Price Perspective - In Depth

10 Years Later

Pension Protection Act's Impact on Defined Contribution Plans

Executive Summary

Called the "most sweeping reform of America’s pension laws in over 30 years," the Pension Protection Act has had a significant impact on helping people save for retirement. Signed into law in 2006, the PPA most notably paved the way for auto-enrollment and also established life-cycle and target date funds as a QDIA (Qualified Default Investment Alternative).

The law provided legal protection so that as long as an employer selects as a default option an investment that has certain characteristics — primarily that it’s a diversified, professionally managed portfolio — and other requirements are satisfied, the employer can be relieved of liability if that choice has negative outcomes from an investment perspective.

When President George W. Bush signed the Pension Protection Act 10 years ago, he called it the "most sweeping reform of America’s pension laws in over 30 years."

While many challenges remain for Americans to achieve financial security in retirement, this act and the subsequent rules established by the Department of Labor, have produced significant progress in helping many more people become better financially prepared for retirement. Although primarily aimed at defined benefit plans, the PPA also affected the design of defined contribution plans. Most notably, it paved the way for auto-enrollment and also established QDIAs (Qualified Default Investment Alternatives) which include target date funds.

Since 2006, the impact of this legislation for defined contribution plans has been substantial. Consider:

  • 61% of plans use auto enrollment, compared to 35% in 20061
  • 73% of plans use target date funds, compared to 32% in 20062
  • 45.9% of plans use auto-increase, compared to 26% in 20073
  • 61.6% of plans have incorporated Roth contributions, compared to 31.1% in 20074

To assess the impact of the PPA on defined contribution plans over the past decade, as well as a look at some of the act’s shortcomings and future challenges, we assembled a diverse panel of experts. Following are some of their insights and suggestions for improvement. Read more...

Opening Quote PPA went a long way in enabling plan sponsors to make it easier for employees in terms of participating in the plan, contributing to it, and having a suitable investment program. Closing Quote

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The Pension Protection Act, which was passed in 2006, produced significant progress in helping many more people become better financially prepared for retirement.

1Callan 2016 Defined Contribution Trends
2The BrightScope/ICI Defined Contribution Plan Profile: A Close Look at 401(k) Plans, 2013
3Callan 2016 Defined Contribution Trends
4Ibid

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