December 5, 2006

Important: New Notice Requirements for Defined Contribution Plans

Notice of Automatic Enrollment

If a qualified defined contribution plan is to include an automatic enrollment feature beginning with the January 1, 2007 plan year, it must provide notice explaining this feature to plan participants by December 1, 2006. 

An automatic enrollment provision provides that a participant will be enrolled in the plan at a certain level, based on plan provision, unless the individual opts for another deferral percentage, or opts out of participation altogether (see the Automatic Enrollment discussion in the September 1, 2006 edition of the Benefit Beat). 

One of the essential elements of an automatic enrollment feature is communication to plan participants.  A notice must be provided to each employee eligible to participate in the plan within a reasonable period (currently defined to be not less than 30 days) before each plan year.  The notice must be written in a manner determined to be understood by the average employee, and be sufficiently comprehensive to advise employees of their rights and obligations. 

The notice must explain the employee’s rights under the plan to elect not to have elective contributions made on the employee’s behalf, or to elect to have such contributions made at a different percentage.  In the event that an employee may elect among two or more investment options under the plan, the notice must explain how contributions will be invested in the absence of any investment election by the employee. 

The eligible employee must be given a reasonable period of time, following receipt of the notice and prior to the date when the first elective contribution is made, to make his/her election. 

Notice of Qualified Default Investment Alternative

If a defined contribution plan implements a qualified default investment alternative (QDIA) beginning with the January 1, 2007 plan year, a notice must be provided to plan participants within a reasonable time (defined to be not less than 30 days) prior to the effective date of the QDIA. For calendar year plans, this notice must be provided by December 1, 2006. 

A QDIA is an investment alternative that relieves plan fiduciaries from certain fiduciary responsibility, as long as the investment alternative complies with certain requirements.  The Department of Labor issued proposed regulations in September, 2006 (see the October 4, 2006 edition of the Benefit Beat).  The proposed rules are to become effective within 60 days after they are finalized.

The notice explaining the QDIA must include:

  • A description of the circumstances under which assets in the individual account may be invested;
  • A description of the QDIA including investment objectives, risk and return characteristics, and fees and expenses;
  • A description of the right to direct the investment of assets to any other investment alternative under the plan without financial penalty; and,
  • An explanation of where the participant can obtain investment information concerning any other investment alternatives available under the plan.


The information contained in this Benefit Beat is not intended to be legal, accounting, or other professional advice, nor are these comments directed to specific situations.

As required by U.S. Treasury rules, we inform you that, unless expressly stated otherwise, any U.S. federal tax advice contained in this Benefit Beat is not intended or written to be used, and cannot be used, by any person for the purpose of avoiding any penalties that may be imposed by the Internal Revenue Service.

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