12.5 Defined Contribution Practice Issues: Forfeitures, Missing Participants, ESG & Crypto

Defined Contribution Practice Issues: Forfeitures, Missing Participants, ESG & Crypto

Quick Answer: The recurring operational problems in defined contribution plans are small balances (cash-out thresholds, automatic rollover IRAs, auto-portability), people the plan cannot find (missing participants and uncashed checks), money left behind (forfeitures and their contested uses), money paid in error (SECURE 2.0 overpayment relief), and contested asset classes (ESG and cryptocurrency, both of which the DOL moved back toward neutrality in 2025).

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1. Small Balances, Cash-Outs & Auto-Portability

A plan may involuntarily distribute a terminated participant's vested balance without consent only up to a statutory threshold. SECURE 2.0 Section 304 raised that threshold from $5,000 to $7,000, effective for distributions made after December 31, 2023.

The automatic rollover safe harbor requires that the IRA provider be a regulated financial institution, that the investment be designed to preserve principal and provide a reasonable rate of return with liquidity, and that fees not exceed those charged for comparable IRAs. Selecting the provider is a fiduciary act.

The leakage problem this creates. Small automatic-rollover IRAs are typically invested in capital-preservation vehicles whose returns are consumed by account fees, and participants rarely consolidate them. SECURE 2.0 Section 120 addressed this by providing a statutory prohibited transaction exemption for auto-portability: a provider may automatically transfer a participant's default IRA into the participant's new employer's plan, subject to notice and conditions, without violating the self-dealing rules. The design intent is that small balances follow the worker rather than evaporate.

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2. Missing Participants and Uncashed Checks

A plan cannot discharge a benefit obligation by mailing a check to an address it knows is stale. The DOL's Missing Participants — Best Practices for Pension Plans organizes expectations into four areas:

1. Maintaining accurate census information. Collect and update contact information at hire, at enrollment, and at termination — including a secondary contact and a beneficiary address; audit census data against payroll periodically; flag undeliverable mail and uncashed checks immediately.
2. Implementing effective communication strategies. Use plain language, state clearly that the participant has a benefit, communicate through more than one channel, and avoid envelopes that look like marketing.
3. Missing participant searches. Check related plan and employer records (including group health plan records), contact designated beneficiaries and emergency contacts, use free online search tools and public records, use certified mail for the largest balances, and use a commercial locator service or credit-reporting database where warranted.
4. Documenting procedures. Reduce the policy to writing, follow it consistently, and record each search step taken. Documentation is what converts a good-faith effort into a defensible one.

Uncashed checks remain plan assets. A distribution check that is never negotiated does not extinguish the benefit. Escheating benefits to a state unclaimed-property fund is generally inconsistent with ERISA's exclusive-benefit rule for ongoing plans, and forfeiting the amount without a reinstatement obligation is not permitted. Practical handling is to return uncashed amounts to the plan, restore the participant's account, and continue the search. For terminating defined contribution plans, the PBGC's Missing Participants Program accepts transfers of missing participants' benefits, which provides a clean and searchable endpoint.

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3. Forfeitures: Use, Timing & Litigation

Forfeitures arise when a participant terminates before full vesting in employer contributions. Two rules govern them.

Rule 1 — the plan document controls the use. Permissible uses generally include reducing future employer contributions, paying reasonable plan administrative expenses, or reallocating to remaining participants as an additional contribution. The plan must specify which, and the plan must be operated consistently with what it says. An operational failure here is correctable under EPCRS (Section 9.1) but is a common audit finding.

Rule 2 — forfeitures cannot be warehoused. Longstanding IRS positions required forfeitures to be used in the plan year in which they arose or as soon as administratively feasible. Proposed regulations issued in 2023 would require forfeitures to be used no later than twelve months after the close of the plan year in which they are incurred, with a transition rule treating pre-existing balances as arising in the first plan year beginning on or after the applicable date. Plans that had accumulated multi-year forfeiture suspense accounts must clear them.

The litigation overlay. Beginning in 2023, a wave of class actions has argued that using forfeitures to reduce employer contributions — rather than to pay plan expenses that participants would otherwise bear — is a breach of the duties of loyalty and prudence and a prohibited use of plan assets for the employer's benefit. Results in the district courts have been mixed. The practical guidance is unchanged regardless of how the doctrine settles: confirm what the plan document actually authorizes, make the choice at the fiduciary or settlor level the document assigns, document the decision contemporaneously, and consider whether the document should be amended to give the committee explicit discretion.

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4. Inadvertent Overpayments

Before SECURE 2.0, a plan that overpaid a participant faced pressure to recoup in order to protect qualification, which produced hardship for retirees who had spent the money in good faith. SECURE 2.0 Section 301 provides that a plan fiduciary generally may decide not to recoup an inadvertent benefit overpayment without jeopardizing the plan's qualified status, and it imposes limits when recoupment is pursued: no interest or collection costs, no recoupment from a beneficiary or spouse of an amount attributable to a prior payment, protections where the participant was not at fault, and preservation of rollover treatment for amounts already rolled over. The provision converts overpayment handling from a qualification problem into a fiduciary judgment.

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5. Contested Asset Classes: ESG and Cryptocurrency

Both topics have oscillated with administrations, and the exam-relevant skill is stating the stable analytical framework rather than the current administration's rule.

The Stable Framework

ERISA §404(a)(1)(A) and (B) require a fiduciary to act solely in the interest of participants for the exclusive purpose of providing benefits and defraying reasonable expenses, with the care of a prudent person familiar with such matters. Any investment — an index fund, a private-credit sleeve, an ESG-screened equity fund, or a digital asset — is evaluated on the same axis: its risk and return characteristics relative to the plan's purpose and the alternatives. A factor may be considered when it is financially material to that analysis; it may not be used to sacrifice return or accept additional risk for a collateral objective.

Regulatory Trajectory

• ESG. The DOL's 2020 rule emphasized "pecuniary factors." The 2022 rule, Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights (effective January 30, 2023), permitted consideration of climate and other ESG factors where relevant to a risk-return analysis, allowed collateral benefits to break a genuine tie, and removed the prior restriction on ESG-themed qualified default investment alternatives. It was challenged in litigation, and in 2025 the DOL informed the courts that it would undertake new rulemaking to replace it.
• Cryptocurrency. Compliance Assistance Release 2022-01 told fiduciaries to exercise "extreme care" before adding cryptocurrencies to a 401(k) menu, including through a brokerage window. In 2025 the DOL rescinded that release through Compliance Assistance Release 2025-01, stating that it does not endorse or disapprove any particular asset and that digital assets are to be evaluated under the same neutral prudence standard as any other investment.

What This Means Operationally

Neutrality is not permission. A fiduciary adding a volatile, custody-complex asset class still owes a documented analysis of volatility, valuation, custody and cybersecurity risk, fee layering, participant suitability, and the appropriateness of that asset for a retirement menu — plus a monitoring plan. And for self-directed brokerage windows, the committee should decide affirmatively whether to restrict asset types available through the window rather than treat the window as a fiduciary-free zone.