On December 20, 2006, the U.S. Department of Labor issued Field Assistance Bulletin No. 2006-03 permitting temporary good-faith compliance with newly enacted requirements to provide periodic pension benefit statements to participants and beneficiaries of ERISA-covered pension plans. The Bulletin, which will apply until the Department issues final regulations, provides helpful guidance on several issues that have been the source of concern among retirement plan sponsors, administrators, and service providers.

Perhaps most important for plan sponsors is the Department’s guidance on how to provide both the new periodic benefit statement and another new statement on diversification rights required by the Act. The Department also provided model language for one portion of the new periodic benefit statements.

Background

Section 508(a) of the Pension Protection Act (the "Act") amended ERISA Section 105 to require plan administrators to furnish periodic pension benefit statements to plan participants and beneficiaries. Initially drafted in 2002 following the implosion of Enron Corp., the enhanced benefit statement provisions have been considered by every Congress since, but not finally enacted into law until this year.

Prior to the Act, ERISA section 105 required pension plan administrators to provide two types of benefit statements. One type, which plan administrators were required to provide only upon request of a participant or beneficiary, had to indicate: (1) the total benefits accrued by the participant or beneficiary, and (2) the nonforfeitable benefits which have accrued, or the earliest date on which they will become nonforfeitable (i.e. "vested"). Participants and beneficiaries were limited to one such statement per year. The second type of benefit statement was an annual statement providing participants with some basic plan administration and benefit information.

The Act’s amendments to ERISA require different types of benefit statements for different types of pension plans. For defined benefit plans, plan administrators must now provide a pension benefit statement automatically to every participant with vested benefits who is employed by the plan sponsor at the time the statement must be furnished. The statement must be sent at least once every three years. For all other participants and beneficiaries, the plan administrator must provide a benefit statement upon request. Alternatively, a defined benefit plan can make such statements generally available (for instance, on an internal workplace website), and provide annual notices to participants that the statements are available.

For individual account plans, there are different rules depending on whether the plan permits participants to direct the investments of their individual account. If the plan is participant-directed, administrators must automatically send an individual benefit statement on a quarterly basis. For individual account plans that do not permit participant direction, administrators must provide a benefit statement annually.

Regardless of the type of plan, the benefit statements must provide information about the participant’s or beneficiary’s total accrued and vested benefits. The statement must also include an explanation of any permitted disparity under Section 401(l) of the Internal Revenue Code or any "floor-offset arrangement" that may be applied in determining any accrued benefits.

For individual account plans, the benefit statement must also include a statement about the value of each investment in the individual account, including the value of any employer stock held in the account. In addition, the statement must include an explanation of any limitations or restrictions to make investment decisions, an explanation "of the importance… of a well-balanced and diversified investment portfolio," and a notice directing the participant or beneficiary to the Department of Labor’s website for additional sources of investment and diversification information.

The new benefit statement requirements are effective for single-employer plan years beginning after December 31, 2006. The effective date for collectively bargained multi-employer plans is the earlier of: (A) the later of (i) December 31, 2007, or (ii) the date on which the last of such collective bargaining agreements terminates (determined without regard to any extension thereof after such date of enactment), or (B) December 31, 2008.

FAB 2006-03

The Department provided guidance in a question-and-answer format on the following eight separate issues:

  1. Form of Furnishing Statements: The Labor Department recognized that, in the case of participant-directed individual account plans, the information required to be included in the benefit statements will typically come from multiple sources (e.g. plan administrator, record-keeper, or brokerage firm), and that compiling all that information into one document may be difficult or cost-prohibitive. Pending further guidance, the Department indicated a plan administrator can use multiple documents or sources, as long as it explains to participants and beneficiaries how and when the statements are being made available.

  2. Electronic Media: The Labor Department indicated that, pursuant to PPA’s statutory text, benefit statements may be provided in "written, electronic, or other appropriate form." The Bulletin indicated that following the rules in existing Department of Labor and new Department of Treasury regulations on the use of electronic media in connection with plan administration will be treated as good-faith compliance.

  3. Dates for Furnishing Statements: Because the new requirements are generally effective for single employer plans for the first plan year beginning after December 31, 2006, the first date on which a benefit statement must be furnished or made available according to the new rules will be March 31, 2007 for participant-directed individual account plans operating on a calendar year (September 20, 2007 for plans operating on a typical fiscal year). For other individual account plans, the first date on which statements must be furnished or made available is December 31, 2007. For either type of individual account plan, the Department indicated that plan administrators will have an additional 45 day grace period following the due date in which to furnish or make available the statements. Plan administrators of defined benefits plans will not have to provide a statement until the 2009 plan year, unless they elect to use the alternative notice requirement, in which case they must provide such notice no later than December 31, 2007.

  4. Plan Loan Provisions: In response to inquiries from the regulated community, the Department indicated that an individual account plan will not be treated as a participant-directed plan solely because it permits participants to take loans from the plan.

  5. Limitations or Restrictions on Investment Direction: The benefit statement required in participant-directed plans must, as noted above, provide an explanation of any limitations or restrictions on the participant’s or beneficiary’s right to make such investment directions. The Department clarified that such explanation must only be with respect to limitations or restrictions imposed by the terms of the plan. In other words, limitations such as mutual fund company prohibitions on late trading, are not required to be included in the benefit statement.

  6. Model Language: The Labor Department provided model language for use in satisfying the requirement to explain "the importance… 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."

  7. Notification of Diversification Rights: The Department also addressed in the Bulletin how to provide the new benefit statement and the new diversification rights statement created by the Act. Specifically, section 901(b) of the Act created a new ERISA Section 204(j), which provides participants greater rights to diversify their individual accounts away from employer securities. Section 507 of the Act created a new ERISA Section 101(m), which requires plan administrators to provide participants and beneficiaries with notice of those new diversification rights. The Department clarified in the Bulletin that, with respect to individual account plans that already provided the same or better diversification rights to participants, the diversification rights notice requirement will be satisfied by the periodic benefit statement. For those plans, that means the diversification rights statement will not have to be provided until March 31, 2007 at the earliest. Plan administrators of plans that would be required to provide greater diversification rights as a result of the Act, however, must provide notice "as soon as possible."

  8. DOL Website: As directed by the PPA, the Department provided an internet address from which participants and beneficiaries will be able to obtain additional information about investment and diversification. That address is http://www.dol.gov/ebsa/investing.html.

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.