Price Perspective - In Depth

The PPA, 10 Years In

A Retirement Revolution Ready for Evolution

Executive Summary

  • The Pension Protection Act of 2006 significantly impacted workplace retirement plan design and helped people save for retirement through auto services.
  • More than 73% of retirement plans have target date investments as the Qualified Default Investment Alternative (QDIA).
  • There is a need for retirement income solutions within defined contribution plans to address the decumulation phase.

The Pension Protection Act (PPA) of 2006 is one of the most significant legislative developments in the modern age of retirement policy. Enacted in 2006, the PPA enabled automatic enrollment features, raised contribution limits, and provided a safe harbor for default investment selections whose combined effect has dramatically increased plan participation rates and put millions of American workers on a path to better retirement outcomes.

A recent survey by Callan Associates1 found that 67% of plan sponsors felt that the PPA was beneficial to their defined contribution (DC) plans. Plan sponsors cited several ways in which the Act has impacted workers’ retirement goals, including: the safe harbor for Qualified Default Investment Alternatives (QDIAs); making permanent provisions of the Economic Growth Tax Relief Reconciliation Act of 2001 (e.g. higher contribution limits and Roth contributions); and providing safe harbors for offering auto enrollment.

Since the PPA’s enactment in 2006, T. Rowe Price has observed dramatic growth in the implementation of auto features among the retirement plans that it administers in these major areas:

  • Auto enrollment: Of retirement plans that outsource deferrals to T. Rowe Price, more than half have embraced auto-enrollment. In 2005, only 17.5% of our plans used auto-enrollment. That has grown to 60.7%, as of year-end 2015.2
  • Default investments: Auto-enrollment into target date vehicles as the default investment have increased from 56% to 96%.3
  • Auto increase: Plans using auto increase have grown from 11.6% to 82.2%4
  • Roth contributions: Now offered in 50% of plans, up 7 percentage points from 2014. As a result, participants making Roth contributions have increased for the eighth consecutive year.5

While there has been significant growth in these areas, there are still many opportunities ahead to improve retirement outcomes.

“How do we get targeted at the right point in time to make sure that you’re starting them out on the right path?” says Aimee DeCamillo, Vice President and Head of T. Rowe Price Retirement Plan Services. “I think there’s an opportunity for a next generation of auto-services to get more targeted. So, for example, imagine where a plan sponsor takes a more innovative approach and automatically enrolls employees under age 40 into a QDIA with Roth deferrals.”

The evolving landscape since the PPA has led to shifts in both plan sponsor and participant behavior. Read More...

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Substantial progress has been made since PPA’s enactment in 2006, but challenges to retirement security remain.

Callan, DC Spot Survey, June 2016.
T. Rowe Price Retirement Plan Services, based on active 401(k) plans that outsource deferrals to T. Rowe Price only, 12/31/2005.
Ibid.
Ibid.
T. Rowe Price Reference Point, 2016.

The principal value of target-date funds is not guaranteed at any time, including at or after the target date, which is the approximate date when investors plan to retire. These funds typically invest in a broad range of underlying mutual funds that include stocks, bonds, and short-term investments and are subject to the risks of different areas of the market. In addition, the objectives of target date funds typically change over time to become more conservative.

This material is provided for informational purposes only and is not intended to be investment advice or a recommendation to take any particular investment action. The views contained herein are as of May 2016 and may have changed since that time.

Call 1-800-922-9945 to request a prospectus, which includes investment objectives, risks, fees, expenses, and other information that you should read and consider carefully before investing.

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