After Nearly 10 Years of PPA, What Has Changed?

Callan’s DC practice lead looks back over a decade of industry development post Pension Protection Act. 

The Pension Protection Act (PPA) of 2006 was the biggest piece of legislation regarding the retirement plan landscape since the Employee Retirement Income Security Act (ERISA) in 1974. As the PPA approaches its 10th anniversary, PLANSPONSOR interviewed Lori Lucas, Callan’s Defined Contribution Practice leader, about how successful the legislation was in helping plan sponsors and participant outcomes, and where it may have missed the mark.

PLANADVISER: You recently wrote an article for Callan’s DC Spotlight grading provisions of the Pension Protection Act. From your grading, what would you say were the most successful provisions of the PPA for defined contribution (DC) plans?

Lucas: Helping people to save more in their defined contribution plan was the PPA’s greatest achievement, and it did so by making permanent the beneficial Federal tax changes that originated with the Economic Growth Tax Relief Reconciliation Act (EGTRRA). The PPA eliminated EGTRRA’s 2011 sunset provision for catch-up contributions, increased DC savings limits, and Roth contributions. Today, catch-up contributions are permitted in more than 97% of large plans, while 62% of plans offer Roth contributions.

The PPA also helped workers to invest better in their DC plan by creating a qualified default investment alternative, or QDIA, safe harbor for target-date funds. Previously, DC participants tended to be defaulted into low-yielding stable value funds. With target-date funds now the default fund of choice, the average participant’s allocation to these well-diversified investment options has grown from 4.1% in 2006 to more than 25% today. 

Finally, the PPA increased workers’—especially younger, low-tenured employees’—participation in DC plans by creating automatic enrollment safe harbors. Prior to the PPA, 19% of plans had auto enrollment; 62% of plans do today, with accompanying dramatic increases in plan participation.

NEXT: PPA misses and how plan sponsors can optimally use PPA provisions

PLANADVISER: What were some of the less successful provisions in the PPA for DC plans?

Lucas: The PPA’s fund mapping safe harbor was supposed to make it easier for plan sponsors to get rid of unwanted funds within the DC plan line-up. However, sponsors are often uncertain how to interpret fund mapping requirements, and remain concerned that participants will loudly object if certain beloved funds disappear from the plan—even if the funds are redundant or poor performers. So fund proliferation continues in DC plans.

Also, the requirement to provide quarterly benefits statements is another low-impact PPA provision. There’s little evidence that such statements positively affect participant behavior.

PLANADVISER: How would you suggest DC plan sponsors use provisions of the PPA in an optimal manner to better participants’ outcomes?

Lucas: Too few workers actually maximize their ability to save in DC plans—and it’s critically important that they do so. Plan sponsors can help participants get to higher contribution levels by implementing opt-out automatic contribution escalation, which was another feature given favorable treatment under the PPA. Plan sponsors might also consider encouraging catch-up contributions by providing a matching employer contribution for catch-ups (45.7% do), or even automatically enrolling workers into catch-up contributions when they turn 50.