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Pension and Employee Benefits: Code, ERISA, & Regulations
This series provides an authoritative and comprehensive reference to the full text of benefits-related provisions of the Internal Revenue Code, the full text of ERISA, and related proposed and final regulations, as well as the official IRS and DOL preambles, and Committee Reports.
From Spencer's Benefits Reports In testimony at a recent meeting of the ERISA Advisory Council, Rebecca Davis, staff attorney for the Pension Rights Center, addressed “the efficacy of ERISA’s reporting and disclosure scheme.” According to Ms. Davis, “ERISA’s reporting and disclosure scheme is vital to ensuring that communication is always open between plans, participants, and beneficiaries,” but she suggested that the Department of Labor’s Employee Benefits Security Administration (EBSA) make disclosures more useful to participants while at the same time avoiding burdening plans with additional costs that are ultimately passed on to the participants.
In her testimony, Ms. Davis initially observed, “Standard language and model notices can be a great help to employers and at the same time aid participant understanding of disclosures. The model notices that EBSA has written as part of its regulatory guidance have been helpful to participants, and we commend these efforts. Model notices are important because notices generated by plans are often confusing to plan participants. Much of the confusion can be traced to the complex nature of retirement plans, and the fact that different people absorb information differently.”
Ms. Davis went on to state, “As a matter of cost, notices crafted to best communicate information to the target audience can ultimately reduce costs to plans, by preventing a flood of inquiries in response to confusing plan communications. Costs can be curbed by having model notices and use of the model notices could be required. We have heard anecdotal stories about law firms representing plans refusing to use the model forms so that they can bill a plan for time spent drafting an original notice. This may result in a more tailored notice for the plan, but it is far more costly than if the firm had simply begun with the model notice and made appropriate modifications. Furthermore, a truly informative and helpful notice will reduce administrative costs because participants who understand the notices are less likely to call the plan with follow-up questions.
“We also want to encourage the DOL not only to write more model notices, but to revisit notices already written to be sure they are delivering useful information for participants. Model notices should give plans the best terminology to use to explain complex pension information to participants in an easy-to-understand manner. One of the most recent model notices issued by the DOL was the model notice for multiemployer plans in critical status. Plans in critical status are required to adopt a rehabilitation funding plan that may cut back certain accrued benefits, including subsidized early retirement benefits. Plans are then required to notify participants of the plan’s critical status and the implications of the status on certain benefits. The DOL issued a model notice for plans to use when issuing the critical status notice. Given that this notice explains to participants that they may lose accrued benefits, it is an extremely important notice. However we have received calls from plan participants who were baffled as to the meaning of the critical status notices they had received.”
Projections, Estimated Benefits
According to Ms. Davis, “The Council has asked whether participants receiving individual benefit statements would benefit from receiving projected estimated benefits for various retirement ages, as is currently provided in the Social Security Administration’s annual statements. We certainly agree the Social Security benefit estimates, including the projections of future benefits, are helpful. But one of the main reasons they are so helpful is because we know that regardless of what happens to our 401(k) or our pension or our job, we can rely on the fact that Social Security will be there for all of us when we retire.
“Unfortunately the same cannot be said for defined benefit pensions. Defined benefit plans may be frozen or terminated at any time. Plans by choice or operation of law may be forced to reduce benefit accruals or terminate the plan entirely. Furthermore, employees are not guaranteed a job with the plan sponsor for the remainder of their careers. Because there are so many uncertainties about the future of an individual’s pension benefit, it can be misleading to provide individuals with projected benefit estimates.” Ms. Davis recommended that the EBSA issue guidance laying out specific parameters that plans must follow if they choose to provide benefit projections.
With respect to the form of disclosure, Ms. Davis concluded, “Many of the disclosures that plans are required to provide to participants are complex and confusing documents but they are important. We recommend that each required disclosure be written and delivered separately as a stand-alone document. The summary plan description (SPD) and individual benefit statement in particular should not be combined with other disclosures. The Pension Rights Center is especially concerned that providing investment information along with the SPD or benefit statement will overwhelm participants and result in these vitally important disclosures being ignored.
“Electronic delivery of required disclosures can yield cost savings for plans. However, the cost savings must be balanced against the needs of participants and beneficiaries for access to plan information. The SPD and individual benefit statement are two of the most important disclosures plan participants receive. It is important that participants read them and retain them while they are working under the plan, after they leave the plan, and well into retirement. Therefore, we suggest that these two crucial disclosures be delivered electronically only after the participant has communicated his or her consent to receive these documents electronically. This affirmative election requirement should apply to all participants, including those who work with computers as part of their jobs. For all other disclosures, we believe that electronic delivery is appropriate for employees who work with computers as part of their job.”
For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.
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