The architects of the Pension Protection Act of 2006 set out to tap the power of plan design, defaults, and inertia.
What PPA did in terms of its impact on the defined contribution system was give a nudge to plan sponsors and providers to adopt the best practices that were already emerging in cutting-edge workplace plans. We might call this new model Workplace Savings 2.0. When we look at the key provisions of the PPA, I think it is important to note that the most critical plan design elements that the new law endorsed were already legal. In fact, they were being used in many existing plans even before the law passed.
But while some far-sighted plan sponsors had seen and acted on the compelling logic of features like auto-enrollment or lifecycle fund defaults, fear of litigation made most others hesitate to adopt these ideas. Fear of lawyers is at least as powerful as fear of spiders. For some people, it is totally paralyzing! That’s why the actual passage of the PPA was so important.
By giving its blessing directly and explicitly to auto-pilot plan elements, including life-cycle funds as defaults, and by granting legal safe harbor from litigation for employers who adopted them, Congress took these cutting-edge ideas into the mainstream virtually overnight. The result was one of the most rapid “up-takes” of policy guidance by private industry ever.
The percentage of plan sponsors adopting auto-enrollment for their plans more than tripled. The percentage offering target-date funds as options or defaults quadrupled. And the most recent studies we have show that roughly 90% of auto-enrolled employees have stayed in their plans. This is a vastly higher rate of success than we ever achieved through traditional communications and education.
Clearly, PPA was more than just a quantitative change. It was a qualitative change. With the endorsement of these key design features, Congress essentially upgraded the first generation of workplace savings from an ad-hoc, supplemental option to something resembling a fully fleshed-out retirement savings system, a fundamentally new model. We can already foresee much improved results for participants as PPA’s core elements, which remain voluntary, are fully implemented.
Excerpted from a speech given by Robert L. Reynolds President and CEO Putnam Investments, at the 401KWire.Com Influencers’ Summit 2009: DC-IO Partnership Washington, DC May 6, 2009. The full speech is embedded below.
