After 10 Years of PPA, Blueprint for ‘DC 3.0’ Has Emerged

As leader of Franklin Templeton Investments’ U.S. large market institutional defined contribution (DC) business, Drew Carrington spends a lot of time discussing and analyzing regulatory happenings under the Employee Retirement Income Security Act (ERISA).

Like others who have spent a significant portion of their careers creating and maintaining tax-qualified retirement plans, Carrington says he’s been thinking a lot lately about the legacy of the Pension Protection Act (PPA), which officially turns 10-years old later in 2016.

“While the DOL’s fiduciary rule gets the most headlines these days, the PPA is still having a major day-to-day impact on the retirement planning space,” he says, “driving employers towards automation and making them more mindful about their ethical and practical responsibilities for preparing their employees for a successful retirement.” What has made the PPA an even more powerful driver of change in recent years, Carrington adds, is the explosion in use of data technology within the retirement planning context. Recordkeeping and investment firms alike are making big efforts to distinguish themselves from the competition through technology partnerships and the rollout of proprietary planning tools. 

“Not only can a new hire or existing employee be swept into an age-appropriate and risk-balanced portfolio that will answer challenging investment questions for them—recordkeepers can increasingly access and leverage external data pertaining to the individual’s unique retirement outlook, allowing for more holistic investment decisions,” Carrington says. “When I am discussing all of this I like to explain to people that we are, I believe, on the cusp of realizing DC 3.0.”

Under this nomenclature, DC 1.0 is “what we had before the Pension Protection Act, with increasingly large and clumsy plans,” Carrington explains. “Then came PPA, which streamlined and automated enrollment and investment menus, making DC 2.0. Finally, we’re at a stage where we can leverage new technologies to bring true customization down to the plan participant level and truly take advantage of all the other features that are available. That is DC 3.0.”

NEXT: DC 3.0 more than just marketing 

Carrington adds that DC 3.0 is also “much more holistic, with the ability to consider everything from anticipated Social Security and pension income to one-time windfalls from home equity, inherited assets or a spouse’s separate retirement accounts. The top providers are already pushing in this direction.”

According to Carrington, there’s an important reason behind defining and advocating for the new set of best practices that are increasingly being employed by top plan providers and consultants, whether as “DC 3.0” or under any other name.

“Given the efforts states are undertaking to attempt to establish their own plans, it is incumbent on industry professionals to advocate for what we know already works,” he says. “This includes all of the great features that were brought about by the PPA, such as auto-enrollment, auto-escalation, more aggressive qualified default investment alternatives, and other elements.”

Carrington predicts that the states which are moving ahead on offering government-backed DC accounts or auto-enrollment individual retirement accounts (IRAs) will continue to move down this path, “but they’ll very soon run into the same problems well-established DC plans, employers and the market providers are already facing.”

“When you look into the mechanics of many of these plans the states are looking to offer, there’s little reason to think they will be able to widely improve retirement readiness,” Carrington says. “Even with auto-escalation, we know that enrolling people at 3% or even 6% of salary is not enough, especially when there is no matching payment coming from the employer, which is likely to be the case here.”