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Pension Protection Act (PPA)

Some have referred to the Pension Protection Act (PPA) as the most significant pension legislation since the Employee Retirement Income Security Act (ERISA) which was enacted in 1974. Although the 900-page law covers many topics that have nothing to do with retirement planning, its main intent is to further protect the nation’s employee pension system and encourage more employees to prepare for retirement by participating in 401(k) plans, IRAs, and other defined-contribution plans.

Benefits Complete Compliance – comprehensive online management reference service and reference manual

Defined-benefit reforms
The bulk of the law’s provisions are designed to make sure that defined-benefit plans offered by private employers are strong and solvent. Defined-benefit plans (as opposed to defined-contribution plans like 401(k)s and IRAs) promise employees a specific pension benefit that’s based on their salary when they retire and how many years they worked for the employer. To pay employees the amount they’ve been promised, employers must contribute enough money to the plan to fund those benefits.

In the past, employers have been required to fund only 90 percent of their pension plans. One of the key requirements of the PPA is that most employers that offer a pension plan will be required to fully fund those plans. Most plans will have four years (starting in 2008) to become fully funded, but those in the airline industry will have longer.

Defined-contribution plans
Other of the new law’s most significant provisions are intended to encourage employees to save more for retirement. The law tries to accomplish that in a number of ways.

The PPA makes it easier for employers to automatically enroll employees in defined-contribution plans such as a 401(k) plan. For several years, employers have been allowed to automatically enroll employees in such plans unless they affirmatively elected not to participate. But many employers were reluctant to adopt automatic enrollment because they feared liability under a variety of legal theories. The PPA attempts to eliminate those concerns by creating a number of protections for employers that use automatic enrollment.

Also, the PPA allows a plan’s financial advisers to give personalized investment advice to employees if the advisors meet certain requirements. Specifically, the advisers must either (1) earn the same fee regardless of what investment option the employee chooses or (2) base their advice on a computer model.

What it all means
Many commentators have expressed concern that the tightened regulation of traditional pension plans will have a boomerang effect of making more employers bail from those plans rather than pour more money into them. Combining those disincentives with the incentives provided for cash-balance plans, you can expect to see more companies converting the former to the latter in the coming years.

On the other hand, there’s strong evidence that automatic enrollment, when used, dramatically increases the rate of employee retirement savings. Now that employers have some protection from the perceived liabilities for adopting automatic enrollment, you can expect to see that option used more in the future as well.

As human resources professionals, you have a lot of options to consider. We suggest you start by contacting your benefits attorney to arrange a comprehensive review of the options and develop a plan for implementing some of the changes that are now available.