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Legal Landmines for Employee Benefit Plan Sponsors During Bad Economic Times

Legal Landmines for Employee Benefit Plan Sponsors During Bad Economic Times

Employee Benefit Plan Review

September 17, 2009


The Pension Protection Act of 2007 (PPA) added a series of new funding requirements for defined benefit plan sponsors. Generally, the legislation is aimed at requiring all defined benefit plans to achieve 100 percent funding within the next seven years.

PPAs new funding mandates include a requirement for every defined benefit plan to now fund the present value of the plans’ accrued benefits and amortize any unfunded liabilities over a seven year period, using legislated actuarial assumptions.

The PPA also requires all defined benefit plan losses to be amortized over seven years. Defined benefit plan administrators must also now provide a mandatory annual notice to plan participants, labor organizations and the PBGC generally describing the plan’s current funding level.

For calendar year defined benefit plans, the first annual funding notice was to be issued by April 30, 2009. 3 Asset smoothing techniques which had not been restricted by law prior to the PPA, now cannot exceed 24 months. If a defined benefit plan’s funding level falls below 60 percent, no lump sum distributions will be allowed.

While there has been a storm of protest from plan sponsors about the wisdom of implementing new funding requirements during a severe recession, those protests have fallen on deaf ears. Many employers face 2009 PPA funding obligations that are multiple times their 2008 contribution amount. Going into 2009, the PBGC was already carrying an $ 1 1 billion deficit and recently announced that it posted a $33.5 billion deficit for the first half of fiscal year 2009, the largest in the agency’s 35 year history.

The PPA added new provisions to ERISA aimed at making customized investment advice more readily available to 401(k) plan participants.


As added to ERISA, new Sections 408(b)(14) and 408(g) provide an exemption from ERISA’s prohibited transaction rules for the provision of investment advice, the acquisition of securities pursuant to the investment advice, and the receipt of fees in connection with the provision of participant-level investment advice to a participant directed plan.

The day after President Obama was inaugurated, on January 21, 2009, the Department of Labor published final investment advice regulations that included rules implementing Section 408(b)(14) and a class exemption covering certain transactions outside the scope of the statute and regulations.

Shortly thereafter, in response to a memorandum issued by Rahm Emmanuel, Obama’s Chief of Staff, the Department of Labor opened a new comment period inviting public comments on any substantive issues raised by the regulation, and delayed the regulation’s effective date until May 22, 2009. On May 22, 2009, the Department further delayed the final regulations until November 18, 2009.

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