United States: DOL Provides Guidance For Retirement Plan Statements, Including Some Changes Effective First Quarter 2007

The Pension Protection Act (PPA) revised the requirements that apply to retirement plan benefit statements that plan administrators must furnish to participants and beneficiaries in defined contribution and defined benefit plans. Under the new requirements, plan administrators of defined contribution plans that provide for participant direction of investments must furnish benefit statements at least quarterly; if participants do not direct investments, plan administrators must furnish the statements at least annually. Plan administrators of defined benefit plans must furnish benefit statements at least once every three years. The PPA also increased the amount of information that must be included in the statements.

The new requirements are effective for plan years beginning after December 31, 2006. The Department of Labor (DOL) is required to develop one or more model benefit statements by August 18, 2007. The DOL has indicated that, until further guidance is issued, plan administrators must make a good faith effort to comply with the new requirements. It has issued Field Assistance Bulletin (FAB) 2006-03 in order to provide its views as to what constitutes good faith compliance.

Most plans that provide for participant direction of investments must focus on complying with the new requirements for benefit statements immediately. For such plans that are calendar year plans, the first statements are required for the quarter ending March 31, 2007. Furnishing the statement information within 45 days following the end of the calendar quarter will constitute good faith compliance. The deadline for compliance for these plans is mid-May 2007.

Plans that provide for participant direction of investments face the challenge that the information required to be included in benefit statements will often involve gathering information from multiple service providers (e.g., the plan administrator may be the source for information on vesting, while the plan’s recordkeeper may be the source for investment-related account information). Accordingly the DOL has indicated that good faith compliance does not preclude the use of multiple documents or sources for information. However, participants must receive an explanation of how and when the information will be furnished, and the explanation must be given in advance of the first statements, in a manner that is easily understood.

Statements for these 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 has indicated that a reasonable interpretation of this requirement is that benefit statements must include limitations and restrictions imposed under the plan, but not limitations and restrictions imposed by investment funds, other investment vehicles, or by state or federal securities laws.

Additionally, statements for these plans must include an explanation of the importance for "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[.]" To that end, FAB 2006-03 includes the following model language that, if included in the statements, will constitute good faith compliance with this new requirement:

To help achieve long-term retirement security, you should give careful consideration to the benefits of a well-balanced and diversified investment portfolio. Spreading your assets among different types of investments can help you achieve a favorable rate of return, while minimizing your overall risk of losing money. This is because market or other economic conditions that cause one category of assets, or one particular security, to perform very well often cause another asset category, or another particular security, to perform poorly. If you invest more than 20% of your retirement savings in any one company or industry, your savings may not be properly diversified. Although diversification is not a guarantee against loss, it is an effective strategy to help you manage investment risk.

In deciding how to invest your retirement savings, you should take into account all of your assets, including any retirement savings outside of the Plan. No single approach is right for everyone because, among other factors, individuals have different financial goals, different time horizons for meeting their goals, and different tolerances for risk.

It is also important to periodically review your investment portfolio, your investment objectives, and the investment options under the Plan to help ensure that your retirement savings will meet your retirement goals.

Lastly, these statements must also give notice directing participants to the DOL’s website for sources of information on individual investing and diversification. That website is: http://www.dol.gov/ebsa/investing.html.

Defined contribution plans that do not otherwise provide for participant direction of investments will not be subject to the requirement to furnish statements quarterly merely because they permit participants to take loans from the plan. According to the DOL, a participant loan feature does not, standing alone, cause a plan to be a plan that provides for participant direction of investments.

Generally, for defined benefit plans, the first benefit statements complying with the new requirements would be due for the 2009 plan year. However, if a plan elects to comply with the alternative notice requirement, the required notification must be furnished no later than December 31, 2007. The alternative notice requirement provides that the requirements for benefit statements are met if, at least once per year, the plan administrator furnishes notice to participants of the availability of the benefit statements and the ways in which the participants may obtain such statements.

All benefit statements may be provided in written, electronic or other appropriate form. In particular, they may be provided on a continuous basis through a secured website to participants who have access to such website. However, plan administrators must notify participants of the availability of the statement information and how to access such information. Such notice must also inform participants of their right to obtain paper copies of the statements, must be provided in a manner in which the statements could be provided, and must be provided in advance of the date the plan is required to provide the statements.

The DOL has also indicated that providing statements in compliance with prior DOL or Internal Revenue Service guidance relating to the use of electronic media to provide certain required retirement plan notices and documents is good faith compliance with the requirement to furnish benefit statements.

The PPA also added new diversification rights for participants in individual account plans that include employer stock, and new notice requirements pertaining to such rights. However, the DOL has indicated that where, prior to January 1, 2007, plans provided participants diversification rights at least equal to the new PPA requirements, compliance with the new requirements for benefit statements will satisfy the new diversification rights notice requirements. In the DOL’s view, requiring separate notices could result in confusion and unnecessary distribution costs that would be passed on to participants. However, because the diversification rights notice requirements are most significant for participants receiving new diversification rights, such participants should still be furnished separate information and notice concerning their rights and the importance of maintaining a diversified portfolio as soon as possible.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.