Important Plan Communications

Few aspects of plan administration are more important than communications to the plan’s participants and beneficiaries. As the retirement industry evolves, so does the awareness that communications to participants are crucial. Certainly this is abundantly evident in legislation in recent years.

Congress is not only passing rules relating to how retirement plans are administered, but also how, when and in what manner communications to participants take place. It would be good for us to review some of the most important forms of plan communications and a newly approved method for communicating with participants.

Limited Employer Liability for Participant-Directed Accounts

For the last several years, more and more plan sponsors have begun to offer the ability of participants to direct their own investments. One of the major incentives in offering this right is the application of Section 404(c) of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”). Plan fiduciaries may choose to comply with the requirements set forth in the Section 404(c) regulations in order to limit their liability for participant-directed investment decisions.

Many plan sponsors do not fully understand the ways to comply with Section 404(c) and afford themselves the protection that it potentially offers. While the list of requirements is long, most non-compliance seems to take place by failure to identify a 404(c) fiduciary and failure to disclose 404(c) status.

Failure to Identify a 404(c) Fiduciary

Section 404(c) requires a participant to have automatic access to a large amount of information relating to investments and the ability to contact a fiduciary responsible for 404(c) compliance for access to further information. This person should be identified by name or position, i.e., Director of Human Resources. Additionally, the related contact information should also be clearly disclosed (i.e., mailing address, telephone number, fax number, email address, etc.).

Failure to Disclose 404(c) Status

One of the most basic requirements is telling participants that the plan intends to qualify under Section 404(c). Many plan sponsors seem to be under the mistaken impression that simply allowing for participant investment direction grants them the associated protection. This is not true. In fact, a plan sponsor could take all of the other steps necessary to comply with 404(c) and lose out on its protection by not communicating to participants.

Department of Labor regulations now require that the summary plan description identify the plan as a Section 404(c) plan. This requirement is effective the second plan year beginning after January 20, 2001 (January 1, 2003 for calendar year plans).

Decreasing or Eliminating Future Benefits

Consistent with the protected benefit standards, a plan sponsor can reduce or eliminate prospective benefits (those not yet accrued). However, a notice must be given to affected participants at least 15 days ahead of the change.

An ERISA 204(h) notice is required when a plan is preparing to decrease or eliminate future accrued benefits. This is usually applicable for a defined benefit plan, money purchase pension plan or a target benefit plan. Under these pension plans, the plan sponsor makes an obligation to accrue benefits annually or otherwise provide contributions on a periodic basis.

Eliminating Money Purchase Plan

The Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA”) brought welcome new rules for retirement plans. One of the most generous portions of the tax law related to contribution deductibility. Prior to EGTRRA, it was necessary to maintain both a profit sharing and a money purchase pension plan to obtain the entire 25% deductible employer contribution and maintain the flexibility to make less than the 25% in years where revenues were not as high as anticipated.

Typically, a company would sponsor a money purchase pension plan with a 10% contribution rate and a profit sharing plan with an inherent ability to make an additional 15% contribution to eligible participants.

EGTRRA raised the allowance within profit sharing plans to give a 25% discretionary contribution. Thus, in many cases, it is unnecessary to maintain both a money purchase pension plan and a profit sharing plan. By properly drafting the document, a plan sponsor can have the flexibility to make a 25% contribution under a profit sharing plan without a mandatory contribution obligation.

How does an employer that currently has both a money purchase pension plan and a profit sharing plan take advantage of these new standards? By getting rid of the money purchase pension plan.

There are two options–terminate the money purchase pension plan or merge it into the profit sharing plan or another qualified plan of the plan sponsor. Each methodology has advantages and disadvantages and their own respective administrative concerns. However, in both cases an ERISA 204(h) notice is required.

ERISA Blackout Periods

Earlier this summer, largely in response to the public outcry over Enron and other incidences of corporate accounting abuses, President George W. Bush signed into law the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley Act”).

Within the Sarbanes-Oxley Act is a provision mandating that an ERISA blackout period be preceded by an advance notice to participants. This new blackout rule will become effective January 26, 2003.

An ERISA blackout period is a period of time that exceeds three consecutive business days during which the participants or beneficiaries in a qualified plan are limited or restricted from their normal right to:

  • Direct or diversify assets in their accounts; or
  • Obtain plan loans or distributions.

If a restriction or limitation is regularly scheduled and was previously disclosed in writing, then it does not meet the definition of an ERISA blackout period. Additional exceptions exist in limited cases, such as one-person plans and in the case of qualified domestic relations orders.

Blackout Period Notice Requirements

At least 30 days prior to the start of an ERISA blackout period a plan administrator must provide a notice to affected participants and beneficiaries. This notice must contain the following:

  • The reasons for the ERISA blackout period;
  • Identification of the investments (or other rights) affected;
  • The anticipated start date and length of the ERISA blackout period; and
  • A statement that participants and beneficiaries should consider the appropriateness of their current investment decisions considering their lack of ability to direct or diversify assets credited to their accounts during the ERISA blackout period.

Additional disclosure is necessary if the blackout period involves employer stock.

Electronic Disclosure

Traditionally, ERISA documents and notices have been furnished in printed form to the participant or beneficiary. Recently, the Department of Labor issued final rules that permit the use of electronic technologies to communicate employee benefit plan information. This is welcome news to plan sponsors who may be able to save on expenses as a result of the reduction or elimination of printing and mailing costs associated with traditional paper disclosures. These rules are effective October 9, 2002.

Electronic disclosure may be made via a company web site, an email attachment or CD-ROM. Documents delivered electronically must be furnished in a manner consistent with the style, format and content of the written disclosure. Some of the disclosures that are permitted electronically include:

  • Summary plan descriptions;
  • Summary of material modifications;
  • Individual benefit statements;
  • Summary annual reports;
  • Information concerning participant loans;
  • Information concerning qualified domestic relations orders; and
  • Investment information required to be provided under ERISA Section 404(c).
Satisfying the Electronic Requirements

With respect to the workplace, electronic disclosure may be made to participants who use electronic systems as an integral part of their jobs. Non-workplace disclosure is permitted to participants and beneficiaries who consent to receiving plan communications electronically.

In general, the plan administrator must:

  • Ensure that there is an actual receipt of the document, i.e., return receipt email;
  • Protect confidentiality of personal information relating to the participant’s benefits, i.e., benefit statement;
  • Prepare disclosures in a manner consistent with the style, format and content of the written document; and
  • Provide each individual with a notice of the documents being provided electronically, the significance of the documents and the right to receive a paper version free of charge.

Non-English Speaking Participants

Throughout this issue on plan communications, we have made one unspoken assumption–that all of the participants in question speak English fluently. However, many plan sponsors in our country have participants who do not utilize English as their primary language.

ERISA provides guidelines for situations where certain levels of participants utilize a language other than English as their primary language.

If the plan has less than 100 participants and at least 25% are literate only in the same non-English language, the plan sponsor must prominently affix a disclosure on the cover of the summary plan description in the applicable non-English language. This disclosure must give the affected participants direction on how to obtain more information on the retirement plan. If the plan has more than 100 participants, then a similar notice must be affixed when the non-English speaking participants total the lesser of 10% or 500 plan participants using the same non-English language.

The summary plan description is not required to be provided in a non-English language. However, a plan sponsor must have provisions to be able to adequately explain the plan to a non-English speaking participant and may choose to take the step of fully translating the summary plan description into the non-English language.


It is wise for all plan sponsors to understand what plan communications are required, when they need to be made and the appropriate methods for communicating to participants and beneficiaries.

Plan sponsors should assess the feasibility of communicating plan information using electronic technologies, which may result in lower administrative expenses.


This newsletter is intended to provide general information on matters of interest in the area of qualified retirement plans and is distributed with the understanding that the publisher and distributor are not rendering legal, tax or other professional advice. Readers should not act or rely on any information in this newsletter without first seeking the advice of an independent tax advisor such as an attorney or CPA.

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