insurance explicitly covers both the retirement plan and this business.) 

Don’t wait for a DOL audit, a participant complaint, or a creative plaintiff attorney to allege you’ve made mistakes and accuse you of a fiduciary breach. Secure your business, your plan, and your personal assets today. Colonial Surety Company makes it easy, speedy and affordable: 

Quote and Obtain Fiduciary+Cyber Liability Insurance Package

Why Colonial Surety Company?

• A-Rated Excellence: Rated “A” (Excellent) by A.M. Best.
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