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 in compliance.
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
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
- 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 method.
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, divorce, etc.
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
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 not.
Automatic Enrollment Notice
Plans that include automatic enrollment must notify participants of:
- 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 investment
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 them.
Qualified Default Investment Alternative (QDIA)
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
Fiduciaries that seek to avail themselves of the ERISA 404(c) safe harbor
must provide additional participant disclosures including:
- 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 distribution.
- 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
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
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
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 copy
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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