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This report was produced by the ERISA Advisory Council’s
Working Group on Participant Benefits Statements. The ERISA Advisory
Council was created by ERISA to provide advice to the Secretary of Labor.
The contents of this report do not represent the position of the
Department of Labor (DOL). |
The Pension Protection Act of 2006 (PPA) was enacted
into law on August 17, 2006 and made important changes to the reporting
and disclosure requirements applicable to all pension plans, specifically
requiring benefit statements to be furnished to plan participants in all
defined benefit and defined contribution plans. The new rules are
effective for plan years beginning in 2007, with a delayed effective date
for collectively bargained plans. The PPA charges the DOL with designing
model benefit statements for plan administrators, and authorizes the DOL
to issue interim guidance prior to the model statements, which it has done
in the form of Field Assistance Bulletin 2006-03 (FAB 2006-3) issued in
December of 2006. On October 12, 2007, the Department of Labor issued
Field Assistance Bulletin 2007-03, relating to the timing of benefit
statements for non-participant directed plans.
The 2007 ERISA Advisory Council formed a Working Group
on Participant Benefit Statements (the Working Group) to study these
legislative requirements and to make recommendations to the DOL regarding
the required content, form and timing of the benefit statements. Testimony
to the Working Group was provided on July 12, 2007, and September 18, 2007
by 13 speakers, representing plan sponsors (both single employer and
multi-employer), third party administrators, investment advisors,
organizations representing participants and beneficiaries, and actuaries
and other service providers.
After careful debate and analysis of the issues and
transcripts, the Working Group submits the following primary
recommendations to the Secretary of Labor for consideration:
Recommendation 1: The Department should provide
longer due dates for defined benefit plan benefit statements, dates that
recognize the time it takes to accumulate details of participant data
necessary to calculate all participants’ accrued benefits, and that
recognize differences in accumulating data. Further, the Department 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.
Recommendation 2: The Department should convene
a Task Force of benefit statement stakeholders to develop the content of a
model statement. The view of the Working Group is that the content should
be minimized, including only that required by the statute. The model
statement should be crafted in a way to inspire sponsors to add
information and education. In that regard, the Working Group recommends
including the application of IB 96-1 to the benefit statement to clearly
communicate the boundaries of the information and education that could be
included in benefit statements without crossing the “advice”
threshold.
Recommendation 3: The Department of Labor should
promulgate regulations that preserve the multi-document option for the
benefit statement. Further, the Department of Labor should update its
regulations regarding electronic communication to a “reasonable access”
standard as in the Department of Treasury safe harbor regulation in
recognition of the continued advancement in web-based communication and
the increase in its use by participants.
Section IV of our report includes additional detail of
these recommendations for consideration by the Department when developing
the regulations for participant benefit statements.
The Working Group was made up of the Council as a
whole, including:
Chris Rouse, Working Group Chair
Kathryn Kennedy, Working Group Vice-Chair
James McCool, Council Chair
William Scogland, Council Vice-Chair
Richard Landsberg
Willow Prall
Robert Archer
Ed Schwartz
Edward Mollahan
Dennis Simmons
Trisha Brambley
Elizabeth Dill
Stephen McCaffrey
Randy DeFrehn
Richard Helmreich
The purpose of the Working Group on Participant Benefit
Statements was to study the automatic benefit statement requirements of
the Pension Protection Act of 2006 (PPA ’06) with an aim to make
recommendations to the DOL regarding content, form and timing of benefit
statements. The scope of the study focused on the content, form and timing
of the automatic benefit statements for both defined benefit and defined
contribution plans (both participant directed or non-participant
directed). Testimony to the Working Group was provided on July 12, 2007,
and September 18, 2007 by 13 speakers, representing plan sponsors (both
single employer and multiemployer), third party administrators, investment
advisors, organizations representing participants and beneficiaries, and
actuaries and other service providers. The Working Group developed a
record of the testimony and made recommendations to assist the DOL in its
development of proposed regulations implementing the benefit statement
requirements.
Part One traces the requirements under prior law and
the 1979 and 1980 proposed DOL regulations, and introduces the reporting
and disclosure requirements of the new law as they impact participant
benefit statements. It also summarizes the DOL’s initial guidance
through its December 2006 field assistance bulletin. Part Two sets forth
the scope of the Working Group’s paper and the questions distributed to
potential witnesses.
Part Three summarizes the issues and recommendations of
plan sponsors, participants, and service providers from the testimonies
provided to the Working Group. Part Four provides the Working Group’s
observations, discussions and recommendations in the context of these
varying concerns. Part Five summarizes the witnesses’ testimonies. Part
Six lists additional information sources.
As originally enacted, ERISA §105 regulated the
content, the frequency and the class of recipients entitled to benefit
statements, whereas ERISA §209 set forth the class of recipients entitled
to similar benefit statements and mandated certain recordkeeping
requirements needed for the disclosure of benefits. In its original 1979
proposed regulations, the DOL linked the requirements of ERISA §105 with
the requirements of §209, taking an expansive view of what was required
under the statute. Due to public comment, the DOL withdrew the 1979
proposed regulations and reissued 1980 proposed regulations. The 1980
proposal retreated from the 1979 proposal and also bifurcated the
recordkeeping issues under ERISA §209 for multiemployer and multiple
employer plans from those of single employer plans.
PPA changed the requirements of ERISA §105 as to the
content of benefit statement information for defined benefit versus
defined contribution plans and the frequency of disclosure for defined
contribution plans that have self-directed participant investments. It
also provides an alternative means of compliance for defined benefit
plans. Penalty for failure to comply with the new requirements is a
potential $110/day per participant, subject to the court’s discretion.
Although PPA ’06 did not alter the requirements of ERISA §209, it is
likely that the DOL will continue to link the requirements of ERISA §105
with §209.
In December 2006, the DOL issued Field Assistance
Bulletin 2006-03, which provides safe harbor compliance with the statute
until final regulations are issued. However, good faith compliance with
the statute is also permitted during the regulatory-gap period. In October
2007, the DOL issued Field Assistance Bulletin 2007-03, which relaxed the
timing requirement for individual account plans that are not individually
directed.
Prior Law
Prior law under ERISA §105 required the plan
administrator to provide, only upon request, benefit statements to
participants and beneficiaries; no more than one statement was required
during a 12-month period. The information required to be furnished
included the total accrued benefits and the total vested accrued benefits
(or the earliest date on which benefits would become vested). Under ERISA
§209, participants who terminated service with the employer or incurred a
one-year break-in-service were required to receive a benefit statement.
Prior law made no distinction as to the benefit statement requirements
between defined benefit and defined contribution plans.
PPA ‘06
Under the new rules, effective for plan years beginning
in 2007 (with a delayed effective date for collectively bargained plans),
automatic benefit statements are now required. The time period and the
information furnished on the statements vary depending on the type of
plan, including tri-annually for defined benefit plans (except that
defined benefit plans may elect an alternative notice provision and
continue to make statements available annually upon request), annually for
non-participant directed defined contribution plans, and quarterly for
participant directed defined contribution plans. PPA ’06 charges the DOL
with designing model notices for plan sponsors, and authorizes the DOL to
issue interim guidance prior to the model notices. In December 2006, the
DOL issued Field Assistance Bulletin No. 2006-03, providing guidance on
good faith compliance with the new rules, which included establishing a
45-day day time period for furnishing the required statements. In Field
Assistance Bulletin No. 2007-03, the DOL relaxed the 45-day time period
for individual account plans that are not individually directed and
provided that the timing for benefit statements for such plans be
coordinated with the filing for the plan’s Form 5500. It is expected
that the DOL through regulations will specify which plans are covered; the
required content for the participant benefit statements; frequency of
disclosure, as well as required due dates for compliance and periods of
coverage; form of furnishing statements; and mode of delivery.
The following is the list of questions (represented as
not exhaustive) distributed to potential witnesses prior to the
testimonies in July and September 2007:
-
What information needs to be disclosed on all
automatic benefit statements? How will the benefit statements vary for
defined benefit versus defined contribution plans? How will the benefit
statements vary for single-employer versus multiemployer plans?
-
What are the appropriate time frames within which
benefit statements should be furnished (automatically and upon request)?
Should there be limits on the age of the information (“latest available
information”) disclosed in the benefit statements? If so, what are those
limits?
-
What are permissible methods for furnishing the
benefit statement information (e.g., paper, employer or plan-based
websites, electronic notices) to participants and beneficiaries?
-
How can plan sponsors and plan administrators assure
that the participants and beneficiaries understand the information
provided on the benefit statements? Are there approaches to the production
of benefit statements that would result in better decision-making capacity
on the part of participants and beneficiaries?
-
What are current practices in furnishing benefit
statement information and how would these practices be required to change
to accommodate particular disclosure options? What costs or burdens may
the plan sponsor or plan administrator weigh in making such
accommodations? If the information on the benefit statements is dependent
on multiple sources, what disclosure and cost considerations may be
considered by the plan sponsor or plan administrator? What costs and/or
burdens, if any, may be considered in preparing an integrated, single
benefit statement?
-
In the context of defined benefit plans:
-
What benefit information is necessary and sufficient
(e.g., vested, accrued, projected)?
-
If data that was used in making such calculations,
should that data be disclosed (e.g., pay, hours, service)?
-
What the costs and burdens may the plan sponsor or
plan administrator consider if the participant requests individualized
projections of benefits (e.g., early retirement benefit, normal retirement
benefit, deferred retirement benefits)?
-
In the context of defined contribution plans that
permit self-direction of investments:
-
Are there “safe harbors” the plan administrators
may rely upon regarding communication of risk and diversification? What,
if any, additional information should be provided by such plan
administrator for default investments?
-
Given that limitations or restrictions on the right
to direct investments must be disclosed, what is the scope of such
limitations or restrictions?
-
How can plan administrators reduce duplication of
required information to participants/beneficiaries?
Department of Labor:
Robert J. Doyle; Employee Benefits Security
Administration (DOL) - The new rules should ensure participants have the
information they need about their retirement benefits to plan for
retirement while minimizing implementation and compliance costs to the
extent consistent with the objective. The benefit statement provisions of
the law appear generally to refer to a single pension benefit statement,
although it does address alternative means by which vested accrued benefit
information might be furnished. While FAB 2006-03 permitted multiple
documents, consideration needs to be given to the circumstances in which
multiple statements should be permitted. Regarding the method of
furnishing the statement, FAB 2006-03 provides that plans can rely on DOL’s
safe harbor regulation or the regulation issued by the Internal Revenue
Service. As to timing, the Department is considering the need for further
guidance for non-participant directed plans, but in general believes that
the regulations need to establish specific time frames for furnishing the
statements. As to content, the Department is considering regulations
related to several areas, including referencing other documents (e.g., the
Summary Plan Description), permitted disparity disclosures, definitions
for “latest available,” details of assets underlying certain plan
investments, diversification and risk statement, and mixed plans, among
others. The Department seeks the input of the Advisory Council with
respect to these matters.
Plan Participants:
Rebecca Davis; Pension Rights Center (defined
contribution and defined benefit) - Although participants may find projections helpful in
retirement planning, there is no need for these projections in benefit
statements of DB or DC plans. The Center believes that the 20% level for
diversification is more than a meaningfully diversified portfolio would
tolerate. Participant statements should also include disclosure of
participant rights to divest their holdings of company (sponsor) stock.
The Center has a strong preference for a single statement for a plan, but
if multiple statements/documents are permitted, any vesting information in
the documents should provide the participant’s vested percentage and a
simple example showing how to apply the percentage to employer
contributions. Social Security and other offsets should be estimated and
shown on benefit statements. Benefit statements should show the dollar
impact of early retirement and joint and survivor reductions in benefits,
and provide other information relative to projected benefits. Any
subsidized early retirement benefits should indicate circumstances under
which the subsidy could be lost. No estimate should be considered “reasonable”
if the plan has or could easily obtain sufficient information to provide a
benefit statement that reflects the actual benefit, and should specify any
assumptions made in estimating benefits and the procedure for correcting
the estimate. In multiemployer plans, any estimates should be realistic,
and disclosure should be made of possible reductions in benefits. Cash
balance and other hybrid plans present unique problems, including
frequency of statements for self-directed accounts, how to state and
disclose assumptions regarding the retirement annuity, and
interest-crediting disclosures, among many. The Department should provide
specific guidance and regulations for these arrangements. While electronic
delivery has advantages, participants should affirmatively elect
electronic transmission and renew it every three years. Sponsors should
retain electronic submissions for a significant period of time. The
Pension Rights Center asks the Working Group to recommend to the Secretary
to ask Congress to amend the statute to eliminate the alternative notice
provision for defined benefit plans.
Plan Sponsors:
Doug Kant, Fidelity Investments; on behalf of the
American Benefits Council - Most participant directed plans furnish monthly
statements well within the 45-day requirement of FAB 2006-3. A “drastic”
increase in Internet use among 401k participants has provided a better
communication solution in recent years, and FAB 2006-3’s recognition
that continuous availability on the Internet will constitute good faith
compliance is appreciated and should be reaffirmed in the regulations.
Smaller recordkeepers may have a difficult time meeting the 45-day
timeframe, and non-participant directed plans will likely need a longer
“reasonable period of time.” For defined benefit plans, the due date
should not be before the due date of Form 5500. Estimates should be
permitted, but not required so if sponsors are concerned about confusing
participants they need not provide them. The FAB provision that multiple
documents are permitted so long as the critical condition that
participants are “notified of the relevant details in any manner that a
periodic statement may be furnished” is appropriate. This is necessary
because in today’s plan environment, investment information is often
divided between more than one service provider. This is particularly true
in the 403(b) market where each mutual fund group keeps its records
separately, and for insurance products inside 401(k) plans subject to
separate recordkeepers. While universal consolidated reporting is coming,
it is not yet here. In these cases, the participants have made the
decision to deal with more than one vendor and should not be surprised if
their account value(s) come from more than one source. The FAB exclusion
of limitations imposed by investment vehicles or securities laws should be
continued in the regulations. Directing participants to sources for
limitations will be more effective than detailing every limitation in the
statement. The applicability of permitted disparity in the statute is
questionable for defined contribution plans, and the regulations should
confirm that for defined benefit plans a generic reference (“see the
summary plan description”) is sufficient. The requirement to disclose
the “value of each investment” in the statement for a participant
directed account is not clear for annuities, life insurance and some other
contracts. The regulations should provide guidance for presenting
investments without a published or quoted value. Because statement formats
differ widely among vendors, any model statement should be furnished
purely for educational purposes because required changes in statement
format would result in substantial implementation costs and increase the
time to bring statements into compliance.
Peter Klein, Local 26 IBEW-NECA Joint Trust Funds (multiemployer
sponsor) - Participants want to know “how much do I have now and
how much will I have at retirement,” and those are essential ingredients
of any statement. Terms used are easily confusing and must be clarified on
the statement or by reference. Annual detail of benefit formula data is
vital, as is the calculation of the basic benefit. For DC plans,
particularly participant directed, performance information is of primary
importance. The visual impact of the statements is important to
understanding them. Local 26 provides annual automatic statements, and
believes the statute term of every 3 years is insufficient. The 45 day
requirement is virtually impossible for multiemployer DB plans, and the
due date of the 5500 is more realistic and still timely. For those few DC
plans that self-administer, the 45-day deadline may be difficult to meet,
but commercial vendors can generally easily produce a statement on a
cost-effective basis. Communicating benefit information electronically is
the ideal medium for a simple statement. In the multiemployer DB world,
many participants do not have ready access to the internet, although that
the number is shrinking. DB automation is lagging DC, but the gap is
closing and available software is improving and becoming cost-appropriate.
But plans should be able to decide what method is best for them. For any
plan that does not currently provide annual statements, the accumulation
of information to calculate the accrued benefit for every plan participant
is going to be costly, more so for plans that have experienced changes in
terms or participants. The various disclosure requirements are not
particularly cumbersome to provide. For DB plans, in addition to accrued
and vested benefit there should be disclosure of the projected benefit at
normal retirement, and would personally disclose an early retirement
benefit. Supporting data must be disclosed. Appropriate software is
essential for this task, and may be prohibitive for some plans. The
content of paper statements is limited and should not be used for
unnecessary disclosures, limitations, etc. But the content of electronic
statements is virtually unlimited.
David L. Wray; Profit Sharing/401k Council of America
(sponsors) - A 2005 PSCA survey of sponsors that provide participant
statements indicated that on a scale of 1-5 (5 being "excellent")
sponsors rated their statements overall at 4.3 (the spread by plan size
was not significant to the results). Any regulations for participant
statements should take a minimalist approach and leave plan sponsors to
make the decisions about how that information is delivered and presented.
It is in the interest of the sponsor to effectively communicate to
participants how the plan is benefiting them. We need to avoid the path
taken for other required plan communications like the SPD, SAR and SMM
that has limited use to the average participant. Statements should be
permitted to inform participants how to access information rather than
having detail on the statement. A 2007 PSCA study indicates that just 7.7%
of plans are not accessible to participants through the Internet. The DOL
should specify that plans utilizing electronic communication are not
required to replicate every feature of the electronic system when
providing a paper-based alternative. The DOL should affirm the FAB
positions regarding Internet access and multiple documents on a permanent
basis. PSCA is concerned that a model statement could do great harm
because many will see it as a safe harbor and adopt it regardless of its
usefulness to its participants. PSCA recommends that DOL authorize a
working group of defined contribution plan communications specialists to
develop a recommended model statement.
Plan Service Providers:
Judith Mazo; The Segal Company (multiemployer service
provider) - Unlike the case with industry practice for single
employer plans, Ms. Mazo testified that it was very rare for multiemployer
plans to provide statements on an automatic basis. First, electronic
communication is much harder between multiemployer plans and their
participants as participants may not be working in a single place with
regular access to a computer and many multiemployer plans lack websites.
Secondly, multiemployer plans collect data from numerous sources and
individual participant data is not necessarily needed until the
participant actually retires and thus commences benefit distributions.
Hence, it is far more unlikely for multiemployer plans to have exact
participant data on an on-going basis. Finally, multiemployer plans have
far more terminated vested participants than most single employer defined
benefit plans because multiemployer plans generally don't make
distributions prior to retirement. Hence, there are more participants with
historical information that may not be as accurate as in the case of
single employer plans, which are more inclined to cash out an individual’s
benefit.
Ms. Mazo stressed that it would be virtually impossible
for multiemployer defined benefit plans to provide individual benefit
statements 45 days after the close of the plan year based on that year’s
accruals. The incremental cost of preparing and delivering participant
benefit statements could result in reduced benefits. Generally, it takes
at least two months to assemble participant data. She suggested providing
regulatory relief for defined benefit plans and coordinating the benefit
statement requirement with the production of the annual actuarial
evaluation.
Thomas Finnegan; Savitz Organization, on behalf of
ASPPA (defined benefit service provider) - Currently approximately 90% of defined benefit plans
with fewer than 10 participants provide annual statements to participants,
75% of plans with 10-100 participants, 50% of plans with 100-500
participants, and significantly less of plans over 500 participants. Basic
content for such statements is the accrued and vested benefit plus a
projected benefit at normal retirement. Other content includes core data,
Social Security data and account balance for cash balance plans. The
regulations re content should ensure the participants can understand the
data, it must be correct and it must be meaningful. ASPPA recommends that
where permitted disparity exists statements include something like “The
Plan’s benefit formula takes into account Social Security. For details
of the calculation of your benefit, please refer to your Summary Plan
Description.” Guidance should clarify that no disclosure is needed for
plans that take permitted disparity into account only for
nondiscrimination and coverage testing. For floor offset plans, ASPPA
recommends the accrued benefit be shown net, or if the gross is shown then
the offset and net benefit should be clearly displayed. ASPPA recommends
that the deadline for furnishing statements be the same as furnishing the
summary annual report, and may be prepared as the valuation date for the
plan, or any later date during the plan year. ASPPA recommends the DOL
specifically authorize the use of valuation quality data will satisfy the
“reasonable estimates” standard. ASPPA recommends that for frozen
plans in which some participants continue to accrue benefits, the 3-year
rule is suspended for the group that accrues no benefits. ASPPA believes
that in order to improve communication and avoid election of the
alternative notice, guidance should encourage simplicity, limit the cost
of compliance, and provide reasonable due dates for statements.
S. Derrin Watson; Relius - SunGard (defined
contribution service provider) - Investment information should be furnished as
frequently as participants can change their investment elections. The FAB
is not clear as to frequency of statements if a non-participant directed
plan allows participants to purchase life insurance. A plan should be
required to furnish quarterly statements only with regard to that portion
of the account they can direct. “Vested balance” is a dollar amount
and should be determinable on the statement. Referring the participant to
another document (e.g., SPD) is worthless. From a participant’s
standpoint, vesting is one of the most useful pieces of information on the
statement. Allowing the separate annual statement of vesting to be
provided by the time for providing the summary annual report would be an
appropriate solution. A similar deadline would be appropriate for annual
statements in general. Defined contribution plans should be exempt from
discussing permitted disparity, or at least allow reference to the summary
plan description. The detail of securities held in pooled separate
accounts owned by participants does not need to be provided to
participants because they cannot change the investments in the pool.
Sufficient information is provided in the plan’s annual 5500. The
benefit statement should separately itemize employer securities regardless
of the participant’s ability to diversify out of employer securities.
Suzanne Samuelson; Mercer Human Resources Consulting
(defined benefit service provider) - Employees for the most part do not understand their
defined benefit plans, so the annual statements should be easy to
understand in that context. The most important disclosure items are
accrued benefits and vested benefits. Participants want to know their
projected benefits at normal retirement using conservative assumptions.
Statements should be furnished within a six-to-nine month period. In
participant directed plans, information regarding investment diversity
will be warmly received. All methods of distribution should be permitted.
Statements should follow the maxim Keep It Short and Simple. Participants
want to know one thing – What are my benefits. Extraneous information
should be kept to a minimum and placed at the back of the statement.
However, duplication of information on the statement with other sources
will not cause a problem. Most DB plans’ statements currently provide
personal data, and it provides confidence to participants that the
calculations are correct. Data should be of the highest quality. Sponsors
not currently providing periodic statements can expect to incur costs to
accumulate the information, and they may be significant if the information
is coming from multiple sources. The preparation of a single, integrated
statement will be almost impossible to accomplish, and it may not make
sense for plans that operate in different ways.
Diane Gallagher; JPMorgan Retirement Plan Services
(defined contribution service provider) - JPMorgan’s service agreements with participant
directed account customers provide for mailing of print statements (the
majority of those distributed) within 10 business days of quarter-end. For
defined benefit and non-participant directed defined contribution plans,
valuation issues can pose challenges to meeting the 45-day requirement.
The Internet is not the panacea for all communications, the important
point is for information to be available in multiple channels. Because
service providers have information about participant’s age, gender,
income, asset allocation and contributions, they should be able to provide
check-ups of a participant’s journey toward retirement.
Adam Pozek; Sentinel Benefits Group (defined
contribution service provider) - Since there are numerous investment arrangements for
participant directed plans, DOL guidance must consider cost and allow
flexibility in providing information to participants. Plans holding pooled
investments should not be required to list each underlying security on the
statement. Plans should be allowed to disclose required information in
multiple documents because many employers use different service providers
for elements of the required disclosures. The guidance should make clear
that permitted disparity disclosures are only applicable to defined
benefit plans, or at least allow reference to the summary plan description
for any permitted disparity. Disclosure of vested benefit information
should be satisfied by referencing the summary plan description or by
providing a separate description of the plan’s vesting schedule.
Non-participant directed plans should be required to furnish the required
annual statement by the due date of the plan’s summary annual report.
Plans with both participant directed and non-participant directed elements
should be permitted to separate the required statements between the two
elements, including the frequency requirement. Guidance must not
accelerate deadlines beyond the employer’s ability to collect the data
and the service provider’s ability to process it. Duplicative
information that could be confusing to the participant should not be
necessary.
Simone L. Rockstroh; Carday Associates, Inc. (multiemployer
service provider) - The informational needs of the participants must be
well-served but be balanced with practicality and efficiency for the
plans. At a minimum, the total accrued benefit and the total vested
benefit should be disclosed on the statement. If not fully vested, the
statement should disclose the remaining service necessary for vesting. The
credited service (hours or dollars, as appropriate) should be disclosed.
Any death benefits should be disclosed. A disclaimer should be included to
indicate any tentative information or information subject to correction.
It is almost impossible for a multi-employer, defined benefit plan to meet
the 45-day requirement, and any time up the end of the following plan year
should be permitted. Most multiemployer plans do not have web sites, nor
are computers available at work sites, and paper is the best method to
communicate to the multiemployer plan participant. In a 2004 survey, 90%
of multiemployer defined benefit plans that provided annual statements
used paper, and 70% produced the statements in-house. Rockstroh estimates
that currently 30-40% of multiemployer plans offer annual statements, and
the rest did not because of cost, lack of appreciation, and because they
cannot produce them. Some plan sponsors estimate a $5-10
cost-per-participant to produce statements, exclusive of implementation
costs. Multiemployer would benefit from flexibility in the design of
benefit statements.
Kyle Brown; Watson Wyatt Worldwide, on behalf of
American Benefits Council - To facilitate transition to the to-be-published
regulations, the good faith standard in FAB 2006-3 should be preserved for
plan years ending for six months following the issuance of final
regulations. The Council is pleased that the FAB permits plans to rely on
both the DOL delivery rule and the Treasury regulations regarding
electronic delivery, and recommends using these rules in a model for any
revised rule. Council suggests that the rule also be applicable to benefit
statements, annual notices and other required communication. The
simplicity of the required disclosure items should not be overlooked, and
can be expected to result in improving participant understanding and
simplify producing the statements. This will increase the likelihood that
sponsors will provide benefit statements every three years rather than use
the alternative notice approach. Vesting schedules and permitted disparity
disclosure should be permitted by a cross-reference to the plan’s SPD.
Floor offset arrangements should be permitted to make disclosures using
multiple documents, specifically the offsetting plan. The due date for
benefit statements should be the same as for the plan’s 5500. Because
there are many valid cases where providing a statement without the use of
estimates is not economically practical (e.g., merged plans, calculations
made at time of distribution), the use of reasonable estimates must be
permitted in the regulations. To the extent practicable, the Council urges
the DOL to include a list of required content in addition to specific
model language. Future guidance should also clarify that hybrid plans need
include only the notional account balance or current value if a pension
equity plan.
Content of Statements
Observations as to Content
The Working Group heard a wide range of testimony
regarding what should be included in participant statements, but the
objective of the benefit statement that we heard was consistent; keep it
understandable - make it useful. What we did find was that at both ends of
the size spectrum, and for all types of plans, there were plans that are
currently in compliance with the requirements of the new statute and the
FAB as to content. What we also heard was that for those plans currently
not in compliance with content, some will incur significant cost to
comply, and it will probably take longer to comply than the statute and
FAB contemplate.
The details of the objectives for participant benefit
statements we heard were also consistent; minimalist; simple, timely,
accurate, informative, plain language, etc. We also heard that information
should help participants make better decisions about their careers and
prepare for retirement, and the benefit statements need to maintain a
balance between necessary information and unnecessary details. It is
apparent that the sponsors recognize their interests are served if the
employees value their plan asset.
However, if too much cost and time is required by
defined benefit plan administrators to prepare the required statements,
they will probably elect the alternative method of compliance.
A lot of testimony was heard regarding information
considered to be essential and information that would be helpful and
useful. Not unexpectedly, it was apparent that participants want
regulations to ensure more information is presented and sponsors want
regulations to provide the minimum necessary to allow them the flexibility
to present a variety of information. A survey by the Profit Sharing
Council disclosed that on a scale of 1 to 5, small plan sponsors (1-50
participants) rated their participant statements 4.1 and large plan
sponsors (> 5,000) rated theirs 4.2. – interesting in that there were
important differences in the content between the sizes. We did not receive
any similar surveys of participants.
Several testified that in addition to the information
required by statute and FAB 2006-3, the regulations should require
information regarding contributions, investment activity, and earnings
information. One participant group representative provided a long list of
information that should be required, which for participant directed
accounts included activity for the life of the account, multiple
projections and access to 6 years of audited financial statements of
non-public company stock in the plan, and for defined benefit plans
included details of earnings/work history and multiple projections.
The service providers compete for business in part on
the basis of the benefit statements they can provide. This has resulted in
a broad array of statement products making available substantial resources
for managing plan assets and planning for retirement.
Testimony regarding including projections was mixed,
including among the 3 groups. While the information was perceived as
useful, even essential, to participants by some, others felt participants
may be confused and even misled by it.
Discussion of Content
The Working Group discussed the apparent significant
difference in capability, and cost, for small plans versus large plans,
for single employer versus multiemployer, and for self-administered versus
third-party-administered. Although we were unable to obtain any numbers on
how close the industry is to meeting the statutory requirements for
content, we do have some numbers for most of the segments that testified.
It appears that for participant directed plans the universe is pretty much
in compliance with both timing and content, if you can accept multiple
documents being used to convey the information. We had only limited
testimony on non-participant directed DC plans, but that seems to indicate
no pervasive significant issues, again permitting multiple documents and
adding an extension of the time requirement. For DB plans, the large
single- and multiemployer plans appear to be capable of meeting the
statutory requirements, but small DB plans of both types are going to have
difficulty in qualifying their information sufficiently to provide
reasonably correct numbers for accrued and vested benefits. Some of these
plans are structured so that only upon distribution is the information
necessary to calculate the accrued benefit brought together, and to
require these plans to do that for every participant and meet the deadline
in the statute is problematic at best. However, once met the continuing
cost will be significantly less, and testimony indicates not at all
prohibitive.
Much of the testimony was about including “education”
in the statements, including references to other sources that provide
retirement planning education. The range of data that could be included in
benefit statements went so far as to spark discussion as to whether some
of the suggestions for inclusion in benefit statements might go beyond
information and education and become investment advice and trigger
fiduciary obligations. The sense of the Working Group was that the
regulations for participant statements should be limited to those matters
contemplated in the statute, and to rely upon other means of improving the
financial literacy of participants. There is another Working Group of this
Council that is addressing that issue.
The sense of the Working Group was that the likelihood
of defined benefit plans electing the alternative method is real and, in
order to improve the information communication in DB plans, it is
important that the regulations not exacerbate this situation. However, if
the statement is simple enough to produce, the plans have sufficient time,
and there is an adequate phase in period, more plans would provide a
benefit statement.
There was little discussion concerning disclosing
accrued and vested benefit information – that has been accepted by all
parties – rather the discussion focused on how to present the accrued
and vested benefit in the statement. Because plans with changes, mergers,
etc. or complex formulas could cause the calculation of the accrued and
vested benefit to be lengthy and confusing, the Working Group consensus
was that there should not be any requirement to present the detail of the
calculations, or to display the elements of the formula that reflect
personal data (compensation, service, age, etc,) in the statement. While
testimony from participant representatives was in favor of such details,
sponsors’ and service providers’ testimony made it apparent that any
requirement for such details could result in sponsors electing the
alternative method, to the detriment of all plan participants. Testimony
also indicated that requiring display of the vested benefit as an amount
could be difficult and costly for some plans, and the Working Group
concluded that reference to the Summary Plan Description for vesting
information should be permitted. Testimony was clear that many plans that
currently provide accrued and vested benefit information include
calculations and/or participant data in participant statements, but to
require such information could increase the number of plans that elect the
alternative method. The Working Group concluded that a notice on the
participant statement regarding how the calculation of the accrued and
vested benefit, and the related participant data, can be obtained would be
appropriate.
Discussion of projected benefit information focused on
the trade-off between its usefulness (high) versus its reliability (low).
For younger workers, the likelihood of future job and plan changes and the
length over which the assumptions work make the numbers too unreliable,
whereas for older workers the usefulness is so high that a higher degree
of unreliability (which is lower because of the shorter projection period)
can be borne. Mitigating the vagaries of any projection regulation was the
availability of the many tools for dealing with retirement planning.
Accordingly, the Working Group concluded that projections should not be
required.
The model language for the diversity disclosure was
generally appreciated, with the caveat that too much “legalese” could
impair the purpose of the benefit statement. With some exceptions, the
witnesses preferred having the option to reference other sources for
information required to be in benefit statements.
The Working Group discussed the “model statement”
at some length. We decided that it might not be an actual statement, but
rather a list of the information that has to be included, and
recommendations for how it might be displayed, similar to the model
language in the FAB for diversification. Although we discussed whether the
list should include elective information, we did not reach any conclusion.
We did discuss a concern that any model statement that is limited to just
the required content runs the risk of confining the statements put in
place by sponsors, to the detriment of the opportunity the statement
provides for retirement planning. At the same time, having a model
statement that sets forth “opportunities” and establishes a safe
harbor for sponsors that are considering enhancing the usefulness of the
benefit statement without jeopardizing fiduciary risk is a win-win.
The Working Group considered whether to develop a model
statement as part of our recommendation, and decided not to because we
believed it was beyond the scope of our undertaking.
Recommendations as to Content
-
The Department should convene a Task Force of
benefit statement stakeholders to develop the content of a model
statement. The view of the Working Group was that the required content
should be minimized, and include only that required by the statute, but
that the model statement could be crafted in a way to inspire sponsors to
add information and education. In that regard, the Working Group
recommends including the application of IB 96-1 to the benefit statement
to clearly communicate the boundaries of the information and education
that could be included in benefit statements without crossing the “advice”
threshold.
-
The Department should consider establishing a
transition period to achieve the benefit statement content requirements of
the regulation that recognizes that a substantial number of sponsors do
not currently have the data necessary to calculate the accrued and vested
benefit information.
-
The assumptions and uncertainties associated with
any projection of benefits in the benefit statement should be included in
the statement, at least in summary form with a reference to a readily
accessible source for further information.
Form
Observations as to Form
The participant representatives generally preferred a
single statement, with paper delivery as the default. Sponsors generally
preferred electronic delivery, but recognized that there is an important
participant population that prefers and is better served by paper.
Sponsors and service providers were unanimous in supporting the safe
harbor regulation of the Department and the Treasury regulation for
furnishing electronic benefit statements, and requesting they be continued
in the regulations.
Plans that perform administration of participant
directed plans in-house (generally small plans) will have difficulty
complying with a “single statement” requirement because the investment
custodians do not have the ability to separate participant from employer
contributions, employment history and other data, and the sponsors do not
have the ability to consolidate the brokerage information into the vesting
report. Also, plans using service providers for recordkeeping frequently
have separate recordkeepers for some assets, e.g. company stock, life
insurance, annuities, etc., and some have different custodians for
participant directed investments and non-participant directed investments
inside the same plan.
Because access to computers and the Internet (and the
ability to effectively use them) is not universal, the participant
representatives preferred paper delivery as the default, with optional
electronic delivery. Among sponsors and service providers, only a few
recommended that electronic delivery be available as the automatic method
of delivery.
Discussion of Form
The Working Group concluded that the risk of error when
consolidating information from multiple sources into a single statement,
and the additional time and cost of consolidating information, more than
outweighs the information benefit and convenience of a single statement.
Following an animated discussion, the Working Group
came to a consensus that although the American workforce is becoming more
computer literate, it is not yet appropriate to make electronic delivery
of participant statements the norm. In addition to access and ability to
use issues, many participants who are computer literate are better served
with paper when managing their plan asset. However, the Treasury rules
regarding communication provide incentive for plan sponsors to migrate to
electronic delivery. In any event, the new regulations should reexamine
the use of electronic communication for benefit statements to recognize
the changes in technology and the participant group’s use of it.
Recommendations as to Form
-
The multi-statement option provided in FAB 2006-3
should be continued in the regulations.
-
The Department should issue regulations for
electronic benefit statements that incorporate the Department’s safe
harbor rules and the Treasury/IRS rules regarding electronic notices.
-
The Department should undertake a review of the use
of electronic communications for benefit statements and issue regulations
appropriate for the technology currently in use and participants’ access
to it.
Timing
Observations
All service providers testified they can deliver
participant directed account quarterly statements well within the 45 day
requirement, but that the completion of non-participant directed annual
benefit statements will depend on the availability of compensation
information, valuation of non-published investments and other matters.
Some contribution information is not known until the filing of the sponsor’s
income tax return. Defined benefit plans will take longer than 45 days,
depending on the availability of compensation information and the
actuarial report required for the plan’s 5500. Most testifiers suggested
non-participant directed plans should use the extended due date for the
plan’s 5500 as the due date for the non-participant directed statements.
The testifiers believed this due date would satisfy the “timely”
objectives of the information and result in more accurate information for
preparation of the benefit statement. However, a participant group
representative suggested 30 days for defined contribution plans and 90
days for defined benefit plans, citing the need to act on market
information in the first case and to verify the correctness of employment
information in the second case. Several witnesses testified about their
concern that if the regulations were too onerous sponsors would elect the
alternative method for benefit statements (see also Content).
Discussion
That 45 days is not generally feasible for defined
benefit plans was apparent to the Working Group. Also apparent was that
plans with hard to value assets or delays in determining sponsor
discretionary contributions would generally need more time in order to
have good information and limit the disclosure assumptions. The primary
discussion centered around whether providing a later due date for the
benefit statement would result in many plans delaying delivery beyond what
was “reasonably possible” for them. Also discussed was the risk of an
alternative of “what is reasonably possible but not later than a
deadline,” which might result in something similar to the contribution
deposit “15 day” rule situation.
Recommendations
-
The Department should provide longer due dates for
defined benefit plan benefit statements, dates that recognize the time it
takes to accumulate details of participant data necessary to calculate all
participants’ accrued benefits, and that recognize differences in
accumulating data for multiemployer plans. Further, the Department 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.
-
The Department should give consideration to delaying
the due date for the initial benefit statement for those defined benefit
plans whose provisions do not require the contemporaneous accumulation of
individual participant data to provide them a cost-appropriate period to
accumulate the data.
Other Matters
Observations
Permitted Disparity: There was a strong belief that the
permitted disparity disclosures did not apply to defined contribution
plans, but uncertainty that the statute and FAB 2006-3 gave that result.
Investment Detail: A couple of witnesses thought the
statute and FAB 2006-3 meant for the detail of investments in pooled
separate accounts to be included in the benefit statement. Bob Doyle
testified before the Council on September 19, 2007 that it was not the
original intent for that information to be included in benefit statements,
but that the disclosure issue was being considered.
Cash balance and hybrid plans: Several witnesses
brought up the unique nature of these plans, and that they do not “fit”
in the statute or FAB 2006-3.
Hard to Value Assets: Some participant directed and
other plans hold life insurance policies, real estate and other hard to
value assets. There is no guidance as to how to report these items in a
benefit statement.
Frozen Defined Benefit Plans: The Working Group heard
one suggestion that DOL should exempt frozen plans from the periodic
benefit statement requirement. The Working Group did not receive other
testimony on this topic and did not reach any conclusion regarding this
suggestion. However, in light of the increasing number of frozen plans,
the Working Group believes that DOL should consider this topic for further
review.
Discussion
Permitted Disparity: Included in the general discussion
of benefit statement content.
Investment Detail: Such disclosure seems out-of-place
and excessive for a benefit statement.
Cash balance and hybrid plans: Limited; no conclusion
Hard to Value Assets: None outside testimony
Recommendations
Permitted Disparity: Benefit statements should be
permitted to reference other documents regarding permitted disparity.
Investment Detail: The Department should clarify in the
regulations that the benefit statement does not need to include the detail
of investments held in pooled separate accounts.
Cash balance and hybrid plans: The Department should
include specific regulations governing the benefit statements for cash
balance and hybrid plans.
Hard to Value Assets: The DOL should provide guidance
regarding valuing and disclosing life insurance, real estate and other
hard to value assets.
Testimony of Robert J. Doyle; Employee Benefits
Security Administration - Robert J. Doyle, Director of Regulations and
Interpretations for the Employee Benefits Security Administration, U.S.
Department of Labor (“Department”), appeared before the Working Group
and provided both oral and written testimony regarding participant benefit
statements. Pursuant to the Pension Protection Act of 2006 (“PPA”),
the Department is to issue both implementing regulations and model benefit
statements pertaining to participant benefit statements.
According to Mr. Doyle, the new benefit statement
requirements will impact an estimated 50,000 defined benefit plans and
640,000 defined contribution plans, covering 110 million participants and
beneficiaries. He advised that it is therefore important that the new
rules governing benefit statements provide a framework that ensures that
plan participants and beneficiaries have the information they need about
their retirement benefits and their plan, while at the same time
minimizing implementation costs for plans. He indicated that
implementation and compliance costs are of particular significance for
individual account plans because such costs can be charged against participant accounts and
thereby reduce retirement savings.
Mr. Doyle noted that the Department issued Field
Assistance Bulletin 2006-03 in December of 2006 to provide interim
guidance on compliance with the new requirements. He stated that the
Bulletin generally provides standards for good faith compliance with the
benefit statement requirements on which plans may rely pending the
issuance of further guidance by the Department.
Mr. Doyle indicated that a number of issues have been
raised for consideration in developing regulatory guidance in the course
of deliberations and discussions about the benefit statement requirements.
These issues include: the form in which benefit statements should be
required to be provided; the manner in which benefit statements should be
furnished; the time frames within which benefit statements should be
required to be furnished; and the required content of benefit statements.
Testimony of Douglas O. Kant of Fidelity Management,
representing the American Benefits Council - Douglas O. Kant is a Senior Vice President and General
Council FMR Corp. His primary legal responsibilities cover FMR and
affiliates in the area of record keeping, Investment Management and
Trustee/Custodial services to thousands of 401(k) plans and section 403(b)
plans. He is also a member of the board of the American Benefits Council.
The American Benefits Council was formed by major US employers that
provide employee benefits to active and retired workers. The council’s
members either directly sponsor or provide services to retirement and
health benefit plans covering more than 100 million Americans.
Mr. Kant’s remarks were related to Section 508 of the
Pension Protection Act of 2006. In section 508 Congress imposed new
periodic reporting requirements on retirement plans in place of the
previously “upon request” process established under ERISA. Under the
Act, defined benefit plans must provide participants with a statement
every three years and in defined contribution plans annual reporting is
the norm. The PPA-2006 requires defined contribution plans to provide
statements quarterly for participant directed plans. Mr. Kant applauded
the DOL issuing transitional guidance in the Field Assistance Bulletin No.
2006-3. The guidance acknowledged “substantial time and expense that
would be incurred.”
Mr. Kant reviewed common practice in the 1980s and
1990s was to provide quarterly statements to participants. He noted that
these statements, while helpful, were not useful related to taking action.
He pointed this out to make a case for the participant being empowered to
manage his or her destiny. Mr. Kant noted that the significant advances in
technology can now provide the participant much more than paper quarterly
statements, and he followed up on his point that now participants can act
on any information daily. For those without internet access they can
always request a paper statement on a periodic basis.
Following the passage of the PPA, Fidelity shared
information with the DOL related to its recent experience. It appears that
participants do take advantage of Internet access when compared to other
communication methods. The DOL has said in its FAB that notice may be
furnished in any manner that a pension benefit plan statement could be
furnished (paper, online, etc.).
FAB 2006-3 requires statements be provided within 45
days of a relevant reporting period. Mr. Kant noted that the smaller
record keepers, and/or in situations with multiple vendors, that the time
frame imposed in the FAB may be very difficult to satisfy. A
recommendation was made to consider as an alternative time frame a longer
period ending with the due date for a plan’s annual return (Form 5500).
Mr. Kant noted that it was equally important that the
due date for a benefit statement for a defined benefit plan not fall prior
to the due date for the Form 5500 for the year. In many cases, it takes
months to gather the data to establish the accrued benefits of all DB plan
participants. In large companies, he noted that because of complexities
resulting from acquisitions and corporate activity it could take most of
the calendar year to gather the necessary information.
Mr. Kant urged the DOL to continue the statutory
support for utilizing estimates. This was deemed critical by Mr. Kant. He
noted that some employers might balk at the use of estimates for fear they
would confuse participants, which supported the request to have more time
to prepare these statements.
On the point of format, Mr. Kant believes the concept
established in the FAB would not preclude the use of multiple documents.
It was noted in an example that this is very important due to the business
realities of multiple service providers often supplying information. In
one example, Mr. Kant noted that Fidelity systems do not speak to each
other, so if a client had a brokerage account it would not be reported
with other retirement assets held at Fidelity in retirement plans. It was
suggested that any attempt at integrating this activity would require
tremendous time, expense and resources. It was noted that participants
were selecting different vendor products and that they would not be
surprised at seeing statements in different formats or from different
sources.
In matters related to content, Mr. Kant noted that the
PPA states that benefit statements must include any limitation on a
participant's rights “under the plan,” but the FAB provides that this
statement disclosure need not include limitations imposed by investment
vehicles or by applicable securities law.
Mr. Kant questioned whether the disclosure of permitted
disparity is required for defined contribution plans, in part due to the
statutory language. The accrued benefit in a DC plan is the account
balance rather than a contribution. The exception to this rule was noted
around insurance products, such as annuities.
In his closing remarks Mr. Kant noted the FAB contained
a requirement for the DOL to publish a model participant statement. Mr.
Kant requested that any model statement be for educational purpose only,
and that the vendors have significantly different statement formats which
could overburden the service providers to the industry seeking to conform
to a model statement.
Testimony of Thomas Finnegan of the Savitz Corporation,
representing the American Society of Pension Professionals and
Actuaries(ASPPA) - Mr. Finnegan, presenting on behalf of ASPPA, is a
Principal and Director of Compliance with the Savitz Corporation in
Philadelphia. While Mr. Finnegan works with a broad and diverse group of
clients, he noted that ASPPA’s membership concentrates primarily on
small to medium-sized plans. His testimony focused primarily on the
participant statement requirements for defined benefit pension plans.
Mr. Finnegan began his testimony by providing some
background on the ERISA rules and subsequent proposed regulations that
direct the manner, content and form of benefit communication to employees.
He stated that since regulations were never finalized detailing the
content of defined benefit statements, that it was important to assess
current marketplace practices to understand what actions plan sponsors
currently employ to communicate benefits, and the degree to which the
benefit statements required by PPA could become too onerous. PPA requires
that a plan sponsor either (a) issue a benefit statement to participants
on a triennial basis, or (b) issue a notice to participants annually
notifying them of their right to request a benefit statement.
Mr. Finnegan noted that current practice can be viewed
along two continuums – content and incidence. Common or basic statement
content typically includes the accrued benefit, vested benefit or percent,
and a projection of benefit to normal retirement age. In the case of cash
balance plans, the statement will appear as a DC-like statement
demonstrating activity in theoretical accounts. Additional content can
include core data used for the calculation or estimations of social
security. The incidence of statements is dependent on the size of the plan
sponsor:
Number of participants |
Percentage providing annual
statements to active participants |
Less than 10 |
Over 90% |
10 to 100 |
Over 75% |
101-500 |
Less than 50% |
More than 500 |
Varied – customized; use of technology
for on-demand content |
Mr. Finnegan indicated concern that if the benefit
statement regulations are too onerous, many employers will opt to provide,
in lieu of the triennial statement, the alternative annual notice
informing participants of their right to request a benefit statement.
Rather than improving participant communication, this could result in
fewer statements being provided regardless of the size of plan sponsor or
number of participants.
Mr. Finnegan then provided some feedback around the
specific issues addressed in PPA. He raised two concerns with statement
content:
-
Explanation of permitted disparity: Rather than
require a description of permitted disparity within the benefit statement,
enable the requirement to be met by referring the participant to the
Summary Plan Description. Clarify that a description of permitted
disparity is not required to the extent that it is only being used to
satisfy nondiscrimination and coverage testing requirements.
-
Floor-Offset Plans: Benefit statements should be
required to disclose the net benefit to the participant after the offset
of the defined contribution benefit. Presenting the gross benefit prior to
offset could be misleading to participants.
Mr. Finnegan pointed out that several organizations
have already commented on the timing difficulties associated with
producing benefit statements within 45 days of the close of the plan-year,
especially for plans valued on the last day of the plan year. It was
recommended that the deadline for defined benefit plan statements coincide
with the date for distributing the summary annual report to participants.
Mr. Finnegan testified that a data standard beyond that
required by valuations could drive plan sponsors to utilize the
alternative notice. He recommended that the DOL specifically authorize the
use of valuation–quality data for purposes of producing the periodic
statements.
Finally, Mr. Finnegan recommended that frozen plans be
exempt from the periodic statement requirement to the extent that no
further benefits are accrued – essentially creating comparability
between vested terminated participants and active participants in frozen
plans.
In his closing statement, Mr. Finnegan reiterated that
if the goal is to improve participant communications, forthcoming guidance
should:
-
Encourage the issuance of periodic defined benefit
statements by limiting the cost of compliance and directing reasonable due
dates, and
-
Ensure the statement provide meaningful information
in an understandable manner.
Testimony of S. Derrin Watson, Esq. - Mr. Watson stated that although employed by SunGard, he
was appearing on his own and these are his views. His testimony was not
offered on behalf of SunGard, Relius or the “tens of thousands” of
employers whose plans use [Relius] products.
Mr. Watson is an ERISA attorney employed by SunGard’s
Relius Division. Mr. Watson indicated that he is a pension educator, who
is responsible for presenting classes, seminars and webcasts for the
pension community such as corporation, banks, insurance companies,
attorneys and accountants as well as third party administrators.
Mr. Watson offered his testimony in connection with the
PPA’s new rules requiring automatic benefit statements. His focus was
primarily addressing defined contribution plan issues relative to the
Working Group’s request for an understanding of how the retirement
community can respond to the new PPA benefit statement requirement. He
stated that the retirement community is trying to respond in good faith to
the statute even though they are less than thrilled with these
requirements.
Mr. Watson stated that since the passage of PPA, he has
held 13 classes across the country with parties representing all types of
plans. He noted that many of his classroom questions focus upon the
participant benefit statement requirements. In testifying before the
Council he considered the Council’s questions. However, he believed that
more information could be gained by addressing issues identified through
the practitioners’ question. Through those classroom questions he
formulated his testimony on the issues of Timing, Content and Usefulness
of the Benefit Statements. The practitioner questions center on the
application of the new requirements to particular situations, how to
assist the participants through the benefit statement information, and do
the prepared benefit statements show that the practitioner has acted in
good faith to comply with FAB 2006-3? He indicated that all the questions
he is asked have helped him to realize that the pension community has many
different investment and administrative styles. Given that fact he
recommends that the DOL must consider the value of the statement
requirements in individual situations.
Mr. Watson then offered and discussed a series of
practitioner questions which helped him to prepare his testimony on the
Timing, Content and Usefulness of Statements.
Mr. Watson then presented several different fact based
questions addressing Timing. For example, how valuable is the PPA’s
quarterly statement requirement for DC plans where an employee may only
make deferral or investment elections annually. He believed that
statements should be required no more frequently than was consistent with
the changes permitted under the plan’s provisions.
He further stated that each unique set of plan
circumstance will generate differences which need to be addressed through
the statements in the simplest manner possible in order to have the most
utility for the Participants. Although a question addressed whether the
DOL needed to give guidance relative to the most common circumstances for
the masses; Mr. Watson stated that it is his position that the fringe
areas should not be forgotten by DOL guidance. These fringe areas include,
but are not limited to, investments in pooled accounts, life insurance,
zero balance accounts and accounts which have bifurcated investments
including both mutual funds and pooled account investments. He contends
that they all need to receive guidance to be most beneficial to the
practitioners.
Mr. Watson then raised issues concerning the content of
statements regarding Vesting and whether Vesting is best presented through
a summary plan description or an attached vesting schedule. He believes
that vesting is one of the most important elements required on the
statements and that a sponsor must give a participant a starting point to
understand what vesting is and how it is determined even if not certified.
Because a participant wants to know quickly what the vested balance is, a
sponsor may want to give the vested amount with qualification that it will
be revisited at retirement. He testified that merely giving the
participant an SPD does not necessarily educate the employee with the
knowledge to address numerous special circumstances; military, being
rehired, breaks in service, leaves of absence, and service before a plan
was adopted. He explained giving a participant the vesting percentage, and
not an actual number, without a mechanism to calculate is insufficient. He
clearly believes that the statement should show the vested balance and
total balance.
He testified that in his classes 60% of the
practitioners’ plans supply the vested account balance while the
remaining 40% may not, which may be because of lack of timely data or time
constraints. His viewpoint is that the best approach is to give sponsors a
reasonable time to include the vesting information and at the present time
45 days generally is not sufficient. He believes that in time the 45 days
may be sufficient for certain plans, such as mutual fund plans, but for
other plans with unique investments such as pooled accounts, real estate,
privately held stock, they will always require additional time.
With respect to actual types of investment to be
disclosed on the statements, specifically, pooled trustee directed
accounts, he recommended that participants not be given itemized lists of
stocks because this data will confuse participants, except when the
investment data deals with Company stock, which he contends should be
separately itemized. With respect to plan restrictions and what is needed
to be included on the statement, he recommends that the benefit statements
should disclose those investments which have limitations on investment
timing and any other plan imposed restrictions.
Mr. Watson testified that he understands the DOL’s
concern for a need for statements with current and timely information
because the older the data is, the less useful it becomes. He further
stated his desire that the DOL not use its guidance to impose upon plans a
requirement for quarterly valuations where it will result in unnecessary
cost, repetitiveness or, stale quarterly data with respect to an annual
valuation plan.
Mr. Watson concluded his testimony by stating that the
burdens and expenses of producing and distributing benefit statements must
be measured relative to the value of the additional information to be
provided. The DOL guidance must be flexible and has to grant Sponsors
sufficient time due to each plan's different investment scenarios and plan
administration choices. This greater time is necessary to allow Sponsors
to create a useful and informative benefit statement for participants.
Testimony of Judith Mazo, The Segal Company - Ms. Mazo is Senior Vice President and Director of
Research for The Segal Company, a national actuarial benefits and
compensation consulting firm.
Ms. Mazo’s testimony focused on benefit statement
issues related to multiemployer plans. Ms. Mazo noted at the outset that,
prior to the passage of the Pension Protection Act of 2006, multiemployer
plans were generally not required to produce an individual participant
benefit statement, even on request. Thus, Ms. Mazo commented that unlike
the case with industry practice for single employer plans, it is very rare
that multiemployer plans provide statements on an automatic basis.
Ms. Mazo cited key differences between multiemployer
plans and single employer plans that make the provision of multiemployer
benefit statements more challenging. First, electronic communication is
much harder between the multiemployer plan and their participants because
participants are generally not working in one place where there is regular
access to a computer and many multiemployer plans do not have a website.
In this regard, Ms. Mazo speculated that only 20 to 30 percent of her firm’s
multiemployer clients have websites.
Secondly, Ms. Mazo noted that multiemployer plans
generally collect data from numerous sources and individual participant
data need not necessarily be exact data prior to the point that the
participant retires and commences benefit distributions. Thus, for
multiemployer plans there is much less of a chance than there is with a
single employer plan that the data will be exact on an ongoing basis.
A third element of multiemployer plan challenges that
Ms. Mazo noted is that in her view, multiemployer plans have far more
terminated, vested participants than do most single employer defined
benefit plans because multiemployer plans do not, as a rule, make
distributions prior to early or normal retirement age. Thus, there are
more participants with historical information that may not be as accurate
since single employer plans are much more inclined to cash out the
individual.
Ms. Mazo next testified that in her view it would be
impossible for defined benefit plans to give individual benefit statements
45 days after the close of a plan year if plans must include all
information about benefits that were accrued during that plan year. In her
firm’s experience, it would take roughly two months after getting clean
data from a client to produce benefit statements, and it usually takes two
to three months after the close of the plan year for the clients to
assemble that kind of data. In response to questions, Ms. Mazo pointed out
that: (i) the statement delivery time frames for her firm would be per
plan, (ii) defined benefit plans would get some relief if the statement
could be based on data as of the end of the prior year; and (iii) the
burden on DB plans would be significantly less if the statements could be
produced as a side product of the annual actuarial evaluation.
In response to questions regarding whether it might be
helpful for plans to simply provide a summary of the determinants for a
given participant’s benefit (rather than going through the process of
determining the actual vested benefit), Ms. Mazo speculated that that
information would be helpful but may not satisfy the requirements of PPA.
In response to other questions, Ms. Mazo felt that
there is the possibility that confirming and calculating participant data
would be very difficult initially, but then would become less difficult in
subsequent years.
In response to another question, Ms. Mazo responded
that the incremental cost of preparing and delivering participant
statements would likely come from the defined benefit plan fund and would,
therefore, likely reduce benefits. On this point, Ms. Mazo later in her
testimony confirmed that the same would also hold true for defined
contribution plan statements.
Lastly, Ms. Mazo concluded her testimony by pointing
out that in the context of multiemployer defined contribution plans, which
are becoming more and more prevalent, there still will be difficulties
meeting a 45-day delivery requirement because data needs to be accumulated
and put in the form of a statement.
Testimony of Suzanne Samuelson, Mercer Human Resource
Consulting - Suzanne Samuelson is a communications consultant and a
principle at the Washington, D.C. office of Mercer Human Resource
Consulting, with 25 years of benefit consulting experience. She answered
each of the eight questions that the Working Group posed to her.
First, as to what information needs to be disclosed on
all benefit statements, the two most important items are the accrued
benefits and the vested accrued benefits. Projected benefits at retirement
for defined benefit participants would be helpful so as to provide
participants with a better picture of their future. A glossary of the key
terms on the statement would also be helpful. As for defined contribution
plans, the diversification information should be written in simple layman’s
terms. The best advice is to simplify the description. If the statement
displays the investment return, the statement may then drive the
participant to act.
Second, regarding the time frames to furnish the
benefit statements and the age of the information, statements for defined
benefit plans take at least a six- to nine-month period to produce in
order to assure that the data is correct. Quarterly disclosure is more
reasonable for defined contribution plans so that participants can
properly manage their accounts.
Third, as to the methods of delivery for the
statement, all methods should be permissible, with electronic delivery the
favored mode for organizations that use that means as a primary
communication tool. Online statements can also provide connections to
other helpful sites such as modeling tools, changes to defined
contribution options, and summary plan descriptions.
Fourth, to assure that participants and beneficiaries
understand the information provided on the benefit statement, it is
critical that disclosure be limited to a single page (with
cross-references to the summary plan description) and extraneous
information be kept at a minimum. There should be consistency in
formatting between the benefit statement and the summary plan description.
Fifth, as to the current practices used by
administrators in furnishing benefit statements, most administrators of
defined contribution plans are currently provided statements with the
required personal data. However, data for the defined benefit plan
disclosure must be of the highest quality; collecting data, reviewing it
and scrubbing for accuracy takes time and is expensive.
Sixth, regarding disclosure of other information on the
benefit statements, the data used to generate the calculation of the
defined benefits’ accrued benefits (e.g., pay, hours, and service)
should be disclosed and the participant should be given the opportunity to
correct any incorrect data.
Seventh, regarding disclosure of information relating
to diversification and risk under a defined contribution plan, such
information is already being disclosed. Reference to the limitations in
the summary plan description should be utilized instead of detailing such
information on the statement.
Lastly, instead of focusing on reduction of duplication
with other disclosures, the key priority should be providing the
participant with a clear picture of his/her retirement benefits.
Duplication may actually result in reinforcement.
Testimony of Peter Klein, Local 26 IBEW-NECA Joint
Trust Funds - Peter Klein is the Fund Administrator for local 26;
IBEW-NECA Joint Trust Funds. He is responsible for two pension plans, a
defined benefit and a defined contribution plan for approximately 9000
active workers and 1200 retirees, in addition to administering health and
welfare benefit plans. Mr. Klein has more than 35 years of benefit
experience. Mr. Klein chose to answer the questions set forth in the
Working Group’s purpose statement.
First Question: What information needs to be disclosed
on all automatic benefit statements? How will statements vary for defined
benefit versus defined contribution plans? How might they vary between
single employer and multi employer?
Universally the accrued benefit and a projected benefit
at normal retirement age are essential for defined benefit plans. In DC
plans, the benefit accounting focuses on contributions in the account at a
certain date, plus earnings or losses on individual investments,
regardless of who directed the investment. While timing is mentioned as an
issue, it was felt these were key components. Mr. Klein suggested that
additional definitions and caveats should be included or observed. He felt
very strongly that any projected information be fully explained and clear
as projections can vary. He recommended that DB statements should reflect
not only accrued and projected benefits but also show the calculation.
DC plans require statement detail that is clear and
shows performance by investment type or asset class. All essential
information - details, benefit calculations and certain demographic facts
- must be presented in a simple and concise way for participant review,
keeping in mind that the participant may have little investment expertise
or much interest in details. He suggested the most daunting and perhaps
most challenging task is the visual presentation of the material. He
recommended that the participant’s eye be guided to important statement
information.
Question two: What are the appropriate time frames
within which benefit statements should be furnished? Should there be
limits on the age of information disclosed and if so what should the
limits be?
Mr. Klein suggested that annual benefit statements have
been normal throughout his 35 year career. He felt strongly that
participants need reminders of annual benefit accruals. He observed that
all too often the participant doesn’t begin to review the statement
until they are close to retirement. Providing annual statements keeps the
message alive while allowing the participant to identify issues if a
mistake has been made and requires correction.
The 45 day requirement in FAB 2006-03 for furnishing
defined benefit statements is an impossibility for most multiemployer
plans. Collection and reconciliation of data in multiemployer plans can
take much more than 45 days. Some of the funds have hundreds of
participating employers submitting records and at various times, making
such a short time frame an important issue. Mr. Klein recommended a more
realistic goal would be to align the annual statements with Form 5500
requirements, which is about six months after year-end. For defined
contribution plans, Mr. Klein suggested that 45 days was more than
reasonable given the advancement in vendor reporting and recordkeeping.
Question three: What should be permissible methods for
furnishing the benefit statement information to participants and
beneficiaries?
Mr. Klein suggested that while technology is evolving
and being accepted by more participants, he finds that many - although
this number is going down each year - do not have access to a computer at
home. He reasoned, however, that the time to convert to the electronic
only solution is near. For now, a paper alternative is important to reach
all participants and beneficiaries.
Question four: How can plan administrators assure that
the participants and beneficiaries understand the information provided on
the benefit statement? Are there approaches to the production of benefit
statements that would result in better decision-making capacity on the
part of participants and beneficiaries?
Mr. Klein reasoned that the most important focus is
simplicity, and benefit statements need not be made more complicated by
using complicated terms and language. This area in particular is ripe for
electronic resolutions. It was felt that the current technology available
mapped for a plan would provide all answers and relevant links that a
participant should need.
Question five: What are current practices in furnishing
benefit statement information and how would they be required to change to
accommodate particular disclosure options? What costs or burdens may the
plan sponsor or administrator weigh in making such accommodations? If
information on the benefit statement is dependent on multiple sources,
what disclosure and cost consideration may be considered, especially as it
relates to producing a single benefit statement?
Mr. Klein offered that this was doable utilizing
technology. This presented an issue in Mr. Klein’s mind in that most
statements are paper. He offered that a time table should be set to cut
over to electronic benefit statements and that this would provide the
opportunity to get to a single statement bearing a consistent message.
Question six: In the context of DB plans, what benefit
information is necessary and sufficient? If data was used in making such
calculations, should that data be displayed?
What cost or burdens may the plan sponsor or plan
administrator consider if the participant requests individualized
projections of benefits?
In addition to the accrued benefit and a projected
benefit to retirement date, a participant must know if he or she is
vested. Statements should be kept simple. Data used must be disclosed to
allow for verification and understanding. Finally, Mr. Klein suggested
that additional computations are not something he supported. He did not
feel that additional information should be considered in DC statements
beyond the basics, and FAB 2006-03 offered clear language that was easy to
understand and would constitute a safe harbor.
Testimony of Diane Gallagher, JPMorgan Retirement Plan
Services - Ms. Diane Gallagher, manager of participant
communication and education services for JPMorgan Retirement Plan
Services, presented testimony before the Working Group on Participant
Benefit Statements (the “Working Group”) regarding the content of
employee benefit statements, the medium for communicating such content and
the timing of such communications.
Ms. Gallagher focused her comments on participant
benefit statement issues relating to defined contributions plans,
deferring to planned testimony from the American Benefits Council to the
Working Group for comments on defined benefit plan statements and the
integration of defined benefit and defined contribution plan statements.
Ms. Gallagher noted that her organization provides benefit statements to
its defined contribution employee benefit plan clients on a quarterly
basis, within ten days of the end of each calendar quarter. These
statements are provided in paper format for the majority of clients,
though the information on these statements is available electronically.
As to the content of participant benefit statements,
Ms. Gallagher emphasized the importance of the context around the
point-in-time account balance information contained on typical participant
benefit statements. Specifically, Ms. Gallagher noted the need to provide
information to participants to enable them to track progress toward
individualized retirement income goals as they move toward retirement.
Ms. Gallagher presented retirement as a purchase –
and the single largest purchase – that individuals make. As a provider
of services for this purchase, Ms. Gallagher perceives that she and others
in the defined contribution retirement plan services industry have a duty
to give individuals the opportunity to retire with sufficient income by
providing information to participants at all life stages in a manner that
they will understand and value.
The content and impact of participant retirement
savings communications have changed dramatically over the last decade. Ms.
Gallagher asserted that the prior industry practice of inundating
participants with lengthy and detailed investment information has
contributed to feelings of intimidation regarding retirement savings and,
consequently, to the low savings rates prevalent among retirement plan
participants and Americans generally. In developing an alternative
approach to participant communications, Ms. Gallagher and her organization
focus instead on the investment behaviors and tendencies of individuals.
Generally speaking, a majority of employees lack the
time, talent or interest in investing and would rather delegate management
of their retirement accounts to someone else. For an individual who is not
participating in an employer-provided retirement plan, the force of
inertia can prevent future participation, particularly when the investment
options presented are numerous and complex. Studies by JPMorgan Retirement
Plan Services have shown that individual investors are “predictably
irrational” in their investment decisions, relying on instinct rather
than information, and that a majority of 401(k) plan participants are “investors
by accident,” lacking meaningful understanding of the investment options
of their respective plans. In addition, individual retirement savings
rates suffer because many individuals, particularly young working
individuals, do no prioritize retirement savings among daily expenses and
activities.
Considering these obstructions to retirement savings,
Ms. Gallagher noted that plan design is an important first step in solving
the problem. Provisions such as automatic enrollment (to turn the power of
inertia in favor of both employees and employers), automatic contribution
rate increases, target-date investment options and managed account options
are plan design components that can counter negative participant
investment trends and increase savings. The last two of these –
target-date funds and managed accounts – would be particularly
attractive to the employee population seeking to delegate account
management.
Once such plan design elements are in place, Ms.
Gallagher stated that the discussion around participant communications
will follow with greater ease. She highlighted five key tenets in
communicating retirement benefits: (1) keep it simple for the population
that may not have the time for or interest in the subject; (2) keep it
personal to drive home the impact of current investment decisions on
retirement in the future, using personal data whenever possible; (3) tie
money to the emotion, using examples to highlight retirement as a new
period in an individual’s life that has a price tag attached; (4) do the
right thing by building the right plan design and offering the right tools
and services; and (5) cultivate a long term relationship through
continuous communication rather than a one-time distribution of a binder
of information at initial eligibility.
Incorporating these ideas into retirement plan
offerings and communications, Ms. Gallagher sees the value of participant
benefit statements as providing not only a point-in-time snapshot but also
a check-up on how the individual is tracking toward retirement. Rather
than highlight the difference between growth and value investing, Ms.
Gallagher asserted that employee communications should include examples
and information to motivate employees to participate in their
employer-provided plans. Participant benefit statements should help
participants answer the fundamental question, “Am I on track to retire
when I want with how much I need?”
Testimony of Kyle Brown, Watson Wyatt Worldwide, on
behalf of the American Benefits Council (the “Council”), September 18,
2007 - Mr. Brown focused on compliance issues for defined
benefit plans. He opened by describing Section 508 of the PPA and
applauding the DOL for offering guidance in FAB No. 2006-3.
The Council is pleased to see within the FAB a
provision allowing for good faith compliance by plans subject to the
requirements of Section 508 of the PPA. Such a good faith standard allows
plan administrators to move forward in a reasonable manner without concern
that rules will later be promulgated that are inconsistent with their own
good faith interpretation of the statute. He and the Council feel the good
faith standard should be preserved unless and until future clarifying
guidance is issued by the DOL.
The Council is also pleased to see included in the FAB
an acknowledgement by the DOL that benefit statements may be delivered
pursuant to current DOL electronic delivery rules, or alternatively,
pursuant to rules under Treasury Department regulations. The electronic
delivery rule in the Treasury Department regulation provides greater
flexibility for plan administrators in satisfying their delivery
obligations than the current DOL rule. The Council believes that
employers, plan administrators and participants are best served by
electronic communications, which are more effective, less expensive, and
consistent with the increasing technological skills and usage rates of
American workers. The Council asks that any revision to the electronic
delivery rule be made applicable to participant benefit statements, and
that the DOL specifically makes it clear that a plan administrator may use
electronic medium to deliver benefit statements to those participants and
beneficiaries who have access to such medium.
The focus of the DOL should be on the core information
disclosed on benefit statements, to ensure statements are not overly
complicated. This will improve participants’ understanding of the plans
and simplify administrative requirements in producing statements.
The Council believes an explanation of the use of
permitted disparity of floor offset arrangement can be meaningfully
provided through a cross-reference to the plan’s SPD. For the vast
majority of participants, explaining the intricacies of permitted
disparity would not be meaningful. Also, multiple documents and multiple
sources, for benefit statement information, should be permitted for floor
offset arrangements. The Council also requests that future guidance from
the DOL makes clear that a plan’s vesting schedule can be explained by
cross-reference to the schedule contained in the plan’s SPD.
The Council also asks that the DOL issue final guidance
which provides that a plan administrator is not obligated to deliver to
participants and beneficiaries a benefit statement for the applicable plan
year, until the due date, including extensions, for the filing of the plan’s
IRS Form 5500. Mr. Brown noted there are many instances where it is not
cost effective to develop precise statements for every participant every
three years. The Council feels it is critical that the DOL regulations
permit reasonable estimates, as provided for in the statute. Full benefit
calculations, other than when a participant reaches retirement age and is
seeking distribution of benefits, are too costly to do on an interim or
annual basis. Deadlines should not be accelerated where estimates are
permitted and used, because such estimates still require a time consuming
process.
The Council urges the DOL to issue model statements for
use by plan sponsors. Model benefit statements should include a list of
required content, in addition to specific model language.
Lastly, Mr. Brown requested on behalf of the Council
that future DOL guidance addresses hybrid plans. Specifically, statements
regarding accrued hybrid plans need only include notional account
balances. To require that plans include both the participant’s single
sum benefit (notional account balance or current value), and an annual
projected benefit, is likely to confuse participants as to the value of
their accrued benefit.
Mr. Brown observed that movement toward hybrid plans
has been heavy in recent years, but then slowed leading up to PPA, for
fear of what PPA would address. Many plan sponsors are now awaiting
further guidance. Mr. Brown predicts a near future increase in conversions
to hybrid plans.
Testimony of Simone Rockstroh, Carday Associates, on
behalf of the International Foundation of Employee Benefit Plans,
September 18, 2007 - Ms. Rockstroh focused her comments on multiemployer
defined benefit plans. She indicated that the following should be included
in automatic participant benefit statements: the total accrued benefit and
total vested accrued benefit; if the benefit is not yet vested, the amount
of additional years of service necessary to become vested; hours earned
throughout the year and the total benefit and vesting credits earned for
the years; if a percentage of contribution plan, the dollars contributed;
death benefit if there is one; and a disclaimer indicating that all
information is an estimate only and is subject to correction.
Ms. Rockstroh indicated that participants in
multiemployer plans work for many employers throughout the years and that
many multiemployers already provide participants an annual or quarterly
statement of contributions and hours received from various employers. She
advised that projected pension benefits are usually not determined for
multiemployer pension plans.
With respect to the timing of the statement, she
indicated that it is almost impossible for a multiemployer defined benefit
plan to meet the 45 day time frame for issuing benefit statements if the
statement is to include the accrued benefits as of the close of the plan
year. For example, she indicated that for a calendar year plan, hours
worked in December are usually due to the fund office by the end of
January. She indicated that it would take some additional time - at least
30 days - for hours and contributions to be posted, balancing to occur and
the benefit statements to be issued. She indicated that one administrator
with whom she conferred suggested that multiemployer benefit plans be
given until the end of the following plan year to deliver statements
covering the previous plan year. When asked about timing of the
statements, she indicated that 4 to 6 months after the end of the plan
year would probably be adequate time based on the most current plan year
that ended.
As far as the method of furnishing the statements, she
testified that most multiemployer plans do not have websites; nor are
there kiosks at the job sites. She indicated that paper is still the best
method to communicate to the multiemployer participant and his or her
spouse, but that electronic notices and website access should be made
available as well, if possible, for those who do have ready access to
computers and e-mail. She advised that a 2004 International Foundation of
Employee Benefit Plans survey found that 90 percent of 105 multiemployer
plan respondents used a paper format for annual statements and mailed them
to participants‘ homes and less than one percent e-mailed the statements
to participants.
Testimony of Adam C. Pozek, Sentinel Benefits Group,
Inc. - Mr. Pozek is the Vice President for Consulting Services
for Sentinel Benefits Group in Boston, serving a variety of plans, small
and large. He testified on behalf of Sentinel, ASPPA and the Council of
Independent 401(k) Recordkeepers (CIKR). His testimony was focused
primarily on defined contribution participant statements specifically
addressing the following:
-
Reporting of underlying investments of pooled
accounts and collective trusts
-
Use of multiple documents to provide participant
information
-
Reporting permitted disparity
-
Reporting of vested information
-
Due dates for statement delivery
-
Determination of what is considered recently
available information.
Mr. Pozek expressed concern about the requirement that
participant-directed defined contribution plans must disclose information
on each investment to which the participant accounts have been allocated.
He has interpreted this to mean that to the extent that an investment
option might include pooled accounts or collective trusts, that the
benefit statement would have to disclose each asset held by those accounts
or trusts. This would generate a significant burden for sponsors and
information overload for participants. He recommended that plan sponsors
not be required to furnish this information, but that if requested by
participants, the level of disclosure would be similar to that required by
the Form 5500.
Mr. Pozek noted that plan sponsors can currently use
multiple documents to disclose benefit statement information as long as
there is an initial explanatory notice informing the participants that
they will receive information from multiple sources. He recommended that
this flexibility continue. Small employers, in particular, often engage
several providers to assist with plan recordkeeping, administration and
investments.
The Pension Protection Act requires that benefit
statements include “an explanation of permitted disparity…in
determining accrued benefits.” Mr. Pozek contended that it is unclear
that the use of permitted disparity in determining defined contribution
allocations to participants directly impacts the determination of the
accrued benefit. Furthermore, permitted disparity is required to be
disclosed in Summary Plan Descriptions. Mr. Pozek recommended that the
statement simply cross reference the SPD for details on the use of
permitted disparity. Plans should be exempt from any requirement to
include permitted disparity language to the extent that there are no
contributions made for a particular plan year.
Mr. Pozek then moved onto the topic of participant
vesting. The PPA requires disclosure of either the participants’
non-forfeitable benefits, the earliest date on which the benefit is fully
vested or information so that the participant can determine his own vested
benefit. Mr. Pozek testified that, particularly for plans that require
1000 hours of service, it would be very difficult (cost and effort) to
provide an accurate assessment of vesting within the 45 days required to
furnish information. He urged for guidance that plan sponsors could simply
reference the SPD, or provide a vesting schedule would be sufficient to
fulfill this requirement, without requiring the disclosure of specific
participant date (for example, date of hire, hours or years of service).
Mr. Pozek addressed the timing of statement delivery by
contrasting trustee-directed plans with participant directed plans. Some
plans have both trustee directed and participant directed accounts. For
trustee-directed plans, where investment decisions are made by the
trustee, investment gains/losses are typically allocated to participant
accounts as of the end of the plan year. Benefit statement are typically
prepared for participants at the same time as the Form 5500 and Summary
Annual Report (SAR). Since small businesses often do not determine
employer contributions until their tax returns are completed, they do not
want to provide incomplete statements. Likewise, earnings are not
allocated until the contribution is determined, because the allocation is
based on the account balance at the beginning of the year, plus some / all
of the contributions for that year. Finally, trustee-directed plans often
utilize assets that are not easily valued. These factors make it
impossible for trustee directed plans to meet the 45 day requirement. Mr.
Pozek recommends that the deadline be extended to when the SAR is due for
these plans.
For plans that are partially participant directed/
partially trustee directed, Mr. Pozek recommends that the participant
direct portion only be subjected to the 45 day requirement, and the
trustee-directed portion only be provided at the time the SAR is due.
Finally, Mr. Pozek noted that there are a number of
factors that can impact not only the data available, but how quickly it
can be compiled and presented in an understandable format. As such, the
currency of data available to be reported to participants varies based on
facts and circumstances. Mr. Pozek recommended that plans continue to be
given flexibility with respect to the “most recently available
information” – which would be a good faith determination based on
relevant facts and circumstances.
Testimony of Rebecca Davis, Pension Rights Center
- Although participants may find projections helpful in
retirement planning, there is no need for these projections in benefit
statements of DB or DC plans. The Center believes that the 20% level for
diversification is more than a meaningfully diversified portfolio would
tolerate. Participant statements should also include disclosure of
participant rights to divest their holdings of company (sponsor) stock.
The Center has a strong preference for a single statement for a plan, but
if multiple statements/documents are permitted, any vesting information in
the documents should provide the participant’s vested percentage and a
simple example showing how to apply the percentage to employer
contributions. Social Security and other offsets should be estimated and
shown on benefit statements. Benefit statements should show the dollar
impact of early retirement and joint and survivor reductions in benefits,
and provide other information relative to projected benefits. Any
subsidized early retirement benefits should indicate circumstances under
which the subsidy could be lost. No estimate should be considered “reasonable”
if the plan has or could easily obtain sufficient information to provide a
benefit statement that reflects the actual benefit, and the statement
should specify any assumptions made in estimating benefits and the
procedure for correcting the estimate. In multiemployer plans, any
estimates should be realistic, and disclosure should be made of possible
reductions in benefits. Cash balance and other hybrid plans present unique
problems, including frequency of statements for self-directed accounts,
how to state and disclose assumptions regarding the retirement annuity,
and interest-crediting disclosures, among many. The Department should
provide specific guidance and regulations for these arrangements. While
electronic delivery has advantages, participants should affirmatively
elect electronic transmission and renew it every three years. Sponsors
should retain electronic submissions for a significant period of time. The
Pension Rights Center asks the Working Group to recommend to the Secretary
to ask Congress to amend the statute to eliminate the alternative notice
provision for defined benefit plans.
List of witnesses and other submissions
Witness Statements on July 12, 2007
-
Robert Doyle, Employee Benefits Security
Administration and Jeffrey Turner, EBSA
-
Douglas Kant, Fidelity Investments
-
Thomas Finnegan, The Savitz Organization, on behalf
of ASPPA
-
Derrin Watson, SunGard Relius
-
Suzanne Samuelson, Mercer Human Resource Consulting
Witness Statements on September 18, 2007
-
Peter Klein, Local 26, IBEW – NECA Joint Trust
Funds
-
Diane Gallagher and Robert Holcomb, JP Morgan
-
Adam Pozek, Sentinel Benefits
-
David Wray, Profit Sharing/401(k) Council of America
-
Simone L. Rockstroh, Carday Associates Inc (for
International Foundation of Employee Benefit Plans)
-
Rebecca Davis, Pension Rights Center
-
Kyle Brown, Watson Wyatt (for American Benefits
Council)
Other Materials
-
Report of the 1987 Advisory Council Work Group on
Individual Benefit Reporting and Recordkeeping
-
Statement of US Chambers of Commerce, the Small
Business Council of America, and the American Society of Pension
Professionals & Actuaries
-
Extract of relevant portion of the Pension
Protection Act of 2006
-
US Department of Labor’s Field Assistance Bulletin
No. 2006-03
-
Survey of Defined Contribution Plan Participant
Statements 2005 (David Wray)
-
Written submission by AARP
-
Written submission by John Simmons
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