EBRI Notes

EBRI Policy Forum: Defined Contribution Plans in a Post-PPA Environment

Jul 10, 2008 12  pages


• May 2008 policy forum: The Employee Benefit Research Institute (EBRI) devoted its May 2008 policy forum to an examination of defined contribution plans in the wake of the Pension Protection Act of 2006 (PPA), which had far-reaching effects on 401(k)-type retirement savings plans. Early results indicate PPA is, in fact, beginning to achieve the growth in automatic 401(k) enrollment and savings that its sponsors predicted.

• PPA’s “automatic” provisions getting the attention: Nearly two years after PPA became law, it is the legislation’s “automatic” provisions—automatically enrolling new workers in their employer’s 401(k) plan, automatically putting their contributions into “default” investments, and automatically increasing their annual contributions—that are receiving most attention by retirement professionals.

• Known problems with voluntary enrollment: Experience and research has long shown that when 401(k) enrollment is voluntary and workers must actively decide to take part in the savings plan, a significant number fail to enroll, or, if they do, to save and diversify appropriately. Enactment of PPA was designed to overcome workers’ indecisiveness and inaction by automating their participation, savings, and diversification in the employer’s retirement plan.

• Key points of policy forum presenters:

   --> Automatic enrollment can nearly double participation in some defined contribution plans.

   --> An increasing number of employers, especially large employers, are adopting automatic enrollment.

   --> Eliminating the company match in a 401(k) plan seems to have only a modest impact on automatic enrollment.

   --> Workers appear to be much more willing to accept automatic enrollment today than they were in the 1990s.

   --> Defined contribution (401(k)-type) retirement plans are becoming popular in many countries worldwide.