Without the Pension Protection Act, retirement plan participants would be less equipped for retirement than they are today as the retirement industry makes the transition to defined contribution from defined benefit plans.
That's the consensus of DC plan experts who also say there's plenty of room for improvement, which they believe can be achieved primarily through greater efforts by sponsors rather than by new laws or regulations.
“The big thing for the defined contribution industry was the building of some structure around automatic enrollment, automatic escalation and target-date funds (through qualified default investment alternatives),” said Lew Minsky, executive director of the Defined Contribution Institutional Investment Association.
Without the PPA, participants likely would have “less well-diversified portfolios, lower participation rates and lower contributions rates,” he said.
Although there “was definitely movement” among sponsors to automatically enroll participants prior to the passage of the PPA, “adoption rates were spotty at best,” Mr. Minsky said. “The Pension Protection Act put forward a workable framework. It gave sponsors comfort and led to widespread adoption.”
Mr. Minsky and other DC industry members said sponsors must move away from offering a 3% initial deferral rate — a common industry practice — to a higher initial rate. They also must be willing, he added, to go beyond the 10% contribution cap on auto features — auto-enrollment plus auto-escalation — covered by Department of Labor non-discrimination rules.
Too many participants view a sponsor's initial deferral rate as an endorsement, and don't raise their contributions. Sponsors practice an “unfortunate overreliance” on safe-harbor rules, he added.
“We don't need a legislative change” to increase participant contributions, he said. “The industry needs to get beyond the misperceptions. We can get there within the existing legislative and regulatory structures.”