Compliance December 28, 2015

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. 
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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?

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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.

Compliance December 24, 2015

DC Plan Litigation Landscape Still Heating Up

The end of 2015 has seen an expanding range of retirement plan litigation cases, notes ERISA attorney David Levine. 
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“From stable value, to proprietary funds, to company stock, to excessive fees, to a mix of all of the above, there are also more plaintiffs law firms filing suits than ever,” warns David Levine, a principal at Groom Law Group specializing in the Employee Retirement Income Security Act (ERISA).

It’s been a busy year for litigators, Levine says, and there even seems to be a developing measure of competition among plaintiffs firms to organize and file complaints first, “to come up with new theories, and to move quickly.” Where does this leave sponsors, advisers and providers?

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“In short, we are in a world where every action could be put under the microscope—before we even gauge the impact of the fiduciary regulation on these lawsuits—and where a prudent process and contemporaneous documentation is more essential than ever,” Levine predicts.

One helpful exercise for retirement plan officials is to review recent court decisions for any potentially problematic shared practices. Levine also suggests plan officials developed trusted go-to resources for sound and responsive legal advice.

NEXT: The influential lawsuits in 2015

Presented below is just a sample of the defined contribution plan litigation to emerge or progress in 2015:

Pledger, et al., v. Reliance Trust Company, et al – Despite being a professional employer organization which provides human resources and business solutions to small- and medium-sized businesses throughout the United States, the Insperity company is accused of failing to engage in a proper process for the selection and retention of a plan recordkeeper for its own 401(k).

Sulyma v. Intel Corporation – In November a participant in retirement plans sponsored by Intel Corporation filed a lawsuit claiming custom-built investment portfolios within the plan are too heavily invested in alternatives and other imprudent investments.

Dennard v. Aegon USA – Another provider-focused lawsuit claims retirement plan provider and asset manager Aegon USA caused superfluous fees to be charged to its own retirement plan.

Urakhchin and Marfice v. Allianz Asset Management of America, et al – A lawsuit filed by two participants in an Allianz retirement plan claims the company and its asset management partners, including PIMCO, misused employees’ 401(k) plan assets for their own financial benefit.

Tibble v. Edison – A decision from the Supreme Court of the United States seemed to solidify the “ongoing duty to monitor” investments as a fiduciary duty that is separate and distinct from the duty to exercise prudence in selecting investments for use on a defined contribution plan investment menu.

Windsor and Obergefell decisions – A notice from the Internal Revenue Service gives guidance to plan sponsors, applying the Supreme Court’s recent same-sex marriage cases to retirement plans, as well as other benefits.

Spano vs. Boeing – In the end it was a rather abrupt conclusion to one of the original and longest-running examples of 401(k) excessive fee litigation. Plaintiffs in this particular case alleged that Boeing violated ERISA by permitting a variety of excessive fees to be charged to 401(k) plan participants. They also claimed that Boeing engaged in self-serving conflicts of interest, and permitted imprudent funds to be included in the company retirement plan.

The full archive of 2015 compliance coverage is online here. 

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