DOL Benefit Statement Guidance
The Pension Protection Act (PPA) requires individual account plans that permit participant direction of investments to issue account statements at least quarterly. If participants do not direct investments, an annual statement is required instead. The PPA also increases the amount of information that must be provided in pension benefit statements. The DOL's just released guidance, FAB 2006-3, provides a method of good faith compliance pending issuance of final regulations.
Good Faith Compliance
Until further guidance is issued, the use of multiple documents or sources to supply benefit statement information is permitted. However, participants and beneficiaries must be provided with an easily understandable explanation of how and when all the information will be provided in advance of the first PPA statement.
Pension benefit statements may be provided electronically if “measures reasonably calculated to ensure actual receipt” are used. This means that the IRS electronic notice rules must be followed. Alternatively, statements may be provided continuously via a website. The participants also must be informed that a paper copy of their statement will be provided at no charge upon request.
Quarterly statements must be provided within 45 days after the end of each quarter, starting with March 31, 2007. The first annual statement for employer investment directed plans must be provided by calendar year plans not later than 45 days after December 31, 2007. The deadline is not later than 45 days after the end of the plan year for an off-calendar year plan.
Benefit statements of participant directed plans must include “an explanation of any limitations or restrictions on any right of the participant or beneficiary under the plan to direct an investment.” The DOL interprets this to mean limitations and restrictions on participants' or beneficiaries' rights imposed "under the plan," but not limitations and restrictions imposed by investment funds, other investment vehicles, or by state or federal securities laws.
Investment Principles Disclosure
Benefit statements of participant directed plans also must include “an explanation . . . of the importance, for the long-term retirement security of participants and beneficiaries, of a well-balanced and diversified investment portfolio, including a statement of the risk that holding more than 20 percent of a portfolio in the security of one entity (such as employer securities) may not be adequately diversified[.]”
The DOL has provided model language for this disclosure and that includes a link to the new DOL website on investment principles: http://www.dol.gov/ebsa/investing.html.
DB Statements
Under PPA, defined benefit plans are generally required to furnish participants with a pension benefit statement at least once every three years. The first pension benefit statement complying with the new requirements would be due for the 2009 plan year, provided that the plan does not elect to comply with the alternative notice requirement. The alternative notice requirement provides that the statement requirements are met if, at least once, each year, the administrator provides the participant with a notice of the availability of the pension benefit statement, and the ways in which the participant may obtain such statement. The first such notice must be furnished not later than December 31, 2007.
Divestiture and Diversification Notice
If an individual account plan with company stock provided participants and beneficiaries divestiture and diversification rights at least equal to the new PPA requirements prior to January 1, 2007, the divestiture/diversification notice requirement may now be satisfied when the first quarterly statement is provided. Because these plans already permitted PPA-like divestiture/diversification the DOL took the position that a stand-alone disclosure may only cause confusion for participants and result in additional costs that may be passed on to the plan’s participants and beneficiaries.
MHC Comment: The new guidance appears to be problematic for annually valued plans maintained with “balance forward” recordkeeping, since it is likely that they have not previously been valued within 45 days after the close of the plan year. Issues have also arisen for plans where the majority of participants are in a “pooled fund” professionally managed arrangement, but one or more participants have elected to self-direct their accounts. In this case, it would appear that all participants must receive quarterly statements, since the guidance does not provide for splitting out those who have stayed in the managed pool. Stay tuned, the fun will be in the details!
MHCO webpage for other PPA information and articles |
