Time to Rethink Your 401(k) Plan? Pension Protection Act Allows Employers to Redesign Retirement Plans

Article excerpt

EXECUTIVE SUMMARY

* The PPA has made it easier for plan sponsors to automatically enroll employees in a retirement plan by eliminating the worry over state withholding laws. It delineates a new safe harbor automatic enrollment provision that starts the automatic deferral at 3%, raising it by 10/0 of salary per year until it reaches 6%.

* Investment education programs have long been allowed under the Employee Retirement Income Security Act of 1974 (ERISA). but to what degree employers would have liability for that education remained a concern. As a result, employers often provided general education but not specific investment advice.

* Section 404(c) was added to ERISA in October 1992 with the intent of relieving the employer from responsibility for the employee's asset allocation decision, but employers found it difficult to comply with all of the requirements. The PPA takes this implied protection a step further by providing an actual exemption from the prohibited transaction rules for fiduciary investment advisers.

* The PPA also allows employers to use computer models to deliver unbiased investment advice and reduce liability. Some companies were already using such models before the PPA passed, but the PPA formally amended ERISA to add an exemption that allows fiduciaries to use such models. This provision, ERISA section 408(b)(14), became effective Jan. 1.

* The PPA also has allowed the DOL to propose regulations for default investment options. Some investment advisers are concerned because proposed new DOL rules do not indicate that a fixed income or money market account would be an appropriate default investment option. Others believe sophisticated models based on the employees' profile are more suitable than defaulting to the most conservative investments.

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Nearly 50% of the U.S. work force will become eligible for retirement by 2012, according to the Bureau of Labor Statistics. And rapidly rising costs of traditional defined benefit plans have led many employers to abandon traditional plans in favor of defined contribution plans such as 401(k)s. But the new responsibility to fund and direct their own retirement investments has left many employees angry, confused and in some cases seeking legal action against their employers.

The Pension Protection Act of 2006 (PPA) strengthened employers' options to bolster their 401(k) plans. Here we look at some of these new options and other strategies to strengthen and promote your 401(k) plan.

AUTOMATIC ENROLLMENT

By superseding conflicting state wage and garnishment laws, the PPA has made it easier for plan sponsors to automatically enroll employees in a retirement plan by eliminating the worry over state withholding laws.

"The goal is to get people saving more," says Karen S. Sanchez, CPA, who heads up human resources and benefits consulting for Chicago-based accounting firm Sikich LLP. "401(k) plans weren't built to be the sole retirement system, yet the reality is, they are now."

Beginning in 2008, the PPA has delineated a new safe harbor automatic enrollment provision that starts the automatic deferral at 3%, raising it by 1% of salary per year until it reaches 6%. "We like to put things on autopilot as much as we can," says Sanchez. "It is easier for employees to do nothing than to do something."

Sue Scott, HR manager of Jacob & Hefner Associates PC, hired Sikich to conduct its benefits-education program when the Illinois-based survey and engineering firm added automatic enrollment after the PPA was signed into law. Scott made the benefits-education presentation mandatory and arranged a Webcast for field employees not able to come into the office for the in-person seminar.

"We've gone from a 78% participation rate to about 95%," Scott said. "That says the education program really worked for us. A good 30% of our employees increased their deferral amounts. …