Diversify or Else!

By John Walch
August 14, 2007

Last August the federal Pension Protection Act of 2006 (PPA) became law.  One of the PPA's many provisions requires that company-sponsored retirement plans allow participants to diversify out of company stock in their account.  Prior to the PPA, plans could and frequently did place severe restrictions on employees selling company stock.  Employers did not want employees dumping large quantities of company stock and thereby sending a very negative signal to investors.

The PPA required plans to make two changes.  First, the PPA mandated minimum diversification requirements.  For example, participants must have at least three different non-company stock investment options and must be allowed to diversify company stock investments into the other options at least quarterly.  Second, the plan must provide a notice to participants that explains their right to diversify and how important diversifying retirement assets is.  This notice must be given at least 30 days before the participant first becomes eligible to diversify assets -- usually after three years of service. 

On Friday, the U.S. Dept. of Labor published final regulations that include a $100 per day penalty for failing to provide a timely notice.  That doesn't sound like much, but do the math: forgetting to send a notice to 10 participants until a year later when the DOL audits the plan can cost $365,000.  The final regulations (and the penalty) are effective October 9, 2007.  However, the diversification and notice requirements were effective January 1, 2007.

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