How Will the Pension Protection Act of 2006 Impact Participant Education?

Multi-channel, comprehensive communications and education programs are beneficial to employees.

The Pension Protection Act of 2006 is one of the most significant pieces of legislation passed in the past decade. As with most legislation, there is only one problem, does the PPA create more questions than answers? And, for those of us that serve as ad hoc advocates for plan sponsors and plan participants, what is the impact on participants and retirement education? The answer to that question, in my opinion, is the good, the bad, and the cloudy.

PPA Specifics
The good news is that the PPA has specific language on employee education and notification. The PPA also makes EGTRRA provisions, which were slated to sunset in 2010, permanent. Permanency had significant ramifications for plan sponsors and plan participants especially in those areas, like the catch-up provision, that enables those over age 50 to save more for their retirement. By making these guidelines permanent, plan sponsors no longer were reluctant to embrace the potential of making plan changes only to have to take the time and expense to change them back.

Specifically, under PPA plan sponsors are given a little breathing room when it comes to notice and consent requirements now having 180 days versus the old 90-day rule for 402(f) rollover notice, 411(a)(11) general consent rules, and the 417 QJSA notice. Although relatively minor, when one thinks of all the additional work thanks to Sarbanes-Oxley as well as guidelines from our own compliance officers and outside counsel, a little break now and then is welcome.

For those plan sponsors that have discrimination issues, PPA provides a safe harbor for 401(k) relieving plan sponsors from ADP/ACP Testing and excludes the plan from top heavy consideration.

Automatic Everything
In the age of automatic everything, it was good of the PPA to provide guidelines in the increasingly popular areas of automatic enrollment and automatic deferral programs. One area of participant concern and subsequently, potential fiduciary and litigious impact, was the area of automatic deferral programs. Although automatic enrollment officially has been blessed and clearly defined, automatic deferral programs — that is the automatic increase of a participant’s contribution into the plan over a several year period — needed some clarification.

The PPA declared that a “qualified percentage of compensation” should be no more than 10 percent of compensation, with the first year being at least 3 percent of salary, and programs may increase the deferral percentage by 1 percent a year until it reaches 6 percent of salary. Also, the Company’s Retirement Plan must provide either a non-elective contribution of 3 percent or matching contribution equal to the participant contribution as a percentage of pay or the matching contribution as a percentage of the participant contribution.

Another area that will benefit all parties will be giving clear direction on additional information and education on benefit statements. These statements will need to be provided quarterly and must include language to help participants better understand their investment options and selection. New language must be included on the statements regarding investment risk and diversification risk. In plain English (or other language if appropriate) plan sponsors must now inform participants that having more than 20 percent in a single investment is deemed too risky. Although they cannot dictate what investment selection or weighting an individual holds in their plan, as plan fiduciaries they must notify the participant that based on accepted financial planning rules, the participant may be at risk. It will be interesting to see how effective this communication will be over the next several years and whether participants accept the responsibility.

PPA and Company Stock
Thanks to Enron and other highly-publicized court cases, company stock as an option in a defined contribution plan is becoming less common. In the past, many firms made the company match with company stock and included strict guidelines on how long the individual needed to hold their position before exchanging it for another plan option. Under the PPA, plans are now prohibited from forcing participants to invest their own contributions in Company Stock.

From a fiduciary standpoint, with company stock being the riskiest investment option available in an investment line up, we will probably see those firms that still have their stock as an option discontinue the offering. In light of increased direction on prudent asset allocation and diversification — see above, re not having 20 percent in a single option — the trend is to legislate participant protection. Ironically, although we spend millions of dollars trying to educate our employees, we now recognize that sometimes you just can’t trust people to make the right decisions.

Everybody Needs a Little Advice
For the past decade, research and focus groups have confirmed that most people would benefit from investment advice. Fortunately, as an industry, we started to understand that most people say they want something — like lose 20 pounds by the summer — but few actually follow through. Financial advice is one of those things that we all know we should be doing; however, we don’t seem to get around to it for a variety of reasons. It is my sincere hope that, through the regulations in the PPA, financial advice will finally start to make some inroads. Plan sponsors should no longer have to worry about litigation if they follow the guidelines.

The Advice Checklist — Five Steps to Offering Your Participants Advice

1. Financial advice can only be provided by “fiduciary advisors.” If there is a question about whether the firm you are currently using or plan to use to deliver online, written, or in-person advice to your employees, secure a letter from their company counsel clearing stating that they are fiduciary advisors.
   
2. Plan sponsors are responsible for the prudent selection of advice providers. You must make a reasonable effort in reviewing credentials of several advice providers, have a documented process for selecting and managing the providers, and provide active oversight and review of their activities.
   
3. Plan sponsors must have on file all copies of materials or samples of print outs from any materials provided by the advice provider to your participants. Proprietary computer models may be used if certified and audited by an independent third party.
   
4. Advice should “be not biased in favor of investments offered by the fiduciary adviser or a person with a material affiliation or contractual relationship to the fiduciary.” For many plan sponsors, this has always been the underlying concern. Will the advisor provide appropriate investment selection advice or steer the participants into higher-revenue producing products? Unfortunately, a few rotten apples sometimes do stink. However, if a plan sponsor does its due diligence in the selection process and actively manages the advice provider, this scenario should be remote.
   
5. The final step in the Advice 5-Step Plan involves fees. Fees are the new lightning rods. As a plan fiduciary and Plan Sponsor you must ensure that you are aware and comfortable with all related fees and that they are “reasonable.” Fee disclosure, conflicts, or affiliations must be provided in “easy-to-understand” language at advice point and annually.

Conclusion
The good news is that PPA has helped the industry, both providers and plan sponsors in a number of positive ways. On the plus side of the ledger, the PPA:

• Makes EGTRRA permanent

• Gives clearer guidelines on Advice

• Provides direction on employee communications

• Removes barriers to auto enrollment

• Allows distributions to “working retirees”

On the cloudy or potentially bad side of the spreadsheet, we still have more questions than answers:

• Is this the end of traditional participant education?

• Do we still need enrollment kits?

• Do we still want employee meetings?

• Do we believe all your employees will appreciate auto-plans?

• Do we think employees will accept more responsibility for their retirement?

I applaud the Pension Protection Act; however, my concern will be what level of commitment the provider and plan sponsors will have toward retirement education and financial literacy. I am concerned about making it so easy for the participant through auto-enrollment and auto-deferral, that they never “learn to tie their own shoes.” What happens to the participant who leaves the plan, rolls over his money, and retires without knowing the difference between a stock, bond, diversification, or asset allocation? It is like learning to drive a car with an automatic transmission and someone gives you a standard transmission — the result can be painful.

Plan sponsors need to partner with providers that endeavor to reach all plan participants and employees through a multi-channel, comprehensive communications and education program. The result not only will be immediately beneficial to employees, it will also provide a secure foundation for their future, and the future of our country.