It seems that every
time you turn around, you are required to provide yet another notice
to the participants in your company's retirement plan. While
plan-related notices are not a new phenomenon, the Pension
Protection Act (PPA) took the concept to a different level by
mandating a host of new notices.
Sponsors of 401(k) plans face the task of providing as many as 40
or more different notices. Some apply to all defined contribution
(DC) plans and others are plan-design or event driven. While
opinions differ on the most effective method to help employees
understand this deluge of information, the focus of this article is
how to satisfy the regulatory notice requirements to keep your plan
Notices Required for all DC Plans
All ERISA-covered, DC plans must provide certain notices
regardless of the provisions they contain.
Summary Plan Description (SPD) and Summary of
Material Modification (SMM)
The SPD is a "plain English" summary of a plan's provisions. All
SPDs must describe the following:
- Distributions; and
- Plan contact information.
The SPD must be distributed within:
- 90 days of initial eligibility;
- 120 days of the plan becoming subject to ERISA; and
- 30 days of receipt of a written request.
Sponsors must generally update their SPDs at least once every
five years. For amendments between updates, participants must
receive an SMM describing the change. Although the deadline for the
SMM is the 210th day of the year following the year the amendment is
adopted, it is a best practice to notify participants of the change
as soon as possible.
The Department of Labor (DOL) can assess a sponsor penalty of up
to $1,100 per day if an SPD/SMM is late to a single participant.
Failure to provide an SPD/SMM within 30 days of a participant's
written request may entitle the participant to up to $110 per day.
Summary Annual Report (SAR)
The SAR provides a snapshot of the financial schedules attached
to Form 5500. The SAR advises participants of their rights to
additional related information and how to contact DOL if they have
further questions. The deadline to distribute the SAR is two months
following the due date (with extensions) for filing Form 5500.
Participant Benefit Statement
The participant benefit statement summarizes activity in a
participant's account for a given time period. Generally, each
statement must include the following information:
- Beginning account balance;
- Contributions and/or distributions;
- Investment gain or loss;
- Ending account balance;
- Statement regarding importance of diversification;
- Description of each asset in which funds are invested; and
- DOL website for more information.
Plans that allocate profit sharing contributions using permitted
disparity must include a detailed description of the allocation
A plan's investment arrangement dictates the frequency with which
statements must be provided. If any portion of the plan has
participant-directed investments, statements must be provided within
45 days of the close of each quarter. For trustee-directed plans,
the statement is due annually by the deadline for filing Form 5500.
The penalty for late statements is $100 per day per participant.
Some participant-directed plans are valued only once each year.
Such plans are still required to provide quarterly statements based
on the most recently available information. That may result in
participants receiving the exact same statement four times
throughout the year.
Beneficiary Designation Forms
While not officially notices, beneficiary designation forms are
extremely important plan documents. A number of beneficiary disputes
are litigated each year in the federal Circuit Courts of Appeals. To
lessen the chance of this type of litigation, sponsors should ensure
all participants complete beneficiary designation forms and update
them any time they experience a "life event" such as a marriage,
Congress and DOL have recently focused attention on fee
transparency in retirement plans. While there is no formal
requirement at this time, it is anticipated that in the near future,
plans will be required to distribute notices describing the fees
allocated to each participant's account each quarter.
A plan can include provisions that subject it to additional
notice requirements. For example, 401(k) plans must provide
information related to salary deferrals while non-401(k) plans do
Automatic Enrollment Notice
Plans that include automatic enrollment must notify participants
- The default deferral rate;
- Their right to defer a different amount or not at all; and
- The default investment to be used if they do not make an
The notice is due 30 to 90 days prior to initial coverage by the
automatic enrollment feature and 30 to 90 days before the start of
each subsequent plan year. Plans that provide eligibility on date of
hire or very shortly thereafter can provide the notice on an
employee's hire date.
Safe Harbor Notice
There are four types of safe harbor 401(k) plans and all are
required to notify participants 30 to 90 days prior to the start of
each plan year. The notice must describe the plan's contribution,
distribution and vesting provisions. Failure to timely provide the
safe harbor notice is an operational failure that can subject the
plan to disqualification.
Defined contribution plans allowing participants to direct the
investment of some or all of their accounts must provide notices
that inform and educate participants on the options available to
Qualified Default Investment Alternative
Participant-directed plans must specify the investment option to
be used as the default when a participant does not make an election.
Plan sponsors selecting a QDIA as their default must inform
participants of the fund selected and notify them of their right to
select a different option. The notice must be provided at least 30
days before the initial default investment and 30 days prior to the
start of each subsequent year.
Diversification of Employer Securities
Certain publicly traded companies that include employer stock as
an investment option must notify participants of their right to
diversify their accounts and the importance of maintaining a
well-diversified portfolio. This notice is due 30 days before a
participant becomes eligible to diversify. Delinquent notices are
subject to a penalty of $100 per day per participant.
Fiduciaries that seek to avail themselves of the ERISA 404(c)
safe harbor must provide additional participant disclosures
- List of investment options including general description of
- List of investment managers;
- Description of fees;
- Limitations on the exercise of voting rights; and
- Contact information for a responsible plan fiduciary.
Some notices are required on the occurrence of certain events or
When participants request distributions, there are several
documents that must be provided before and after the date of
- Rollover Notice and Special Tax Notice: describes
participants' rights and the tax implications of electing a
rollover in lieu of cash. Due 30 to 180 days prior to the date
of actual distribution.
- Form 1099-R: Due by January 31st of the year following the
year of distribution.
Although the IRS recently updated its sample Special Tax Notice,
it does not include the rollover notice. Plan sponsors should either
incorporate the mandatory rollover language or provide a separate
notice to satisfy this requirement.
The pre-distribution paperwork for plans providing automatic IRA
rollover of vested balances under $5,000 must notify employees of
the financial institution and investment option to be used as well
as any associated fees.
In order to qualify for the prohibited transaction exemption for
participant loans, the plan must provide the following items when a
participant requests a loan:
- Participant loan program (if not included in the SPD);
- Loan application;
- Promissory note;
- Amortization schedule;
- Irrevocable pledge; and
- Truth-in-lending disclosure (not required for loans issued
after July 1, 2010).
A blackout period occurs when participants' access to their
accounts is restricted for more than three consecutive business
days. In response to several corporate scandals involving 401(k)
plans, a notice is now required at least 30 days prior to the start
of the blackout. The notice must identify the beginning and ending
week, explain rights and investments affected and advise as to the
prudence of a diversified portfolio.
There is a penalty of $100 per day per participant for failure to
give notice, and the failure must be reported on Form 5500.
It's Not Easy Being Green
Many companies are making efforts to "go green" by using
electronic communication in lieu of paper. The IRS and DOL permit
electronic delivery of most notices to employees who access the
electronic delivery system as part of their jobs. Since participant
disclosures must generally be "pushed" to employees rather than
posted in a common location, providing kiosks to access notices does
not satisfy this requirement. Participants without job-related
access can follow a detailed process to consent to e-delivery.
Employees not fitting into one of these categories must receive hard
These are only a few of the many notices plan sponsors and
participants must juggle. There are additional notices for plans
that map investments when changing service providers, request a
determination letter from the IRS or permit distributions in the
form of annuities. Several industry organizations are working with
the government agencies to identify more efficient and effective
methods to communicate retirement benefits to employees. In the
meantime, your participants are on a need to know basis…and they
need to know!
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