Before this year, retirement plans typically had to provide benefit statements only when participants or beneficiaries (“participants”) requested them. Through the Pension Protection Act of 2006 (the “PPA”), however, Congress has established an affirmative obligation on the part of retirement plans to provide participants with periodic benefit statements, whether participants request them or not.
Effective for plan years beginning on and after January 1, 2007, defined contribution plans must provide such statements at least once each quarter (if they allow participants to direct the investment of their account balances) or at least once each year (if participants are not permitted to direct investments). Sponsors of defined benefit plans must furnish benefit statements at least once every three years.
The PPA requires the Department of Labor (“DOL”) to provide model retirement plan benefit statements, but these are not due until August 18, 2007. In response to concerns raised by plan sponsors and others in the benefits community regarding compliance in the interim, the DOL has issued Field Assistance Bulletin 2006-03 (the “FAB”). In it, the DOL adopts a temporary “good faith compliance” standard, under which it will treat plan administrators as satisfying the new PPA benefit-statement requirements if they act “in good faith with a reasonable interpretation of those requirements.” The FAB summarizes the DOL’s position as to what constitutes good faith compliance.
Defined Contribution Plans with Participant-Directed Investments
A defined contribution plan that allows participants to direct the investment of their accounts (e.g., a typical 401(k) plan) must provide quarterly benefit statements. Each such statement must be provided no more than 45 days after the end of the quarter to which it relates. Thus, for the quarter ending March 31, 2007, the notice must be provided by May 15, 2007.
As we noted in our November 2006 issue of Benefits in Brief (see “Coming Soon to a Retirement Plan Near You”), this statement must include:
- The value of assets in the participant’s account as of the most recent valuation date (with a separate report on company stock, if any);
- An explanation of the participant’s vested status;
- An explanation of any restrictions on the participant’s right to direct investments under the plan (such explanation should contain restrictions imposed “under the plan,” but need not include limitations or restrictions imposed by the investment vehicles themselves or by state or federal securities laws);
- An explanation of any permitted disparity or floor-offset arrangement;
- A discussion of the importance of a well-balanced portfolio (the FAB includes model language addressing this requirement, including a discussion of the risk of investing more than 20% of one’s retirement savings in any one company or industry); and
Instructions for reaching the DOL’s website for more information regarding investment and diversification (located at www.dol.gov/ebsa/investing.html).
Significantly, the FAB permits a plan administrator to satisfy these requirements with multiple documents or sources of information, as long as participants are provided with notification explaining how and when the information will be furnished. Thus, unless and until the DOL issues contrary guidance, plans need not undertake the formidable task of constructing a single document satisfying all of these requirements.
Transition Relief for Plans Holding Company Stock
In addition to the requirement, noted above, that the quarterly benefit statement include an explanation of the risks of failing to properly diversify investments, the PPA also requires a “diversification notice” from plans holding publicly traded employer stock. The FAB provides transition relief for plans that already provided participants with diversification rights at least equal to those imposed by the PPA. Under this transition relief, such plans will not be required to issue a separate diversification notice; instead, they may satisfy the diversification notice requirement by timely providing the first quarterly benefit statement. However, plans that will be changing participant diversification rights pursuant to the PPA requirements must provide the diversification notice as soon as possible after January 1, 2007.
Defined Contribution Plans Without Participant-Directed Investments
Those few defined contribution plans that do not allow participants to direct the investment of their accounts need furnish a benefit statement only once each year. The statement must include the following:
- The value of assets in the participant’s accounts as of the most recent valuation date (with a separate report on company stock);
- An explanation of the participant’s vested status; and
- An explanation of any permitted disparity or floor-offset arrangement.
Defined Benefit Plans
The deadline for providing the first defined benefit plan participant statement required under the PPA depends on which of two alternative methods the plan elects. Under the first method, the plan must automatically provide a statement to all actively employed participants who have non-forfeitable benefits under the plan, at least once every three years. Under this approach, the first PPA-mandated benefit statement must be furnished for the 2009 plan year.
Alternatively, the plan may notify such participants at least once each year that a benefit statement is available to them. The first required notification under this approach must be furnished no later than December 31, 2007.
Thus, to take advantage of the alternative method, plan sponsors must make and implement a decision by the end of this year.
In either case, any benefit statement actually provided must include the following:
- The participant’s total accrued benefit;
- His or her vested percentage (or earliest vesting date); and
- Certain technical explanations affecting the benefit.
The FAB permits distribution of benefit statements via electronic media, provided the method selected would satisfy existing regulations issued by the DOL and the IRS governing the electronic distribution of plan materials. The FAB specifically addresses the provision of benefit statements through a secure website, noting that this method will constitute good-faith compliance only if the availability of such statements is explained in a separate notification that (i) apprises the participant that a paper version of the statement is available at no cost, and (ii) is provided before the date on which the plan is required to provide the first PPA-mandated benefit statement (and annually thereafter).
What Does This Mean for Plan Sponsors?
Periodic benefit statements are now a fact of life for retirement plan sponsors and administrators; indeed, the first required statements for most defined contribution plans will be due in a few short months. The time is now to establish clear, written administrative procedures to ensure that participants receive their benefit statements on time and with the required content.
As they prepare to meet this challenge, plan sponsors and administrators should consider the fact that much of the information necessary to prepare these statements will be under someone else’s control. Negotiations with third-party administrators, recordkeepers, or brokerage firms will probably be necessary to ensure that participants receive all information required under the PPA in a timely manner.