Briefly explain the provisions of the Pension Protection Act (PPA) of 2006.

Question

What will be an ideal response?

Answer 1

This law made extensive changes to the Employee Retirement Income Security Act (ERISA) of 1974 that governs employer-sponsored, qualified (for tax deferral) retirement-benefit plans. For example, it extended provisions of an earlier act that specified conditions such as the following:

1. Higher limits on the annual amount of compensation that can be taken into account for retirement-plan benefits
2. Higher limits on the annual amount of permissible benefit and employer contributions
3. Ability of individuals age 50 and older to make "catch-up" salary-deferral contributions

In addition, the PPA specifies that ERISA preempts any state wage-withholding law that would prevent an employee's participation in a 401(k) plan under an automatic-enrollment provision. It also permits employers to adopt new cash-balance plans and to convert existing defined-benefit plans into cash-balance plans, if the latter satisfy specific requirements.

Finally, the PPA also provides "safe harbor" protection for employers from complex and costly compliance regulations and from liability for breach of fiduciary duty with respect to the performance of default investments if employers do the following:

1. Automatically enroll workers in the company plan at a default savings-contribution rate
2. Establish default investments, for example, those that automatically invest a worker's 401(k) contributions in an age-appropriate "life-cycle" diversified fund (great equity exposure for younger participants; greater fixed income for older ones)
3. Automatically escalate workers' contributions to their 401(k) accounts on a periodic basis

Under the PPA, 401(k) participants can still exercise individual control over their investments if they want to, but the new law encourages sponsors to set up such plans in a manner that helps workers to help themselves simply by doing nothing. By 2011, 41 percent of employers adopted automatic enrollment.