Taking Notice of the New 401(k) Notice Requirements

Taking Notice of the New 401(k) Notice Requirements

By Christine M. Moehl

Several new disclosure and notice requirements applicable to 401(k) plans were included in the Pension Protection Act of 2006 (“PPA”), which was signed into law on August 17, 2006. Many of these provisions recently became effective and, given the costly penalties for non-compliance, are of particular importance to plan administrators and fiduciaries. This article highlights two important rules that became effective in 2007, and provides plan administrators and fiduciaries with some guidelines to follow with respect to the delivery of proper notices to their participants.


Prior to PPA, plan administrators were required to provide a benefit statement only upon the written request of a plan participant or beneficiary. PPA bolstered this obligation. Effective January 1, 2007, plan administrators are required to provide benefit statements to participants and beneficiaries with greater frequency, regardless of whether it is requested. The frequency with which these statements must be provided depends upon whether the participants have the right to direct the investment of their own accounts. If participants are not allowed to direct their investments, then the plan administrator must furnish a benefit statement annually. However, if a plan allows for participant-directed investments, the plan administrator must provide quarterly statements. Each of these statements are due within 45 days of the end of each plan year quarter. For plans on a calendar year, that means the quarterly statements must be distributed to the participants by May 15th, August 14th, November 14th, and February 14th. Failure to timely distribute these notices can result in a fine of up to $100 per day.

PPA requires both annual and quarterly benefit statements to reflect the amount of a participant’s accrued benefit or account balance, along with the participant’s level of vesting. However, in the case of participant-directed accounts, the requirements are once again bolstered. In this situation, plan administrators must disclose the value of each investment held in the participant’s account, along with statements containing a description of any restrictions on the participant’s ability to direct his or her investments. The statement must also warn participants about the risks of not diversifying their investments, and must direct the participants to the U.S. Department of Labor’s website, containing information on individual investing and diversification. Finally, if the plan allocates employer contributions using a formula that takes into account the Social Security wage base (also known as “permitted disparity”), the statement must contain a description of that allocation formula.


PPA also brought with it much welcome relief from fiduciary liability in regards to default investment funds. Prior to PPA, fiduciaries could be liable for poor investment returns realized by participants who failed to choose their own investments and were placed in the plan’s “default fund.” PPA provides that if the plan fiduciaries designate a “qualified default investment alternative” (“QDIA”) as the plan’s default fund, and if certain notice requirements are met, the plan fiduciary will not be liable to participants who are defaulted into the QDIA and subsequently experience poor investment returns.

The required default investment notice must be provided to participants at least 30 days prior to the participant’s initial placement in the QDIA, and again 30 days before the beginning of each plan year. The notice must include a description of the participant’s right to designate how contributions and earnings will be invested, and a statement of how his or her account will be invested in the absence of any investment election, including a disclosure of fees and costs applicable to the QDIA.

In order to qualify as a QDIA, the fund must be one of the following: (1) a “life-cycle” fund or targeted retirement date fund; (2) a balanced fund appropriate for plan participants as a whole; or (3) a professionally-managed account. In its recently-released proposed regulations, the Department of Labor made it clear that many funds currently used by plan sponsors as default investments, such as stable value funds or money market funds, do not qualify as QDIAs. Although participants may still be defaulted into such funds, any plan fiduciary that does so will not benefit from the fiduciary liability relief afforded to those fiduciaries who establish QDIAs.

If you have any questions about these notice requirements or the PPA in general, please contact a member of our firm’s Employee Benefits Practice Group.