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]
