Guest Article

(From the February 5, 2007 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

DOL Guidance on Pension Benefit Statements

The Department of Labor (DOL) has issued Field Assistance Bulletin 2006-03 (December 20, 2006) to provide guidance on the new requirements for defined benefit and defined contribution plans to furnish participants and beneficiaries with regular pension benefit statements. The Field Assistance Bulletin (FAB) is designed to provide guidelines for satisfying the "good faith" standard for complying with these new requirements pending the release of regulations, model statements, or other guidance. This interim guidance is needed because the new benefit statement requirements generally are effective for plan years beginning after December 31, 2006.

Background

The PPA amends ERISA § 105 to require all ERISA plan administrators to furnish pension benefit statements ("Statements") to participants or beneficiaries on a regular basis. However, the requirements differ for defined benefit (DB) plans and defined contribution (DC) plans, and for DC plans that allow participants or beneficiaries to decide how to invest their account balances. The new requirements generally are effective for plan years beginning after December 31, 2006, although a later effective date applies to plans subject to one or more collective bargaining agreements.

DB plan administrators must provide Statements to active employees with a vested benefit at least once every three years, and to all other participants or beneficiaries upon written request. In lieu of sending a Statement every three years, DB plan administrators can provide an annual notice alerting participants that a Statement is available and how they can obtain such a Statement.

The Statements furnished by DB plan administrators must include the participant's or beneficiary's total accrued benefit and vested accrued benefit. Additionally, the Statement must explain any permitted disparity or floor-offset arrangement that may be applied in determining any accrued benefits.

Administrators of DC plans must furnish Statements to participants or beneficiaries who cannot direct investments in their accounts at least once each calendar year. Those participants or beneficiaries who can direct investments in their accounts must be given a Statement at least once each calendar quarter. A DC plan administrator must give a Statement to any other beneficiary only upon written request.

The Statements for DC plans generally must include the same information as those for DB plans. In addition, if none of the participant's accrued benefit is vested, the Statement must provide the earliest date vesting will occur. Statements for DC plans also must provide values (as of the plan's most recent valuation date) for each investment the participant's or beneficiary's account holds, including the value of any employer stock holdings. The value of employer stock holdings must be provided regardless of whether the employer stock was contributed by the plan sponsor, or acquired at the participant's or beneficiary's direction.

Even more information is required for DC participants or beneficiaries who can direct investments in their accounts. The Statements given to these participants or beneficiaries must also include the following information:

All Statements, including the annual notice DB plan administrators can provide in lieu of giving a Statement every three years, can be furnished in written, electronic, or other appropriate form. Whatever form is used must be "reasonably accessible to the participant or beneficiary."

The PPA specifically directs DOL to issue, by August 18, 2007, one or more model Statements plan administrators can use to satisfy these requirements. Additionally, DOL plans to issue regulations pursuant to the revised ERISA § 105 in the future. In the interim, plan administrators must make a good faith attempt to comply with these new requirements. The purpose of FAB 2006-03 is to express the DOL's views on what constitutes good faith compliance with certain aspects of the revised ERISA § 105.

Form of Statement

Because participant-directed DC plans often offer investment options through multiple service providers, and may use still other vendors for plan administration functions, the information a plan administrator needs to provide Statements may come from several sources. For example, the plan administrator might keep information about vesting, but the plan's recordkeeper or brokerage firm might maintain investment-related information. As a result, some plan administrators might have difficulty compiling all the needed information in a single document before the first quarterly Statements are due.

Recognizing this potential problem, FAB 2006-03 explains plan administrators can satisfy the good faith standard if they compile Statement information from multiple documents or sources. However, the plan administrator has to provide a notice to participants and beneficiaries explaining how and when the required content for Statements (as specified in ERISA § 105) will be furnished or made available. This notice must be given by the deadline for furnishing the first Statement to participants or beneficiaries.

Furnishing Statements Electronically

As noted, ERISA § 105(a)(2)(A)(iv) authorizes plan administrators to deliver Statements electronically. But the statute does not provide specific guidance for electronic distribution. According to FAB 2006-03, plan administrators that want to distribute Statements electronically can meet the good faith compliance standard by following existing DOL or IRS regulations on using electronic media to distribute certain notices and other documents to participants and beneficiaries. The DOL regulations are codified at DOL Reg. § 2520.104b-1(c), and the IRS regulations are codified at Treas. Reg. § 1.401(a)-21.

Of course, many 401(k) and other participant-directed DC plans maintain secure Web sites that offer participants continuous access to the same information that must be included in Statements. The Joint Committee on Taxation's description of the PPA explains that DOL regulations relating to furnishing Statements "could permit current benefit statements to be provided on a continuous basis through a secure plan website for a participant or beneficiary who has access to the website." Eventually, the DOL may issue regulations providing specific guidance on using these Web sites to satisfy the requirement to distribute Statements. Until then, under FAB 2006-03 the availability of the required information on these Web sites will meet the good faith compliance standard if the plan administrator gives participants and beneficiaries a notice explaining the availability of the required information and how it can be accessed by participants and beneficiaries. Also, this notice must tell participants and beneficiaries that they can request and obtain, free of charge, a paper version of the Statement. This notice must be provided by the deadline for providing the first Statement and annually thereafter.

Dates for Furnishing Statements

As noted, these requirements are effective for plan years beginning after December 31, 2006. Thus, participant-directed DC plans will be required to furnish their first Statements for the quarter ending March 31, 2007 if they are calendar year plans. All other calendar year DC plans will be required to furnish their first Statements for the year ending December 31, 2007. According to FAB 2006-03, plan administrators will satisfy the good faith standard by furnishing statements no more than 45 days following the end of the quarter or the year, whichever is applicable.

Administrators of DB plans only have to furnish Statements once every three years, so the first Statement generally would be due for the 2009 plan year. However, if the plan wants to send an annual notice about the availability of Statements instead of furnishing a Statement every three years, FAB 2006-03 provides the first such notice must be furnished not later than December 31, 2007.

Special effective date rules apply to collectively bargained plans. Unless the DOL later issues contrary guidance, FAB 2006-03 explains these plans can apply similar principles for purposes of meeting the good faith compliance standard.

Participant-Directed DC Plans and Plan Loan Features

DC plans must give Statements to participants and beneficiaries who can direct investments on a quarterly basis. Thus, it is important to know which plan features will cause the DOL to treat a plan as giving participants the right to direct investments. FAB 2006-03 clarifies that "a participant loan feature does not, standing alone, cause a plan to be a plan that provides participants the right to direct the investment of assets in their accounts."

Special Content Requirements for Participant-Directed DC Plan Statements

As noted, Statements for participants or beneficiaries who can direct investments in their accounts must include the following information:

With respect to limitations or restrictions on the participant's or beneficiary's rights to direct investments, FAB 2006-03 provides Statements "must include limitations and restrictions on participants' or beneficiaries' rights imposed 'under the plan,' but need not include limitations and restrictions imposed by investment funds, other investment vehicles, or by state or federal securities laws." For purposes of directing the participant or beneficiary to the DOL Web site with information about individual investing and diversification, the FAB states plan administrators can use the following address: www.dol.gov/ebsa/investing.html.

Finally, in order to satisfy the requirement to include an explanation of the importance of a diversified investment portfolio, FAB 2006-03 provides the following model language plan administrators can use:

Coordinating Statements With Notice of Diversification Rights

The PPA also amends ERISA § 204(j) to require defined contribution plans to permit participants to divest any employer stock holdings attributable to employer contributions after completing three years of service. These plans must permit participants to divest employer stock holdings attributable to employee contributions at any time. Additionally, the PPA amends ERISA § 101(m) to require these plans to give participants notice of their rights to divest employer securities not later than 30 days before they are first eligible to exercise this right. (These notices also must include information about the importance of diversifying investments.) Both the mandatory diversification and ERISA § 101(m) notice requirements are effective for plan years beginning after December 31, 2006.

Even before the PPA, some plans voluntarily provided employer stock diversification rights that are equal to, and in some cases better than, those required by ERISA § 204(j). These plan sponsors have raised questions about whether it is necessary to give participants the ERISA § 101(m) notice, especially in light of the fact that the new quarterly Statements must include similar information about the importance of maintaining a diversified portfolio.

FAB 2006-03 explains that DOL will treat a plan administrator's compliance with the quarterly Statement requirement as satisfying the ERISA § 101(m) notice requirement if, prior to January 1, 2007, the DC plan provided diversification rights at least equal to those conferred by ERISA § 204(j). Other DC plans that do not fall within this narrow exception must provide the ERISA § 101(m) notice "as soon as possible following January 1, 2007."

The information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations. If you have any questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact: Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Taina Edlund 202.879.4956, Laura Edwards 202.879.4981, Mike Haberman 202.879.4963, Stephen LaGarde 202.879-5608, Erinn Madden 202.572.7677, Bart Massey 202.220.2104 , Laura Morrison 202.879-5653, Martha Priddy Patterson 202.879.5634, Tom Pevarnik 202.879.5314, Tom Veal 312.946.2595, Deborah Walker 202.879.4955. Copyright 2007, Deloitte.