The 'Threat' of the PPA

Anyone who works in the retirement plan industry knows it is a world of acronyms, most of which refer to regulations or laws. The first such law with an acronym that I remember watching evolve was the Pension Protection Act of 2006—the PPA. The PPA was the first time in my reporting career that I—being familiar with the process from the popular “I’m Just a Bill” Schoolhouse Rock song—really saw a law grow out of the bills developed in each house of Congress. The other big rules, ERISA and EGTRRA—the Employee Retirement Income Security Act of 1974 and the Economic Growth Tax Relief Reconciliation Act of 2001, respectively—I knew by both name and acronym. They were foregone conclusions, laws to learn and understand.

It’s amazing—even more so in this election year—to see the clear preponderance of lawmakers who supported the PPA, not only in the majority party in Congress but the support by all of Congress. In our recent and current political climate, when can you remember such a law bringing folks together and working across the aisle? With retirement such an important social policy, you can see why people would come together to advance rules that would protect and improve retirement security for American workers.

The PPA is the most comprehensive reform of the U.S. pension laws since the enactment of ERISA. While it was envisioned to tackle underfunding of pension plans, when we think or talk about the law today, we tend to focus on its outcomes for defined contribution (DC) plans: acceptance and increased adoption of automated plan design and asset-allocated investments as defaults, particularly target-date funds (TDFs).

Ten years ago, before passage of the PPA, some plan sponsors were confronted by state laws that prohibited deductions from employee paychecks without the explicit permission of the worker. These state withholding laws were often cited as a reason not to implement automatic enrollment, or negative election as it also was called. The PPA eliminated that challenge for most defined contribution plans, pre-empting state laws. And, as was expected, many employers that may have been considering such a plan design element before the law, implemented it—sometimes with automatic deferral escalation but oftentimes without. The PPA also included safe harbor plan designs to allow plan sponsors a new way to avoid the actual deferral percentage (ADP) and actual contribution percentage (ACP) tests.

Further, the law instructed the formation of qualified default investment alternatives (QDIAs), which remade the traditional thinking about default investments. Before the PPA, the default investment for participants who failed to make an affirmative investment selection was often a stable value or money market fund—conventional wisdom being that it was better for participants not to lose money. However, QDIAs turned that thinking on its head, advocating for equity-based investments—i.e., balanced funds, TDFs and managed accounts—so that participants could keep up with inflation and have their balances grow if they remained in the plan. The endorsement of target-date funds in the QDIA regulation has been instrumental in the immense growth in those funds’ development and asset-gathering.

These elements allowed for plan design by leaps and bounds. Now, we are able to assume that most plan sponsors can add automated plan features if they are interested, and we often question why a plan wouldn’t be interested in such a design feature. Perhaps, though, the industry has seen another evolution—maybe the largest brought on by the PPA—and one that may be somewhat overlooked.

In the summer of 2006, we were in production for the inaugural issue of PLANADVISER (more on that in the next issue), and it’s amazing to think back to our cover story, which was titled “Now What?” The article featured industry experts discussing threats and opportunities that might result from the act. Some of those sources were concerned that the act and the development of automated plan designs and QDIAs would render the guidance of a retirement plan adviser unnecessary. How wrong they were. Those who saw opportunities in the law were, I think, correct.

Instead of being rendered obsolete, I believe the opposite has happened for retirement plan advisers.  The PPA gave retirement plan advisers a new set of tools—automation and QDIAs—to use for the benefit of the plan and its participants.

It also ushered in a movement to view defined contribution retirement plans as a retirement income vehicle. The industry has evolved to expect plans to be designed for retirement readiness, with the Department of Labor (DOL) asking for comments about how to express savings as an income stream or searching for ways to reduce leakage, as proof of the law’s impact. It is unlikely that this rethinking of the role of a retirement plan, the focus on plans designed for savings and income—not just as an ancillary employer-sponsored benefit—would have occurred without the ability to design plans as prescribed by the PPA.

Additionally, many of the best advisers in the country today have achieved that status through embracing their role as a plan-level adviser­—not just an investment adviser—providing better services, which results in improved plans for plan sponsors and participants. Likely, they have the PPA to thank, as well.