Showing posts with label retirement legislation. Show all posts
Showing posts with label retirement legislation. Show all posts

Saturday, August 15, 2026

20 Years Later, Did the PPA Really Change Everything?

Twenty years ago, I authored[i] a cover story about the then-newly enacted Pension Protection Act of 2006 with an ambitious headline: “The Pension Protection Act: This Changes Everything.” 

Twenty years later, it seems like a reasonable time to ask:

Did It?

The short answer, I think, is yes — though probably not quite in the ways we expected in 2006.

The PPA was a sweeping piece of bipartisan legislation, addressing among other things defined benefit funding, pension accounting, and cash balance plans — it was titled the PENSION Protection Act, after all.  And it was, for the benefits promised by those plans, an important defensive measure.[ii]  

However, to my eyes then — and now — the most lasting influence of the PPA was on the defined contribution side, where it helped change not just plan design, but the industry's thinking about participant behavior.

To Appreciate 2006, Go Back to 1986

Twenty years earlier, the Tax Reform Act of 1986 had significantly tightened contribution and nondiscrimination rules for defined contribution plans — some may remember things like a $7,000 cap on pre-tax savings, among other limits designed to “pay for” tax reductions elsewhere. Some will surely also remember that the 401(k) of the 1980s and 1990s was largely a participant-directed proposition. Employees were expected to enroll themselves (on paper), decide how much to contribute, pick investments, and — in theory, anyway — periodically revisit those decisions.

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The industry's response was largely to give participants more information and more choices. Unfortunately, participants didn't always make good choices — or make any choices at all. 

By 2006, the industry was increasingly recognizing that asking people to take responsibility for their retirement savings decisions didn't necessarily mean they would do so effectively. Procrastination, inertia, inadequate savings rates, overly conservative investments, and poorly diversified portfolios were not simply educational problems. They were behavioral ones.

The PPA Changed the Question

Of course, the PPA didn't invent automatic enrollment, target-date funds, or professional investment management. What it did[iii] was provide a framework that made it much easier — and arguably “safer” — for employers and fiduciaries to embrace them.

Let me start by reminding us of an unappreciated aspect of the PPA. It made permanent significant retirement enhancements we now take for granted. In 2001, the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) had restored some of what the 1986 act took away — but it not only raised contribution and compensation limits, it created age-50 catch-up contributions, expanded portability, created the Saver's Credit, and authorized Roth contributions in 401(k) and 403(b) plans. But those provisions were scheduled to “sunset” after 2010. The PPA made those retirement provisions permanent.

But it didn’t stop there. Automatic enrollment received important protections in the PPA — and more importantly, a safe harbor design template. Automatic escalation became a practical plan design feature. And Qualified Default Investment Alternatives (QDIAs) gave fiduciaries a framework for defaulting participants into diversified investment strategies, rather than the stable value or money market “vaults” that had long been chosen to preserve, rather than grow accounts.

The bigger change was philosophical. The PPA gave us a plan design template architected to leverage participant behavior towards better outcomes. Not so much an “if you build it, they will come” presumption, as a “let us do it for you” acknowledgement.

And the Numbers Moved

Twenty years later, the evidence of that shift is hard to miss.

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Automatic enrollment is now commonplace — and nearly ubiquitous among large employer plans, while participation rates have reached historically high levels. Automatic escalation has helped push those default savings rates higher, with industry data now regularly showing average participant savings rates around 12% when employee and employer contributions are combined.

Target-date funds provide perhaps the clearest illustration of the change. In 2006, they were still a developing concept. Today, they are a central part of the defined contribution investment landscape and the default investment for millions of participants. Participants, it’s worth noting, who would otherwise have been left to their own devises in choosing — and maintaining — those portfolios. 

The Advisor's Job Changed, Too

“Ironically, at the same time,” I wrote then, “the PPA dramatically opens the door for a new generation of financial advisers to help participants make the very same decisions that the auto-solutions would seem to render obsolete.”

That’s right — this was an evolution that changed the role of the retirement plan advisor. In the wake of the PPA, while investment selection remained important, advisors (and TPAs) today increasingly work with sponsors on plan design, automatic features (and levels), QDIA selection, participant engagement, retirement readiness, fiduciary governance, fee benchmarking, financial wellness, managed accounts, and retirement income. 

Now, the PPA didn't do all of that by itself. Technology, markets, demographics, regulation, litigation and subsequent legislation — including the SECURE Acts — have all contributed.

But to my eyes, the PPA was an important inflection point. It was, in many ways, a reset in the perspective of what retirement plans could — and perhaps should — be.

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So, Did It Change Everything? 

Not quite.

It didn't solve all of America's retirement savings issues. Coverage gaps remain. Too many participants still save too little. Turning retirement savings into reliable retirement income remains a challenge. 

But 20 years ago, the conversation was more likely to focus on whether a plan offered a broad investment menu and provided participants with enough information to make good decisions — assuming they would — and could. 

Today, we ask not only whether workers are participating, but at what level, whether the default investment is appropriate, whether the plan's design encourages better behavior, and increasingly, whether accumulated savings will actually translate into sustainable retirement income.

That's a very different conversation.

Looking Back—and Ahead

Ok, so the PPA didn't change everything. But it helped change something fundamental: the assumption that retirement security should depend primarily on participants making a long series of good decisions…on their own.

In that sense, the PPA didn't merely change retirement plans in 2006. It established a direction — and provided a foundation — that plan design has followed for the last 20 years — and that SECURE 2.0 is still following today.

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Turns out, it really DID change everything.

Happy birthday, PPA!

  • Nevin E. Adams, JD

 


[i] My name was on the PLANSPONSOR story, though there were several other key contributors — and one important editor, who, though not named in the piece, contributed much of the vision (none other than Charlie Ruffel).

[ii] That said, at the time I also wrote “What the PPA effectively does is hammer the nail into the defined benefit coffin by revoking the financial wiggle room that encouraged corporations to accept the pension bargain in the first place.” 

[iii] It’s worth noting that a significant part of the PPA was removing the sunset provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001, which maintained higher deferral limits, retained the catch-up contribution provisions for older workers, and kept in place the Saver’s Credit and Roth 401(k).

Saturday, November 16, 2024

When ‘More’ Retirement Readiness Is (Much) Less

  A new study shows how a proposed government-run retirement program said to increase coverage could actually undermine the nation’s retirement readiness.

The report — by Morningstar’s Spencer Look and Jack VanDerhei (yes, that Jack VanDerhei) — considers the potential effects of the Retirement Savings for Americans Act (RSAA) on retirement-income adequacy for Generation Z and millennial workers. The proposed legislation — which aims to expand retirement coverage for American workers by creating a federal retirement plan for those not covered through their employer — has been introduced in both the House and the Senate.[i] 

The legislation has been positioned as a means of helping close the coverage gap — of creating not only an opportunity for those without access to a retirement plan at work to save for retirement, but to receive the incentive of a matching contribution from the federal government. How then, would such a proposal undermine the nation’s retirement security?

‘Under’ Mining

As it turns out, in a variety of ways. 

Structurally, and significantly, it directly competes with the existing private retirement system — providing an alternative that employers might well consider rather than adopting a new plan on their own. 

That said, and even more significantly, it seems likely to encourage employers that already provide a plan — and matching contributions — to abandon those in place of the proposed government-run alternative. 

Finally, and compounding the damage of the first two, it does so with a structure that would not only have workers contributing less (generally speaking) than they do with the current system[ii] — and with a match that runs well below that found with the current system.[iii] 

The Damage Done

So, how much damage could this proposal wreak on the nation’s retirement security? The Morningstar researchers found that wealth could decrease by as much as 20% for Gen Z workers and 12% for millennial workers.

Those are some jaw-dropping numbers, to be sure — but the Morningstar researchers apply what seem to be reasonable, conservative estimates to get there.

First, since workers would be able to opt-out of this program, they assumed an opt-out rate roughly half that of the current state-run programs (that don’t have a match) — 20% (that’s about double the rate in private sector plans, which enjoy the backing and support of their employer as well as the convenience of payroll deduction).

More than that, one of the biggest assumptions in the researchers projected impact had to do with employer behaviors in response to the RSAA alternative — and here they used two different scenarios.  In one — a “best case” scenario — they assume that no plans with a thousand participants or more would do so (but that a third of those with less than a hundred participants, and a quarter of those with 100-999 participants would). 

However — the one that they said more likely represents the longer-term impact — they assumed anywhere from a third to 22% of employers of ALL sizes that currently offer a plan would abandon it.[iv]  

The Bottom Line

The research provides valuable insights as to the potential calamitous impact of this proposal on the nation’s retirement security — its introduction ironically just ahead of when some of the more impactful provisions of the SECURE Acts on new plan formation are scheduled to take hold. 

There is, however, yet another factor that could even more dramatically impact these projections — something that the bill’s sponsors have, for the very most part, avoided speaking to; how would this expansive government match program be paid for? 

The answer to that question — which might well have an even more deleterious impact on retirement security — was at least hinted at a couple of months back by the RSAA’s sponsor Sen. Hickenlooper — who said that he’d be willing to lower 401(k) tax incentives and contribution limits to pay for this program.

Talk about robbing Peter AND Paul…

- Nevin E. Adams, JD

 


[i] Sponsored by Sens. John Hickenlooper (D-CO) and Thom Tillis (R-N.C.), as well as Reps. Terri Sewell (D-Ala. 7th) and Lloyd Smucker (R-Penn. 11th), the bill is championed by the Economic Innovation Group (EIG), an organization founded by Napster and Facebook billionaire Sean Parker and Steve Glickman, former Senior Economic Advisor at the National Security Council under President Obama. Rocket Mortgage majority owner Dan Gilbert is a member of the organization's Founders Circle, an advisory board with no governance responsibilities. 

[ii] As the Morningstar study notes, the default RSAA contribution rate of 3% is significantly lower than typical contribution rates in DC plans. For instance, the average deferral rate in Vanguard’s "How America Saves 2024" report was 7.4%. Notably, even workers earning less than $50,000 per year had deferral rates of 5.1% or more.

[iii] “Additionally, employer matches for DC plans do not start to phase out for workers earning more than the median income level,” the study explains. “Therefore, for many workers, including those earning less than median income, participation in an employer sponsored DC plan would result in larger overall contributions than the RSAA federal account. Results for the RSAA improve when we assume federal program participants increase their savings rate to 7%, as those earning less than median income would get the full 5% federal match tax credit (the "Above Default Saving" scenario). However, while some participants would save at a higher rate, most participants are likely to contribute at the default. This is because the RSAA does not include an auto escalation feature, which is a key driver of the higher contribution rates seen in DC plans.”

[iv] “To elaborate, the RSAA would likely stymie new plan creation, and while the change may primarily affect smaller plans in the short term, we do think that access to plans, even with larger employers, would go down in the long run.”