Report Of The Working Group On Participant Benefit Statements
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
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.
Prior Law and Regulations, New Law, and Initial Guidance
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 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.
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.
Scope of the Working Group’s Paper and Questions Distributed to Potential Witnesses
The following is the list of questions (represented as not exhaustive) distributed to potential witnesses prior to the testimonies in July and September 2007:
Concerns of the Department of Labor, Participants, Plan Sponsors and Service Providers
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.
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.
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.
Working Group’s Observations, Discussions and Recommendations
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
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
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).
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.
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.
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
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.
Summaries of the Speakers and Written Testimony
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:
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:
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:
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:
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.
Additional Information Sources
List of witnesses and other submissions
Witness Statements on July 12, 2007
Witness Statements on September 18, 2007