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.
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.
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.
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.
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.
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).
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