President Bush signed the Pension Protection Act (PPA) into law on August 17, 2006. Ostensibly, the bill is a reaction to the current consolidation of Defined Benefit Pension plans, but there are a significant number of changes which impact Defined Contribution Plans, too: 401(k), 403(b), and 401(a) plans. You may have read about some of the most prominent changes already, especially the Automatic Enrollment provisions.

At PensionTrend, we’re waiting for guidance from the Department of Labor, and even some technical corrections from Congress before we feel comfortable relying on the new legislation. We were researching and preparing for the new options, though, even before the Act was signed into law.

Depending on the demographics and design of your plan, we think Automatic         Enrollment is a great idea. It works best in low turnover industries (manufacturing and financial services as opposed to retail & restaurants), and larger companies and may provide some help passing your discrimination tests if your plan needs it. Automatic Enrollment is a positive feature: it’s been proven that most participants who start to defer won’t stop.

However, this is one of the components of the Pension Protection Act which requires some additional description. Today we are waiting for the government to provide guidance about the mechanics of automatic enrollment:

 ·         Where should automatic contributions be invested?

·         What should the notice to participants look like?

Some explanation has already been provided. It’s a near certainty, for example, that the default investment for automatic contributions won’t be a money market or stable value fund. Most likely it will be some kind of lifecycle or balanced fund, but until we get a definitive answer we think it’s prudent to wait for guidance before adopting automatic contributions in your plan.

•  EGTRRA Permanency gets the least coverage, but it is the most important component of the PPA. The catch up contributions you’ve been using for your over age 50 employees to contribute more than the annual limit, the higher compensation limits we’ve been using in your compliance tests, the 100% of compensation limit for deferrals were all set to expire in 2010. With the PPA, these limits won’t be reduced back to their pre-EGTRRA limits. Roth contributions, initially set to expire in 2010, are also here to stay.

• Some Vesting Schedule terms need to be scaled back from their current 7 year term, or in some cases 5 year term (in the case of a “cliff” schedule-0% for the first 4 years, 100% on the 5^th). With the introduction of the PPA, these schedules need to be amended back to a 6 year term (or 3, in the case of a cliff schedule). Most of our clients’ matches and profit sharing dollars are contributed to ‘safe harbor’ sources-they’re already on a 6 or 3 year term vesting schedule. Vesting schedules on other Profit Sharing or Match sources, however, will need to be amended.

There is certainly more to the Pension Protection Act which may affect the way we work with your retirement plans. The PPA may require changes to our blackout notices, the timing of our distributions, even the distribution of the Summary Annual Report to participants. The legislation even promotes a new retirement product in 2010: the DBk!

Rest assured that we’ll stay on top of the latest developments. In October, in fact, we sent a delegation from PensionTrend to Washington, DC to learn more about the ramifications of the PPA & how you can use it to best advantage. Stay tuned!

The above statements are expressed as a general description and should not be construed to contain specific tax or legal advice. The reader should consult their attorney or accountant for advice specific to their circumstances.