PPA Reporting and Disclosure Requirements for 2007 Plan Year

 

 

Under the Pension Protection Act of 2006, sponsors of qualified pension and profit sharing plans must comply with new reporting and disclosure requirements. A few of the requirements effective for the 2007 plan year are highlighted below.

 

Frequency of Benefit Statements for Defined Contribution Plans. Plans that permit participants to direct the investment of their accounts must issue quarterly Benefit Statements. Plans that do not permit participants to direct the investment of accounts must issue annual Benefit Statements.

 

Content of Benefit Statements for Defined Contribution Plans. Benefit Statements for all defined contribution plans must include the following:

 

·      value of the participant’s account (and, for Plans that maintain separate accounts for participants, the value of each investment in the account)

·      the participant’s vested percentage (or the earliest date on which benefits will become vested)

·      an explanation of the Plan’s “permitted disparity” (applicable only to Plans that use a benefit formula that is integrated with Social Security).

 

If a Plan permits participants to direct the investment of their accounts, the Benefit Statement must also include the following:

 

·      an explanation of any limitations on the participant’s right to direct the investment of the account

·      reference to a DOL web site that lists sources of information for investing and diversification (www.dol.gov/ebsa/investing.html)

·      diversification statement (see additional discussion below).

 

The DOL has acknowledged that the required Benefit Statement information may involve multiple service providers. For example, a monthly brokerage statement that provides valuation information may not include a participant’s vested percentage. Because use of a single source document may be impractical (at least in the short-term), the DOL has indicated that multiple documents or sources for Benefit Statement information may be used if participants are furnished notification that explains how and when the required information will be made available.

 

            Diversification Statement. Benefit Statements for participant accounts must include an explanation of the importance, for long-term retirement security, of a well-balanced and diversified investment portfolio, including a statement of the risk that holding more than 20% of a portfolio in the security of one entity may not be adequate diversification. Until regulations are issued, the DOL has indicated that use of the following language will constitute good-faith compliance:

 

To help achieve long-term retirement security, you should give careful consideration to the benefit of a well-balanced and diversified investment portfolio. Spreading your assets among different types of investments can help you achieve a favorable rate of return, while minimizing your overall risk of losing money. This is because market or other economic conditions that cause one category of assets, or one particular security, to perform very well often cause another asset category, or another particular security, to perform poorly. If you invest more than 20% of your retirement savings in any one company or industry, your savings may not be properly diversified. Although diversification is not a guarantee against loss, it is an effective strategy to help you manage investment risk.

In deciding how to invest your retirement savings, you should take into account all of your assets, including any retirement savings outside of the Plan. No single approach is right for everyone because, among other factors, individuals have different financial goals, different time horizons for meeting their goals, and different tolerances for risk.

It is also important to periodically review your investment portfolio, your investment objectives, and the investment options under the Plan to help ensure that your retirement savings will meet your retirement goals.

            Distributions. Effective for distributions after December 31, 2006, distribution notices must describe the consequences of failing to defer the receipt of a distribution. Although plan sponsors are entitled to good-faith compliance until regulations are issued, failing to include any provision in a notice is probably not good-faith compliance. Accordingly, plan sponsors should update distribution notices. The consequences of failing to defer receipt of a distribution may include: (1) having to make a rollover within 60 days or else being taxed on the amount of the distribution not rolled over; and (2) for participants under age 59-1/2, a 10% early distribution penalty on taxable distributions.