On December 20, 2007, the Department of Labor ("DOL") released Field Assistance Bulletin No. 2006-03 (the "FAB") containing guidance for its staff, as well as plan sponsors and administrators, relating to certain notice requirements enacted under the Pension Protection Act of 2006 ("PPA"). While the FAB generally addresses the PPA’s requirement for periodically furnishing pension benefit statements, it also clarifies and eases the PPA’s requirement for notifying plan participants and beneficiaries of their right to diversify plan investments.
As discussed in a previous Alert, the notice regarding diversification must describe the right to diversify (including the frequency with which such right may be exercised) and the importance of investment diversification. The IRS issued a Model Notice earlier this month that, after customizing to reflect a plan’s unique provisions, may be distributed to participants as required. However, confusion remained as to how the diversification notice requirement applies to an individual account plan that already permits investment diversification on a basis at least as frequent as is required under the PPA.1 The FAB is, in part, a response to requests for clarification of this issue.
In the FAB, the DOL first acknowledges that the diversification notice is "most significant" for plan participants who, as a result of the PPA, are gaining new diversification rights. Those participants must be provided with a diversification notice as soon as possible following January 1, 2007. However, the DOL also indicates that, for a plan that allowed participants to diversify their plan investments before January 1, 2007 at least as frequently as the PPA requires, a plan sponsor will be in good faith compliance with the PPA’s diversification notice requirement if the plan sponsor complies with the PPA’s periodic benefit statement requirement that includes a reminder of the importance of investment diversification.2
Accordingly, plans that, prior to January 1, 2007, contained diversification provisions that were at least as permissive as those required by the PPA need not provide any separate diversification notice so long as those plans comply, in form and in substance, with PPA’s quarterly benefit statement requirement.
1. The PPA requires defined contribution plans (other than certain ESOPs) holding publicly-traded employer securities to allow participants to immediately diversify their employee contributions and elective deferrals out of employer securities and to diversify their employer contributions out of employer securities after three years of service.
2. The PPA requires the administrator of a defined contribution plan that permits participant direction of investments to provide benefit statements at least quarterly to plan participants and beneficiaries. The benefit statement must include (1) the value of each investment to which assets in an individual’s account are allocated (including the value of any assets held in the form of employer securities), (2) an explanation of any limitations or restrictions on any right of the individual to direct an investment, (3) an explanation, written in a manner calculated to be understood by the average plan participant, of the importance, for the long-term retirement security of participants and beneficiaries, of a well-balanced and diversified investment portfolio, including a statement of the risk that holding more than 20 percent of a portfolio in the securities of one entity may not be adequately diversified, and (4) a notice directing the participant or beneficiary to the DOL’s Internet website sources of information on individual investing and diversification.
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