As we mentioned in our year-end compliance memo, the Pension Protection Act of 2006 (PPA) imposes new timing and content requirements for participant statements, including statements provided electronically. These new requirements apply to the first statements which cover 2007 plan year activity. Thus, plan sponsors should contact their plan vendors to discuss the timing and content of their initial 2007 plan year statements to ensure their compliance with the new requirements. Most vendors understandably do not take responsibility for meeting these new legal requirements – they merely provide a “draft” updated statement for the plan sponsor’s finalization. We have already assisted many plan sponsors in updating their statements to comply with these new rules. Some plan sponsors are also using this opportunity to improve the disclosure of expenses being deducted from plan balances, to (i) secure fiduciary protection under ERISA Section 404(c), and (ii) reduce their exposure to fiduciary lawsuits, like those recently filed against several large employers alleging excessive fees are being deducted.
Although the U.S. Department of Labor (DOL) has not yet issued a model participant statement, it did publish some interim guidance late last year (in Field Assistance Bulletin 2006-03) that sheds some light on several of the new content requirements. Here is a summary of the new requirements.
Under the new law, all 401(k) and other defined contribution/individual account plans with participant-directed investments (including 403(b) plans) must provide participant statements at least once every quarter. In its recent guidance, the DOL said that participant statements should be provided no later than 45 days after the end of the quarter. Thus, participant statements for the first calendar quarter of 2007 should be provided no later than May 15, 2007.
- Participant statements must set forth a participant’s total account balance and total vested account balance. If the participant is not yet vested, the statement must show the earliest date on which the participant will have a vested interest in his account.
- Participant statements must show the value of each investment to which assets in the participant’s account have been allocated, determined as of the most recent plan valuation date. This must include the value of any assets held in the form of employer stock.
Participant statements must include an explanation of any “permitted disparity” that may be applied in determining the participant’s account balance. This requirement will most frequently apply to plans which include a profit sharing feature which is “integrated” with Social Security.
Participant statements must include an explanation of any limitations or restrictions on a participant’s right to direct investments under the plan. According to the DOL’s recent guidance, this requirement applies only to restrictions contained in the plan, not to restrictions imposed by the plan’s investment funds. Thus, for example, if a plan limits the number or frequency of investment changes that can be made in a given time period, this limitation must be disclosed in the participant statement.
Participant statements must explain the importance of a well-balanced and diversified investment portfolio for the long-term retirement security of participants. FAB 2006-03 contains model language that may be used for this purpose.
Participant statements must contain a notice directing participants to the DOL’s website for information on individual investing and diversification. The specific website address is provided in FAB 2006-03.
All of the above disclosures must be written in a manner that is calculated to be understood by the average plan participant.