Confusion reigns among practitioners trying to comply with the new benefit statement requirements of PPA ’06. The DOL has issued Field Assistance Bulletin 2006-03, (FAB) which provides some “good faith” standards for the statements, but those standards leave many questions unanswered. Complicating the matter is that plans have different investment platforms, as well as an array of service providers, each with different information reporting responsibilities. For example, the financial institution may have investment information and the third party administrator may have vesting information.

For plan years beginning after December 31, 2006, ERISA §105, as amended by PPA §508, requires the plan administrator of a defined contribution plan to provide a benefit statement at least once each calendar quarter to participants (or beneficiaries) entitled to direct any of their account investments, and at least once each calendar year to participants (or beneficiaries) not entitled to direct their account investments. A delayed effective date applies to collectively-bargained plans, and different standards apply to defined benefit plans.

This Technical Update will demonstrate a practical approach for handling several different plan situations. This analysis is based on our reading of ERISA, as amended by PPA, and the FAB. In each case, the employer sponsors a qualified plan with some participant direction of investment, and therefore the quarterly statement requirement applies. It is possible that subsequent guidance will alter these recommendations. The DOL has informally indicated that they intend to issue proposed regulations by this summer.

ERISA requires the quarterly benefit statements to include, the following 7 items:

1. The participant’s total account balance.
2. The participant’s vested account balance.
3. An explanation of permitted disparity if used in the plan.
4. The value of assets allocated to the participant’s account.
5. Any plan restrictions on investment direction.
6. Diversification information. The easiest and safest way to provide this information is through use of the DOL good faith language in the FAB.
7. The DOL Web site for investment information.

Situation 1: X Co. maintains a calendar year 401(k) plan with deferrals and matching contributions. Matching contributions are subject to a 6-year graded vesting schedule. Participants can direct the investment of their entire accounts. The investment provider is Best Mutual Funds, and the plan provides daily valuation. The plan does not impose any restrictions on participant investment direction other than the participants must choose among 15 Best Fund options selected by X. Currently, Best has sent each participant a quarterly statement showing the participant’s account balance (including a breakdown by contribution types [deferrals and matching contributions]) and the value of the various funds in the accounts. Annually, the plan’s TPA sends each participant a statement showing the participant’s year-end account balance, breakdown of the contribution types and vesting percentages. To comply with the new benefit statement requirement, the TPA has agreed to provide a quarterly benefit statement to each participant with the information not provided by Best Mutual Funds.

This situation, the quarterly Best statement already satisfies requirements 1 and 4 of the new benefit statement requirement. Since the plan does not provide an integrated profit sharing allocation formula, the statement need not reflect requirement 3. The statement provided by the TPA will need to satisfy the balance of the requirements. The TPA will need to complete the following two steps to satisfy the new benefit statement requirement:

1. The TPA will need to send a notice explaining to each participant that the participant will receive a benefit statement in two parts: (a) the investment provider will continue to provide quarterly statements, roughly 30 days after the end of the quarter, showing account balance and asset valuations; and (b) the TPA, on behalf of the plan, will provide the balance of the information within 45 days after the end of the quarter. This notice is a separate one-time explanation the TPA must provide in advance of the May 15 date for providing the first benefit statement. The TPA also should give this “multiple sources” notice to new participants as they enter the plan.
2. The TPA should send a quarterly statement to each participant within 45 days after the end of each quarter. The statement should include the following information:
   • Vesting information. Since the employer generally does not provide the information necessary to determine the vesting percentages until late in the following year, the statement will include the participant’s vesting percentage for the matching contributions as of the latest date for which the plan has the information. For example, the TPA may not have the 2006 vesting information for the May 15, 2007, statement. Therefore, the statement would include vesting percentages as of December 31, 2005. The TPA would update the second (due 8/15/07) or third statement (due 11/15/07) with the 2006 plan year vesting information. Of course, the statement should state that the participant’s deferrals are fully vested. [Note: If the financial institution statement did not include the breakdown of the values of the respective contribution types, the statement with the updated vesting information would need to include that information so the participant could determine his/her vested interest.]
   • A statement that the plan does not restrict the participant’s rights to direct his/her investments, other than restricting the choice of funds.
   • A copy of the DOL diversification statement from FAB 2006-3.
   • A reference to the DOL Web site.

Note: With the exception of the vesting information, the information provided on the statement provided by the TPA will not change from quarter to quarter. Furthermore, the TPA only needs to update the vesting information (and include the breakdown of the contributions) once per year. Accordingly, once the TPA has updated the statement with the vesting information, the employer (or TPA) could use the same statement for that quarter and the next three quarters. Since the quarterly statements provide the same information provided in the annual statement, the TPA no longer needs to provide the annual statement.

Situation 2: Assume the same facts as in Situation 1, except X provides the vesting information to Best and Best includes that information in the quarterly statement it provides.

In this situation, the quarterly benefit statement the TPA provides needs to reflect requirements 5, 6 and 7 only. Unless the employer makes a change in the plan, these requirements will not change from quarter to quarter. Accordingly, with the exception of changing the date on the statement, the TPA could prepare a benefit statement and the employer could provide the same statement each quarter. Because the information is being provided by Best and by the TPA, the “multiple sources” notice described above is also required.

Situation 3: Y Co. maintains a 401(k) plan with a fiscal year ending April 30. In addition to the elective deferrals, the plan provides for a matching contribution and a discretionary integrated profit sharing contribution. Matching and profit-sharing contributions are vested under a 6-year graded schedule. Y generally determines the profit sharing contribution after the plan year ends (i.e., by the due date of the employer’s extended tax return), and the plan’s TPA allocates the contribution to participants’ accounts in January of the following year when the TPA prepares the Form 5500. Participants can make quarterly changes in the investment of their deferral accounts among several Best Mutual Funds. However, to reduce costs, the plan does not use daily valuation. Rather, the plan assets are pooled so Best does not have individual participant information. Consequently, Best does not provide statements to the participants. The trustee (owner of Y) directs the investment of profit sharing contributions and annually values the profit sharing accounts as of April 30. Currently, the plan’s TPA provides quarterly statements with account balance information using a balance forward approach. One of the quarterly statements each year will provide vesting information.

A “multiple sources” notice described above is not required since only the TPA will provide the benefit statement information. Because the participants can direct the investment of some of the assets in their accounts, the plan must provide a quarterly statement, even though the profit sharing information only will change annually. The TPA will send a quarterly statement to the participants consistent with the new rules in lieu of the quarterly statement it currently provides. The first statement under the new rules would be for the quarter ending June 30, 2007 (the first calendar quarter of the first post-2006 plan year), and the plan should send it to participants by August 14, 2007. The statement will include the following information:

• The participants’ 401(k) deferral and matching account balances and the value of the various funds in each participant’s respective accounts.
• The participant’s profit sharing account balance as of the most recently available information. For the period ending June 30, 2007 (and maybe the next two quarters), the statement may reflect the balance as of April 30, 2006. This information would not change until the plan completed the accounting for the April 30, 2007, plan year end. Probably, the February 14, 2008 statement would be the first statement to reflect the April 30, 2007 balance.
• Vesting information. As discussed in situation 1, the vesting information for the matching and profit sharing contributions likely will not be available until late the following plan year. Therefore, the statement will include the participant’s vesting percentages for the matching and profit sharing contributions as of the latest date for which the plan has the information (probably as of April 30, 2006). The statement also will explain that deferrals are 100% vested.
• An explanation of permitted disparity as it applies to allocations of the profit sharing contribution. The statement should provide a general explanation of the plan’s allocation formula, rather than of the specific allocations for any one participant or the allocation of any specific profit sharing contribution. Using a general explanation will avoid the necessity of updating this portion of the statement.
• A list of the profit-sharing plan investments, with their values. The values would be as of the most recently available valuation date. Since it is unlikely the April 30, 2007, valuation would be available by August 14, the plan would use the April 30, 2006, valuation. As with the profit-sharing account balance, the plan would likely continue to use that information until the February 14, 2008, statement. [Note: The inclusion of the trustee-directed profit sharing account investments may be burdensome to the employer and of little value to the participants since they have no control over the investments. However, the statutory provision appears to require the participant’s total account information and the DOL has not seen fit to provide any relief as of this time.]
• An explanation of the plan’s limitations on directing investments. This would include the fact that participants cannot direct the investment of profit sharing contributions, and that participants can exercise investment direction rights only once per quarter.
• A copy of the DOL diversification statement from FAB 2006-3
• A reference to the DOL Web site .

Note: In this situation, the only information that will change from quarter to quarter is the value of the elective deferral and matching accounts. The profit sharing and vesting information will change once a year (probably in the fourth quarter). The balance of the information on the statement should not change.

Situation 4: Z Co. maintains a calendar year 401(k) plan with deferrals and matching contributions. Matching contributions are subject to a 6-year graded vesting schedule. Participants can direct the investment of their entire accounts among 10 fund options. The investment provider is Best Mutual Funds, and it values the participants’ accounts daily. The plan does not impose any other restrictions on participant investment direction. For years, Best has sent participants a quarterly statement showing their account balances, the value of the various funds in each participant’s account (including a breakdown by contribution types) and vesting information. Consistent with the IRS’s electronic media regulations, a participant may elect to access his/her statement online rather than receive a paper copy of his/her statement.

Under this situation, the statement Best provides already satisfies requirements 1, 2, 3 (unnecessary), 4 and 5. Best will need to complete the following steps to satisfy the new benefit statement requirement:

1. For participants who did not elect to access their benefit statement electronically, Best will need to continue sending the quarterly statement to participants within 45 days after the end of each quarter. Best will need to add the following information to the statement:
   • A statement that the plan does not restrict the participant’s rights to direct their investments, other than restricting the choice of funds.
   • A copy of the DOL diversification statement from FAB 2006-3.
   • A reference to the DOL Web site.
2. Since Best provides continuous electronic access to statements, Best will need to provide a notice to all participants and beneficiaries: (1) informing them of the availability of the statements on the website; (2) providing access instructions; and (3) informing them of their right to a paper statement (at no charge). Best must provide this notice in advance of the May 15 date for providing the first benefit statement and then annually thereafter. [Note: The FAB is not clear as to whether the plan needs to provide this notice to all participants or just to those who have elected to access their statements online. However, since most financial institutions already include language on the paper statements encouraging participants to access the information on line rather than receive paper statements, the plan could satisfy this requirement for participants receiving paper statements by adding a sentence indicating they would still have the right to request paper statements if they accessed their statements online.]
3. Best will need to add to the online statement the restrictions on participant direction of investment, diversification statement and the DOL’s Web site on diversification.

Note: A “multiple sources” notice described above is not required since only Best will provide the benefit statement information.

Situation 5: W Co. maintains a calendar year 401(k) plan with matching and profit sharing contribution formulas. Matching and profit sharing contributions are subject to a 6-year vesting schedule. The plan offers a brokerage account option to all participants. Under the brokerage account option, the plan will establish a brokerage account at a trustee-approved financial institution and the participant may select from any of the investment options available through the brokerage firm (e.g., stocks, bonds, mutual funds). Participants who do not select the brokerage account option will remain in a pooled account invested by the plan trustee. For participants who have selected the brokerage account option, the brokerage firm provides monthly statements of the value of the accounts but does not provide vesting information or a breakdown of the deferral, matching, or profit sharing accounts. Currently, the TPA provides an end-of-year statement to all participants with vesting information and the breakdown of the various accounts. Generally, the TPA reports the profit sharing contribution for the year on an accrual basis.

Because all participants have the right to direct the investments their accounts in this situation, the plan must provide a quarterly statement to all participants, even though the account information for those participants in the trustee-directed account only will change annually. For participants electing the brokerage account option, the monthly brokerage firm statement already satisfies requirements 1 and 4 of the new benefit statement requirement. The statement provided by the TPA will need to satisfy the balance of the requirements. The TPA will need to complete the following steps to satisfy the new benefit statement requirement:

1. The TPA will need to send a notice to each participant who has elected the brokerage account option explaining that he/she will receive his/her benefit statement in two parts: (a) the brokerage firm will continue to provide monthly statements showing account balance and asset valuations; and (b) the TPA, on behalf of the plan, will provide the balance of the information within 45 days after the end of the quarter. This notice is a separate one-time explanation the TPA must provide in advance of the May 15 date for providing the first benefit statement. The TPA also should give this “multiple sources” notice to new participants who elect the brokerage account option as they enter the plan.
2. The TPA should send a quarterly statement to each participant within 45 days after the end of each quarter. Some of the information will differ depending on whether the participant elected the brokerage account option. The statement should include the following information:
   • For the participants with trustee directed accounts, the participant’s account balance and a list of the plan investments, with their values. The values would be as of the most recently available valuation date. In other words, this information will change only once per year. [Note: The brokerage firm already provides this information for participants electing the brokerage option. The balance of the quarterly statement will apply to all participants.]
   • Vesting information. Since the employer generally does not provide the information necessary to determine the vesting percentages until late in the following year, the statement will include the participant’s vesting percentage for the matching and profit sharing contributions as of the latest date for which the plan has the information. In other words, this information will change only once per year. Of course, the statement should state that the participant is 100% vested in his/her deferrals.
   • The statement that includes the update of the vesting information will need to include a breakdown of the value of the respective contribution types (i.e., deferral, matching and deferral accounts). Otherwise, the participant will not be able to determine his/her vested benefit.
   • The statement will indicate that the plan does not restrict the participant’s rights to direct his/her investments for participants electing the brokerage account option. For participants who do not elect the option, the trustee will direct the investment of their accounts.
   • A copy of the DOL diversification statement from FAB 2006-03.
   • A reference to the DOL Web site.

Note: The quarterly benefit statement can replace the annual statement the TPA has been providing.

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