Category Archives: Quarterly Benefit Statements 508

Information about Quarterly Benefit Statements required by Section 508 of the Pension Protection Act – PPA.

Fee and Expense Information for 401(k) Plans is About to Become Clearer

On July 22, 2008, the Dept. of Labor released new proposed regulations on fiduciary requirements for disclosures in participant-directed individual account plans effective for plan years beginning after January 1, 2009. Participant-directed Individual account plans are plans such as 401(k) plans where each participant has an account which they can select how they want invested. Specifically, these proposed regulations require disclosures regarding fees and expenses, and contain specific timing requirements for providing the information to participants and beneficiaries.

Within these proposed regulations, the DOL created 4 separate categories of information which must be disclosed to participants and beneficiaries – general plan information, administrative expense information, individual expense information, and investment-related information. For each category of information disclosures, the DOL has also imposed timing requirements for the disclosures. Additionally, for each category, the DOL is suggesting whether the required disclosures can be made in the summary plan description, the quarterly benefit statement, or on a separate disclosure form.

General Plan Information

Before the date an individual becomes eligible to become a participant or beneficiary under the plan, the plan sponsor must provide information on how participants and beneficiaries may give investment instructions, including specified limitations such as restrictions on transfers to or from a designated investment alternative; how the exercise of voting, tender or similar rights in a designated investment alternative will occur, what the specific designated investment alternatives offered under the plan are; and who the designated investment managers are to whom participants and beneficiaries may give investment directions. This information can be provided to participants and beneficiaries in the summary plan description. Material changes to this general plan information must be furnished to participants and beneficiaries no later than 30 days after the date such changes are adopted by the plan.

Administrative Expense Information

Before the date an individual becomes eligible to become a participant or beneficiary, and at least annually thereafter, they must be provided with an explanation of any fees and expenses for plan administrative services, such as legal, accounting, and recordkeeping services to the extent that such fees may be charged against, or affect the balance of, the individual accounts of participants and beneficiaries. The DOL states that the intent behind this requirement is to ensure that the plan fiduciary informs all participants and beneficiaries about the plan’s day-to-day operational expenses which will be charged against their accounts.

Additionally, at least quarterly, participants and beneficiaries must be furnished with statements containing the dollar amounts actually charged during the preceding quarter to their accounts for administrative services along with a general description of the services to which the charges relate. This information can be combined, and included, with the quarterly benefit statement provided to participants and beneficiaries pursuant to ERISA section 105(a)(1)(A)(i). The DOL states in these proposed regulations that it does not believe that it is necessary, or particularly useful, for participants to have administrative charges broken out and listed on a service-by-service basis.

Individual Expense Information

Information about expenses which might be assessed on an individual-by-individual basis, such as expenses related to a qualified domestic relations order, a participant loan, or investment advice services, can be disclosed in the plan’s SPD. When an individual expense is actually assessed against a participant’s or beneficiary’s account, that information may be disclosed in a quarterly benefit statement .

Investment-Related Information

For investment-related information, the DOL is proposing a number of specific requirements, including providing information to participants and beneficiaries in a chart or similar format which allows straightforward comparison of the plan’s designated investment alternatives. The DOL has also provided a model disclosure form.

Next week, I will be discussing these proposed regulations in detail in QPC’s live web seminar, “The DOL’s New Proposed Fee Disclosure Regulations”, on July 29th at 11am ET and again on July 31st at 2pm ET. As part of that live web seminar, my company will be distributing our comprehensive guide to these proposed fee disclosure regulations.

[tag]pension protection act, ppa, DOL, Dept. of Labor, EGTRRA, SPD, summary plan description, fee disclosure, expense, 401(k), proposed regulations, ERISA[/tag]

DOL Working Group Ideas for Benefit Statements

The ERISA Advisory Council’s Working Group on Participant Benefit Statements has delivered it’s report to the Dept. of Labor. This working group was formed to study the Pension Protecion Act’s requirement that benefits statements are furnished to plan participants in defined benefit and defined contribution plans. The group was also given the task of making recommendations regarding the content, form and timing of the benefit statements.

It was Section 508 of PPA which contained the benefit statement requirement. Within Section 508(b), it provided that the Secretary of Labor would develop 1 or more model benefit statements within one year after PPA was enacted, and that those model benefit statements would be written in a manner calculated to be understood by the average plan participant and could be used by plan administrators to comply with the requirements of Section 105 of ERISA. When PPA was enacted on August 17, 2006, the expectation was that the model benefit statements would become available for use no later than August 16, 2007. This did not happen. The DOL has released Field Advisory Bulletin 2006-03 and Field Advisory Bulletin 2007-03 on benefit statements but has not released model benefit statements. The working group, in the report, states that they considered whether to develop a model statement as part of their recommendation, but decided not to because they believed it was beyond the scope of their undertaking.

They did make these recommendations regarding the content, form, and timing of benefit statements:

    1. The DOL should convene a task force to develop the content of a model benefit statement. The working group recommended including theh application of IB 96-1 to the benefit statement to clearly communicate the boundaries of information and education which could be included in benefit statements without crossing the “advice” threshold;
    2. The DOL should consider establishing a transition period for the content requirements because a substantial number of sponsors do not currently have the data necessary to calculate the accrued and vested benefit information;
    3. The assumptions and uncertainties associated with any projection of benefits should be included in the statement;
    4. The multi-statement option provided for in Field Advisory Bulletin 2006-3 should be continued in the regulations;
    5. The DOL should issue regulations for electronic benefit statements which incorporates the DOL’s safe harbor rules and IRS rules regarding electronic notices;
    6. The DOL should review the use of electronic communications for benefit statements and issue regulations appropriate for technology currently in use and participants’ access to it;
    7. The DOL should provide longer due dates for defined benefit plan statements which recognize the time it takes to accumulate the information necessary to calculate all participants’ accrued benefits. The DOL should provide a means for obtaining relief from the due dates for those defined contribution plans with non-participant directed assets that cause delays in obtaining complete data because of the timing of determination of plan assets, such as contributions and asset valuation, participant compensation, and other matters inherent in the plan; and
    8. The DOL should consider delaying the due date for the initial benefit statement for those defined benefit plans whose provisions do not require the contemporaneous accumulatioin of individual participant dataa to provide them a cost-appropriate period to accumulate the data.

With the working group recommending that the DOL continue to study some of these issues, it is not clear when the model benefit statements might be forthcoming.

[tags]Pension Protection Act, ppa, benefit statement, DOL, Dept. of Labor, Advisory Council, ERISA[/tags]

Benefit Statement Deadline Changed for Non-Participant Directed Accounts

The Dept. of Labor has updated Field Advisory Bulletin 2006-03. FAB 2006-03, issued last year, requires that pension benefit statement information will be furnished to participants and beneficiaries not later than 45 days following the end of the calendar quarter or calendar year as good faith compliance with Section 508 of the Pension Protection Act.

In Field Advisory Bulletin 2007-03, issued on October 12th, the Dept. of Labor supercedes FAB 2006-03 as it relates to the dates for some plans for furnishing pension benefit statements to participants and beneficiaries. For individual account plans which do not permit participants and beneficiaries to direct the investment of assets in their individual accounts, the participants and beneficiaries can be furnished with statements on or before the date on which the Form 5500 Annual Return/Report is filed by the plan (but in no event later than the date, including extensions, on which the Annual Return/Report is required to be filed by the plan) for the plan year to which the statement relates.

The DOL reasoned that, since much of the required information in the pension benefit statements is compiled when preparing the plan’s Form 5500 Annual Return/Report, the time frame for furnishing the statements should correspond to the required filing of the plan’s Form 5500.

The Dept. of Labor did not change the requirements for plans which do permit participants and beneficiaries to direct the investment of assets in their individual accounts.

The Dept. of Labor also has not released the Model Statement which was expected to be released on August 18, 2007.

[tags]Pension Protection Act, ppa, 508, benefit statement, 2007-03, 2006-03, FAB, Field Advisory Bulletin, Form 5500, ERISA[/tags]

Possible Quarterly Benefit Statement Relief in Sight

The ERISA Advisory Council is meeting next week, on Sept. 18th, 19th, and 20th. The schedule is:

  • Sept. 18 – 9am to 5pm is testimony on benefit statements required by the Pension Protection Act;
  • Sept. 19 – 9am is full council update on all working groups, then the Working Group on Financial Literacy will hear testimony on financial literacy and the role of employers;
  • Sept. 20 – 8:30am to 5pm is testimony on the implications of PPA on multiemployer plans and fiduciaries, and revenue-sharing practices of defined contribution plans.

The meeting is open to the public and is being held at the U.S. Department of Labor, 200 Constitution Avenue NW, Room N4437 A-C, in Washington, D.C.

[tags]pension protection act, ppa, benefit statements, quarterly benefit statements, DOL, ERISA Advisory Council, retirement, employee benefits, ERISA[/tags]

How Many Notices Can a Participant Handle

Several conversations today all circled around to the same point – how to map out the notices currently required to be provided to participants and beneficiaries into a coherent schedule so that the required information is provided by the required deadline. The Pension Protection Act added several new notices, including pension benefit statements, to the already existing notices, such as safe harbor notices. Juggle this with the requirements and timetable contained in Revenue Procedure 2005-66 on restating plan documents for EGTRRA, and submitting the individually designed plans for determination letters, and mistakes may become inevitable unless great care is taken.

The Dept. of Labor recently issued a Request for Information on Fee and Expense Disclosures to Participants in Individual Account Plans. DOL has requested “views, suggestions and comments” for rules on how to ensure participants and beneficiaries “have the information they need to make informed decisions about the management of their individual accounts and the investment of their retirement savings”. Responses to this RFI should be submitted on or before July 24, 2007.

The RFI specifies 19 items that the DOL is examining, including comments on “what basic information to participants need to evaluate investment options” under the plan and what information participants need to evaluate fees and expenses. Item 5 is:

5. How is information concerning investment options, including information relating to investment fees and expenses, communicated to plan participants, and how often? Does the information or the frequency with which the information is furnished depend on whether the plan is intended to be a section 404(c) plan?

Information designed to help participants make intelligent and informed decisions on investing the funds in their accounts is always a good thing. How many different notices can a participant receive in one year is something the IRS and DOL seem to have decided to experiment with. One part of the equation is how much in fee increases will be caused by the increased notices associated with the Pension Protection Act and the guidance issued after August 17, 2006. Maybe a really truthful comment to the RFI is a statement to participants about how much they were paying in plan expenses before the Pension Protection Act, and how much they are paying in fees after the Pension Protection Act, and what portion of the fee is directly attributable to all of the notices now required to be provided to participants. [tags]Pension Protection Act, fees, expenses, participant, notices, statement, retirement, pension, ppa[/tags]

Vesting Schedule Included or Not Included in QBS

Interesting question today – should the Quarterly Benefit Statement include the vesting schedule for the plan. The easiest answer to this question is to avoid it all together and provide the alternate notice because the alternate notice does not require vesting information to be provided this quarter, and hopefully the IRS will issue a model notice before the second quarter notice is due.

If you do provide vesting information in this first quarter’s statement, should the notice include the vesting schedule? Section 508 of PPA requires that “using the latest available information, the nonforfeitable pension benefits, if any, which have accrued, or the earliest date on which benefits will become nonforfeitable“. Providing a participant with the percent they are vested in their account would provide them with their nonforfeitable pension benefits when this information is included along with the total benefits accrued in their account.

I think it is a judgment call on whether providing the actual vesting schedule for the plan fulfills the requirement to provide “the earliest date on which benefits will become nonforfeitable”. For the average participant, the vesting schedule along with an explanation of how to determine when their benefits become nonforfeitable would be clearer than just providing the vesting schedule without any explanation.

[tags]Pension Protection Act, benefit statement, Section 508, vesting, ppa[/tags]

The Content of PPA Benefit Statements

Yesterday was a brief look at who should receive a pension benefit statement required by the Pension Protection Act, and when they should receive it by. Today, I wanted to take a brief look at what information the statement should contain for good faith compliance. Hopefully, the IRS will be releasing a model statement or sample language soon so this information becomes not as crucial.

So, what information should the statement contain? Section 508 requires different information depending on whether the plan is an Individual Account Plan or a Defined Benefit Plan. It also provides for alternative notices.

Vesting Info Not Necessarily Required by May 15th

For Individual Account Plans, Section 508 provides for an alternative way to meet the requirement to provide the “nonforfeitable pension benefits, if any, which have accrued, or the earliest date on which benefits will become nonforfeitable”. This requirement can be met if, at least annually, the plan updates this information AND “provides in a separate statement such information as is necessary to enable a participant or beneficiary to determine their nonforfeitable vested benefits”. So, for Individual Account Plans, vesting information can be provided annually, it is NOT required to be provided quarterly.

Individual Account Plans

For Individual Account Plans, the statement must include either some of the following items, or all of the following items, depending on whether the plan permits participants and beneficiaries to direct their investments. If the participants and beneficiaries are permitted to direct their investments, then all of these items are required:

    1. using the latest available information, the total benefits accrued;

    2. using the latest available information, the nonforfeitable pension benefits, if any, which have accrued, or the earliest date on which benefits will become nonforfeitable;

    3. an explanation of any permitted disparity under section 401(l) or any floor-offset arrangement that may be applied in determining any accrued benefits described in the items required by 1 or 2;

    4. the value of each investment to which assets in the individual account have been allocated, determined as of the most recent valuation date under the plan, including the value of any assets held in the form of employer securities, without regard to whether such securities were contributed by the plan sponsor or acquired at the direction of the plan or of the participant or beneficiary, and;

    5. an explanation of any limitations or restrictions on any right of the participant or beneficiary under the plan to direct an investment;

    6. an explanation, written in a manner calculated to be understood by the average plan participant, 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; and

    7. a notice directing the participant or beneficiary to the Internet website of the Department of Labor for sources of information on individual investing and diversification. (FAB 2006-03 says to use this website – http://www.dol.gov/ebsa/investing.html)

If a participant or beneficiary has his or her own account under the plan but does not have the right to direct the investment of assets in that account, then only the first 4 items are required.

Interestingly enough, item 4 is only required to be provided to participant and beneficiaries in the first two categories identified yesterday – it is not required information for the third category of persons who can receive these statements. As a reminder, the Individual Account Plan categories of participants and beneficiaries are:

    1. A participant or beneficiary who has the right to direct the investment of assets in his or her account under the plan;

    2. a participant or beneficiary who has his or her own account under the plan but does not have the right to direct the investment of assets in that account; and

    3. a plan beneficiary not described in the first two categories.

It is difficult to image a plan beneficiary who does not fit in the first two categories but I am sure they will pop up because they were assigned their own category, which normally means that theoretically they can exist.

In FAB 2006-03, the Dept. of Labor states that for good faith compliance with item 6 about the importance of long-term retirement security, this language can be used:

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.

Defined Benefit Plans

For Defined Benefit Plans, the statement must include:

    1. using the latest available information, the total benefits accrued;

    2. using the latest available information, the nonforfeitable pension benefits, if any, which have accrued, or the earliest date on which benefits will become nonforfeitable;

    3. an explanation of any permitted disparity under section 401(l) or any floor-offset arrangement that may be applied in determining any accrued benefits described in the items required by 1 or 2;

Instead of providing this information once every three years, Section 508 permits an alternative notice to be provided at least once each year to “each participant with a nonforfeitable accrued benefit and who is employed by the employer maintaining the plan at the time the statement is to be furnished”. The alternative notice must contain “notice of the availability of the pension benefit statement and the ways in which the participant may obtain such statement. Such notice may be delivered in written, electronic, or other appropriate form to the extent such form is reasonably accessible to the participant.”

Once the information is assembled, the task of writing the contents is a little challenging. For Defined Benefit Plans, Section 508 states that information provided to each participant with a nonforfeitable accrued benefit and who is employed by the employer maintaining the plan at the time the statement is to be furnished “may be based on reasonable estimates determined under regulations prescribed by the Secretary, in consultation with the” PBGC. These are the first category of participants and beneficiaries in a Defined Benefit Plan identified by Section 508. For category two, which would be every one, such as those participants and employees without a nonforfeitable accrued benefit or who are no longer employed by the employer maintaining the plan at the time the statement is to be furnished, there is no such requirement of a reasonable estimate.

Delivering the Statement

How to deliver the pension benefit statement may be the easiest part of complying with Section 508. Once the statement is ready for delivery, Section 508 states that it “may be delivered in written, electronic, or other appropriate form to the extent such form is reasonably accessible to the participant or beneficiary”. Of course, Section 508 requires that the statement should be written in a manner calculated to be understood by the average plan participant. [tags]Pension Protection Act, vesting, defined benefit, benefit statement, ppa[/tags]

The Who and When of PPA Benefit Statements

Section 508 of the Pension Protection Act requires that participants and beneficiaries – or at least SOME participants and beneficiaries – must be provided with a benefit statement containing some very specific information by some very certain deadlines. Determining what information must be provided, who the information must be provided to and when it must be provided is challenging. Section 508 requires the IRS to issue a model statement which can be used by plan administrators to comply with this requirement. Such a model statement will provide plan administrators a solution to WHAT information must be provided, and leaves them to answer the questions about WHO they are required to provide it to and WHEN it must be provided by.

WHO and WHEN are two questions which go hand-in-hand in Section 508, which separates participants and beneficiaries into two categories – those in defined benefit plans and those in individual account plans. When the statement must be provided is different depending upon which category the plan falls into.

Individual Account Plans

For individual account plans, Section 508 provides three different time frames for providing the statement. The first time frame is for participants and beneficiaries who have “the right to direct the investment of assets is his or her account under the plan”. These participants and beneficiaries must receive statements every calendar quarter. The Dept. of Labor, in FAB 2006-03, states that providing the statement within 45 days of the end of the quarter is good faith compliance with this requirement. As the first quarter ends on March 31st, good faith compliance means the statement will be provided by May 15th.

The second time frame is for participants and beneficiaries who do “not have the right to direct the investment of assets” in his or her own account under the plan. These participants and beneficiaries must receive a statement at least once each calendar year. Good faith compliance means this statement will be provided by February 14th, which is 45 days after the end of the calendar year.

The third time frame provides that a plan beneficiary not included in the two previous categories can make a written request for a statement. Even though is it not stated in FAB 2006-03, it is assumed that reasonable compliance means providing the statement to such a plan beneficiary within 45 days of the written request.

Defined Benefit Plans

For defined benefit plans, the time frame is not approaching as quickly. Section 508 contains two options for defined benefit plans. The first option is to provide a pension benefit statement once every 3 years to participants “with a nonforfeitable accrued benefit and who is employed by the employer maintaining the plan at the time the statement is to be furnished”. To other participants and beneficiaries, the pension benefit statement is to be furnished upon written request by the participant or beneficiary.

The second option is – instead of providing a pension benefit statement every 3 years – the plan administrator can provide participants with notice once a year that the pension benefit statement is available and how it can be obtained. This notice of availability can be provided to participants in “written, electronic or other appropriate form to the extent such form is reasonably accessible to the participant”.

For defined benefit plans, Section 508 provides for an extension of the 3-year time frame for years in which no benefits accrue. Section 508 specifically states that, when determining the 3-year period, the “Secretary may provide that years in which no employee or former employee benefits (within the meaning of section 410(b) of the Internal Revenue Code of 1986) under the plan need not be taken into account.” So the 3-year time frame for providing the pension benefit statement is potentially longer than 3 years.

Section 508 also provides an exclusion from providing the pension benefit statement – one-participant retirement plans as defined by ERISA section 101(i)(8)(B) are specifically excluded from this requirement. ERISA section 101(i)(8)(B) defined a one-participant defined benefit plan as:

(B) One-participant retirement plan. For purposes of subparagraph (A), the term “one-participant retirement plan” means a retirement plan that –

    (i) on the first day of the plan year –

      (I) covered only the employer (and the employer’s spouse) and the employer owned the entire business (whether or not incorporated), or
      (II) covered only one or more partners (and their spouses) in a business partnership (including partners in an S or C corporation (as defined in section 1361(a) of the Internal Revenue Code of 1986)),

    (ii) means the minimum coverage requirements of section 410(b) of the Internal Revenue Code of 1986 (as in effect on the date of the enactment of this paragraph) without being combined with any other plan of the business that covers the employees of the business,

    (iii) does not provide benefits to anyone except the employer (and the employer’s spouse) or the partners (and their spouses),

    (iv) does not cover a business that is a member of an affiliated service group, a controlled group of corporations, or a group of businesses under common control, and

    (v) does not cover a business that leases employees.

Tomorrow – Part II – The Statement’s Content [tags]Pension Protection Act, benefit statement, vesting, defined benefit, FAB 2006-03, ppa[/tags]

Quarterly Benefit Statement – Include Vesting or Not?

A interesting debate has started on BenefitsLink.com about the contents of the new quarterly benefit statements required by PPA Section 508. The question is whether the quarterly benefit statements must include vesting information, or can it be provided to participants annually instead of quarterly? This is important because the first quarterly benefit statement must be provided to participants by May 15th. If vesting information is only required to be provided annually, then the first vesting information does not need to be provided until February 14, 2008. After rereading Section 508, it does provide for an alternative notice to be provided annually. More on this on Monday. [tags]Pension Protection Act, benefit statement, vesting, ppa[/tags]