The Pension Protection Act of 2006

Important Changes to 401(k)/Profit Sharing Plans

Introduction

The retirement industry is touting the Pension Protection Act (PPA) as one of the most important pieces of legislation since the enactment of ERISA in 1974. While many of the provisions of the PPA focus on issues facing Defined Benefit pension plans, the law also addresses a number of rules affecting 401(k)/profit sharing plan Sponsors, Participants, and the Investment Professionals servicing 401(k)/profit sharing retirement plans.

Plan Sponsors

  • Automatic Enrollment. This plan feature allows the employer to enroll employees into the 401(k) portion of the plan without their consent, so long as the employee has the right to opt-out. In 2006, PPA removes some barriers that existed for employers that were considering the automatic enrollment feature, and also creates a new Automatic Enrollment 401(k) Safe Harbor (the new Safe Harbor is effective in 2008).
  • Default Investment Safe Harbor. PPA amends section 404(c) of ERISA to provide fiduciary liability protection for money invested in a default investment fund. Regulations will define the type of investment that qualifies for the safe harbor, and it is anticipated that multi-asset class investments will qualify. (Regulations anticipated in 2006 or 2007)

Plan Participants

  • EGTRRA Made Permanent. In 2001, the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) made substantial increases in the amount participants are allowed to contribute to their retirement plans. However, Congress chose to write the EGTRRA legislation with a “sunset” expiration provision (set to expire in 2010). PPA eliminates the sunset provision giving continued certainty to the EGTRRA contribution increases and also the Roth 401(k) feature.
  • Increased Reporting and Disclosure. in general, many PPA provisions focus on the participant’s retirement benefit. As a result, the law expands the reporting and disclosure rules with respect to retirement plans, allowing participants to be better informed about their retirement. Examples of the new rules include: required disclosures on benefit statements, and advance notice of the right to diversify employer securities. (Effective 2007)

Investment Professionals

  • Investment Advice. In general, ERISA has prohibited advisors from providing specific investment advice to participants in 401(k) plans where the compensation the advisor received from the plan varied based on the advice given. PPA creates an exemption from this rule as long as specific and very detailed procedures are followed. (Effective 2007)
  • Portability. EGTRRA changed the rules governing rollovers between different types of retirement plans. As noted above, PPA makes these portability changes permanent. In addition, PPA builds on the EGTRRA rules to allow direct rollovers into Roth IRAs and to allow non-spouse beneficiaries the ability to roll over the inherited amounts into IRAs. (Effective 2007)

Other Notable Issues

  • Vesting of employer Profit Sharing contributions: Prior law allowed a 7 year graded schedule; PPA requires 6 years as the maximum schedule for this contribution type. (Effective 2007)
  • New DB(k) Plans: If certain requirements are met, PPA allows Defined Benefit plan elements to be combined with those of a 401(k) plan, running the plan in a single trust. (Effective 2010)

How TSC Can Help

PPA makes significant changes to the rules governing retirement plans. The changes affect plan Sponsors, Participants and Investment Professionals. TSC is committed to making sure all parties involved with the plan are ready for these changes. Our professionals are ready to assist you, as we continue to offer Successful Corporate Retirement Plans Made Easy.