Section 105 of the Employee Retirement Income Security Act (ERISA) requires that pension benefit statements for both individual account plans and defined benefit plans be provided to plan participants and beneficiaries. Initially, such statements only had to be provided upon request, but the Pension Protection Act amended Section 105 to establish a direct obligation to provide pension benefits statements automatically, as follows:
* At least once each quarter, in the case of individual account plans that permit participants to direct their investments;
* At least once per year, in the case of individual account plans that don’t allow participants to manage their investments; and
* At least once per three years, in the case of defined benefit plans.
Beneficiaries are entitled to receive statements upon written request. The amendment also says the information needed to be contained in the pension benefit statements, depending on the type of plan (individual account or defined benefit).
The PPA specifically authorized disclosure of participant benefit statements in “written, electronic, or other appropriate form to the extent such form is reasonably accessible to the participant or beneficiary.”
This article describes the procedures for providing the pension benefit statements to participants in a form other than paper. It focuses on defined contribution plans such as 401(k) plans. It describes in detail the recently issued Department of Labor Technical Release 201103R, which explains when certain new DOL fee disclosure information can be provided electronically.
Participant Disclosure Requirements for Defined Contribution Plans
As noted above, the PPA requires additional disclosures for defined contribution plans that offer participants investment choices. Under regulations issued by the DOL, there are two types of information that individual account plans must provide. The first is “benefit plan information” and the second is “investments-related information.”
The “benefit plan information” generally must be provided at enrollment and annually, and includes the following:
* An explanation of how investment instructions can be given;
* A description of fees and expenses that may be charged for general plan administration;
* A list of plan investment options, and the procedures to make investment elections;
* A description of any self-directed brokerage account option, and fees and commissions charged;
* Identification of the plan’s investment managers, if any; and
* A description of stock voting rights incidental to the plan.
In addition, a plan must disclose, on a quarterly basis, the actual fees and expenses charged to a participant’s account, including a general disclosure about any revenue sharing arrangements. This “plan-related information” can be part of the quarterly benefit statement or it can be provided in a separate summary.
“Investment-related information” that must be disclosed includes the following:
* Investment performance;
* Comparative benchmarks;
* Fund expense information (including an example to demonstrate the meaning of an “expense ratio”);
* Required “educational” statements about the role of fees and expenses;
* Information on annuity options (if any); and
* An Internet site address where the participants may obtain more detailed information.
In addition, the plan must provide a glossary of investment-related terms; this can be provided in a Web site. The plan must also offer to provide a paper copy of this information free of charge.
As can be seen from this brief description, although the plan administrator is responsible for providing this statement, the required information must generally be provided by third parties and will come from a variety of sources. Therefore, the challenge is determining how to combine the required information into a coherent statement that provides easy and efficient access for participants. The Internet format, with links, is clearly an attractive option for these purposes, and so these new rules have encouraged the DOL to review again the procedures for electronic disclosure of this information.
Labor Department General Electronic Notice Requirements
Despite the prevalence of electronic communication in the United States, the DOL has publicly expressed its reluctance to support the wholesale use of electronic communications for required employee benefit notices. This is in large part due to the DOL’s belief that because the information communicated is so significant, it is necessary to ensure that plan participants have access to it and can review this information. The DOL is particularly concerned about preserving the rights of individuals who do not have access to computers at work and/or at home.
These DOL rules generally apply to statements such as documents required under Title I of ERISA. In addition to benefit statements, the rules govern summary plan descriptions, summary annual reports, 401(k) benefit statements, and summaries of material modifications.
Generally, electronic disclosure of benefits information is permitted if such disclosure is provided using means reasonably calculated to guarantee receipt of the documents.” In its regulations finalized in 2002, the DOL provided two safe harbors under which that standard is deemed to be met: “effective access/essential part of duties” and “affirmative consent.”
Effective Access/Vital Part of Duties
The participant must have the right to speedily access documents provided in online form at any place where the enrollee is normally expected to carry out their duties as a worker and regarding to whomever access to the employer’s or benefit plan sponsor’s electronic data system is a vital part of these duties. The “integral parts of duties” standard prevents use of the safe harbor for active employees who do not use a computer at work. The DOL has made it very clear that merely providing information in a central location, or kiosk, or computer systems that are generally available for use by workers who do not use a pc as a normal part of their work is not enough for this purpose.
“Affirmative Consent” Agreement to Electronic Notices
This safe harbor can be used to provide required notices for current workers who do not use a pc for their work or for former employees, vested terminated employees, or retirees or beneficiaries. These persons must directly agree to get disclosures through electronic means after required disclosures:
* Prior to providing consent, the individual must receive a precise and conspicuous statement on paper describing the document that are covered by the consent, the software and hardware requirements for online delivery and for retention of the document, and an explanation of the individual’s right to revoke his or her consent and receive paper copies of the materials.
* The statement must also describe the procedures for revoking consent and for providing updated email addresses and other relevant information.
* If documents are to be provided via the Internet or some other electronic communication network, the individual must provide an email address to which the documents will be delivered and must consent electronically in ways that demonstrates his or her capability to access the document in the agreed-upon electronic medium.
* When there are changes to hardware or software that create a risk that the individual will not be able to access the documents electronically, the individual must be given a new paper statement describing the new software or hardware requirements and the individual’s right to withdraw his or her consent to electronic delivery, and after the statement is provided, the individual must directly agree to receive the electronic documents.
Whether the “effective access” or “affirmative consent” method is used to permit electronic access, there are other general requirements that apply for any electronic delivery of information:
* The plan administrator must take needed and immediate steps to make sure that electronic delivery ends in receipt of the transmitted information. Use of “return-receipt” has been suggested as an appropriate measure, but there are costs to this method. Some plan administrators conduct occasional overviews to confirm that the electronic information is being transmitted.
* Administrators must take measures to protect the security of personal information related to the individual and his or her account or benefits.
* The documents must be prepared and provided in a manner that is current with the style and format with info requirements that specifically apply under ERISA (probably “Twitter” will not work!).
* When electronic documents are provided, an electronic or paper notice must be given to the individual which describes the importance of the electronic document if it’s not obviously evident as sent.
* When the electronic document is provided, notice must be given to the individual which describes the individual’s right to require and receive a paper copy of the file.
* Upon requesting, the individual must be furnished a paper copy of the document, and the employer may impose a reasonable charge for such document, but only if such charges are permitted under ERISA. For example, summary plan descriptions must be provided without charge.
Some information can be disclosed through the employer’s Web site or intranet if it is easily accessible from the home page, with access restricted to employees and others by passwords or PIN requirements. A plan administrator that relies on disclosure through a Web site or intranet must satisfy all of the requirements described above plus it must notify the participant and beneficiaries of the availability of the particular disclosure document and its significance by sending a written or electronic notice that directs them to the document on the Web site and takes appropriate and needed steps to ensure that the Web site results in actual receipt.
For example, the Web site home page should contain a prominent link to the Web site sections that contain information about the plan and it must provide directions for obtaining a replacement for a lost or forgotten password. The disclosure documents should remain on the Web site for a reasonable period of time after participants and beneficiaries have been notified of their availability.
IRS Methods for Use of Electronic Consent
Although they do not apply to participant benefit statements, which are under the jurisdiction of the DOL, the Internal Revenue Service (IRS) rules are summarized below because they are referenced in the more recent DOL guidance.
The IRS issued regulations in 2006 that provide for two methods for providing notices and consents that are similar, but not identical, to those proposed by the DOL. The IRS rules apply to notices and consents over which the IRS has authority; for example, required rollover notices, Section 401(k) “safe harbor” notices, and the notices and waivers for joint and survivor annuities.
In contrast to the DOL rules, the IRS regulations do not provide a “safe harbor” for electronic consents, but impose two alternative methods of compliance similar but not identical to the DOL safe harbors. Like the DOL rules, one is based on prior affirmative consent and the other depends on the participant’s ability to access the electronic documents.
Under the “effective ability to access” alternative:
1. The recipient must have an “effective ability to access” the medium used to provide the notice;
2. At the time the notice is provided the recipient must be advised of the right to get a hold of a free paper copy of the notices; and
3. If requested, the paper copy of the notices must be provided at no charge.
One looks to facts and circumstances to determine if a recipient has an “effective ability to access” the electronic medium. This is not a “safe harbor.” Also, unlike the DOL “effective access” method, no fee can be charged for paper copies.
The “affirmative consent” method (sometimes referred to as “consumer consent”) is based on the general government E-SIGN rules that apply when a statute or regulation requires information to be provided to a consumer in writing. Under this method, a participant gives prior agreement to receive electronic notices. Before providing the consent, the participant must receive the following information:
* The right to get a hold of a paper notice upon request, and procedures for requesting the copy, and whether a fee will be charged;
* The ok to withdraw the consent, and an explanation of the withdrawal procedures;
* The scope of the consent, and what transactions are affected by the consent;
* The procedures to update the recipient electronic contact information; and
* The hardware or software requirements to access and retain the notices.
The consent must be made in a manner that demonstrates that the participant can access the electronic medium. This can be done if the consent is transmitted electronically (which demonstrates access to the appropriate media) or it can be done by traditional writing if the consent is later confirmed in a manner that demonstrates that the recipient can access the appropriate media.