High on PPA: insurers find much to like about the 2006 Pension Protection Act following its first full year of implementation.Tom Foster, national spokesman for The Hartford Retirement Plans, speaks enthusiastically about the automatic enrollment provision in the 2006 Pension Protection Act. That's the section of the law that allows employers to auto-enroll employees in the companies' defined-contribution plans Defined-Contribution Plan A retirement plan wherein a certain amount or percentage of money is set aside each year for the benefit of the employee. There are restrictions as to when and how you can withdraw these funds without penalties. , and keep them there unless individuals opt out within 90 days. "Employees who have never previously participated say, 'Wow, I have money in my retirement plan!' And some say they didn't even feel it, and they're going to put even more money in," Foster said. "So I think it's a great educational tool. Auto-enrollment is one of the best marketing opportunities we've had in the retirement plan business." About one-third of eligible workers don't sign up for their employers' retirement plans, but automatic enrollment could reduce that rate to less than 10%, according to according to prep. 1. As stated or indicated by; on the authority of: according to historians. 2. In keeping with: according to instructions. 3. the U.S. Department of Labor. Illinois-based Hewitt Associates Some of the information in this article may not be verified by . It should be checked for inaccuracies and modified to cite reliable sources. Hewitt Associates , a global human resources The fancy word for "people." The human resources department within an organization, years ago known as the "personnel department," manages the administrative aspects of the employees. consulting firm Noun 1. consulting firm - a firm of experts providing professional advice to an organization for a fee consulting company business firm, firm, house - the members of a business organization that owns or operates one or more establishments; "he worked for a , reported in October that 34% of companies surveyed automatically enrolled employees in their 401(k) plans in 2007. That's up from 19% in 2005. The 90-day provision also made automatic enrollment more appealing to plan sponsors, Foster said. Before PPA PPA 1. Palpation, Percussion & Ausculation 2. Pittsburgh pneumonia agent 3. Postpartum amenorrhea 4. Price per accession 5. Pure pulmonary atresia , employers that auto-enrolled employees couldn't return those workers' contributions if the employee decided to opt out. "If they took money out of a paycheck, it was then a plan asset," he said. "They had to record-keep those small balances." The new law also knocks down three other employer concerns, Foster said. First, it pre-empts state tax withholding rules. Next, it provides safe harbor Safe Harbor 1. A legal provision to reduce or eliminate liability as long as good faith is demonstrated. 2. A form of shark repellent implemented by a target company acquiring a business that is so poorly regulated that the target itself is less attractive. for employers using automatic contribution acceleration. As long as the program is structured properly, lower-paid employees who stop contributing won't cause employers to fail the 401(k) nondiscrimination non·dis·crim·i·na·tion n. 1. Absence of discrimination. 2. The practice or policy of refraining from discrimination. non fired test. The test is used to balance contributions from highly compensated and lower-paid employees, to keep the plan from becoming top-heavy. Lastly, it "alleviates potential fiduciary problems that arose late last year when the Department of Labor identified default investment options for the act. "If an employee hasn't told an employer that he wants to invest, then he hasn't said how he wants to invest," said Foster. The options are an age-based or target maturity fund, a balanced fund Balanced Fund A mutual fund that invests its assets into the money market, bonds, preferred stock, and common stock with the intention to provide both growth and income. Also known as an asset allocation fund. or a managed money account. [ILLUSTRATION OMITTED] The Hartford also has been very active in promoting Roth 401(k)s, which are funded with after-tax money but provide tax-free earnings. These were created under the Economic Growth and Tax Relief Reconciliation Act of 2001, and many employers were still under the impression they would sunset after 2010. That is no longer the case, Foster said. What's more, The Hartford is able to handle the five-year tracking rule concerning when contributions can be withdrawn tax-free. Employees can fund their 401(k)s with both Roth and pretax pre·tax adj. Existing before tax deductions: pretax income. pretax adj [profit] → vor (Abzug der) Steuern contributions, he said. According to A.M. Best Co. data, The Hartford Life Group in July 2007 had nearly $25 billion in 403(b), 457 and 401(k) assets. Foster said his only disappointment with PPA so far is that some employers have not yet grasped the opportunities. "We have to continue what we do best: Educate them," he said. "But over all, we're pleased with the PPA." Reaching Younger Workers Prudential Financial's retirement business has about 7,000 clients in 401(k), pension and nonqualified plans Nonqualified plan A retirement plan that does not meet the IRS requirements for favorable tax treatment. with assets of about $100 billion. "The PPA has absolutely grown our business faster," said James K. Cornell, chief marketing officer for Prudential Retirement. "More participants enroll in plans that use auto-enrollment, and more than hall" of our total client base uses our qualified default vehicle, GoalMaker." New enrollees at lower deferral deferral - Waiting for quiet on the Ethernet. rates have driven the plans' growth, Cornell said. Many are young employees using automatic increase programs that boost their deferrals. "There is much greater awareness, especially among younger employees, that they're not going to have a pension plan when they retire," he said. "So it's really going to be the 401(k) that is their only savings vehicle. Especially the Generation Y and the Millennials are eager to sign up and contribute to a 401(k) plan." There is also much greater awareness of the $5,000 catch-up contributions available to people 50 and over, Cornell said. Interestingly, Prudential has found that participants typically don't use the opportunity to get investment advice, and many employers are adding investment advice options to their plans "as simply a way to say 'we offer it,'" Cornell said. "But what we're seeing is much stronger use of embedded Inserted into. See embedded system. advice into the actual products themselves. The qualified default is a great example of that." GoalMaker is different from traditional life-cycle fund life-cycle fund A mutual fund that maintains a certain mix of stocks and bonds in order to attract investors of a given age and risk preference. Mutual fund families sometimes offer several different life-cycle funds with various asset allocations so as to , he said. It allows levels of personalization Custom tailoring information to the individual. On the Web, personalization means returning a page that has been customized for the user, taking into consideration that person's habits and preferences. at the participant level, helping to generate an age-appropriate asset allocation Asset Allocation The process of dividing a portfolio among major asset categories such as bonds, stocks or cash. The purpose of asset allocation is to reduce risk by diversifying the portfolio. . Cornell said he sees 10% to 15% usage of advice, but 50% usage of a default investment vehicle. Variety of Plans For Nationwide Financial, the PPA provides "a huge opportunity, to help our business partners"--third-party administrators, investment professionals and plan sponsors, said Steve Gradeless, vice president of business development for private-sector retirement plans. To help, the company has created a "Straight Talk" program that "simplifies key features of the PPA by putting them into plain English Plain English (sometimes known, more broadly, as plain language) is a communication style that focuses on considering the audience's needs when writing. It recommends avoiding unnecessary words and avoiding jargon, technical terms, and long and ambiguous sentences. ," he said. The company has added plan-design options, including cash-balance plans and how they can complement 401(k) plans, said Gradeless. "Because of our efforts, we've seen plan sponsors make significant enhancements to their retirement plans, including automation of enrollment, escalation es·ca·late v. es·ca·lat·ed, es·ca·lat·ing, es·ca·lates v.tr. To increase, enlarge, or intensify: escalated the hostilities in the Persian Gulf. v.intr. of deferral rates, default options and cash-balance plans." Since late 2006, Nationwide has seen its managed account business grow to $2.2 billion in assets from $1.7 billion. Gradeless said Nationwide provides financial advice at the participant level, and also helps plan sponsors select core fund options, such as target maturity funds. Nationwide began administering Roth 401(k)s in January 2006, but adoption rotes were low due to Economic Growth and Tax Relief Reconciliation Act of 2001's sunset provision A statutory provision providing that a particular agency, benefit, or law will expire on a particular date, unless it is reauthorized by the legislature. Federal and state governments grew dramatically in the 1950s and 1960s. . Since PPA, the company has seen an increase in plan adoption rates, Gradeless said. The company talks up cash-balance plans in its education programs and has seen the number of proposals increase. Nationwide does not actually create and administer such plans, but helps its business partners to understand how they can help improve retirement security for plan participants Plan participants Employees or other beneficiaries who are eligible to receive benefits from a company's employee benefit plan. . "In our market, cash balance plans are typically new and introduced in conjunction with a profit-sharing 401(k) plan, said Gradeless. "If done appropriately, they can actually increase the deferrals that employers are making into profit-sharing 401(k) plans for employees. So generally, they're received by employees very well." Focus on Advice Lincoln Financial Group's Employer Market segment is made up of defined contribution programs, executive benefits and group protection products. The company's merger with Jefferson Pilot Financial in 2006 created synergies and new opportunities for the segment to meet the needs of employers, said Cindy King, head of product for retirement business. The DC line markets fixed and variable annuities Variable annuities Investment contracts whose issuer pays a periodic amount linked to the investment performance of an underlying portfolio. , and has about $33.7 billion of assets under management Assets Under Management (AUM) is a term used by financial services companies in the mutual fund and money management or investment management business to gauge how much money they are managing. , including mutual funds, according to data compiled by A.M. Best Co. The PPA changes "play strongly to LFG's expertise in retirement income security solutions," said King. King said PPA has been a catalyst for defined contribution plans Defined contribution plan A pension plan whose sponsor is responsible only for making specified contributions into the plan on behalf of qualifying participants. Related: Defined benefit plan . The company expects plan sponsors to increasingly use auto-enrollment, primarily by larger-case plans. For plans that use auto-enrollment, they should see an increase in participation by about 10%, she said. Higher contribution limits have not been a factor, however. Instead, education programs are the impetus to encourage people to save more. "The PPA made us focus on what is the right type of education programs and investment advice to be offering to make participants think longer and harder about how much they can save and about how to save it," she said. [ILLUSTRATION OMITTED] Financial advice to plan participants plays a big role for Lincoln. To help them understand investment options, the company uses an objective computer model when working with individuals, and outside education teams to enroll participants or conduct group education meetings. Conversely con·verse 1 intr.v. con·versed, con·vers·ing, con·vers·es 1. To engage in a spoken exchange of thoughts, ideas, or feelings; talk. See Synonyms at speak. 2. , its own advisers work one-on-one with participants in the MultiFund 403(b) segment, which is still larger than its 401(k) segment. Lincoln also has a 457 plan business. "We really feel the financial-advice aspect is another quiver in our arsenal to plan asset allocation for plan participants," King said. * The News: Insurers are using features of the 2006 Pension Protection Act to grow their retirement-plan businesses. * Behind the Trend: The act's automated enrollment and default investment options have helped both employers and employees. * What's Next: An increase in plan utilization is under way, which improves chances that workers will be better prepared financially for retirement. [ILLUSTRATIONS OMITTED] Pension Protection Act's Features Automatic acceleration of employee contributions in ensuing en·sue intr.v. en·sued, en·su·ing, en·sues 1. To follow as a consequence or result. See Synonyms at follow. 2. To take place subsequently. years Default investment options for plan participants unwilling or unable to choose Permanent status for higher contribution limits that were scheduled to sunset after 2010 under the Economic Growth and Tax Relief Reconciliation Act of 2001 Beginning in 2010, the right for plan sponsors and providers to create a combination Defined Benefit and 401(k) plan, called a DB(k), combining elements of defined benefit and defined contribution plans into a single trust with one filing Sanctioning sanc·tion n. 1. Authoritative permission or approval that makes a course of action valid. See Synonyms at permission. 2. Support or encouragement, as from public opinion or established custom. 3. of cash-balance plans as a simpler alternative to traditional defined benefit pension plans Recognition that plan providers should be allowed, under certain circumstances, to give financial advice BY THE NUMBERS 401(k)s: From a Walk to a Run According to a Hewitt Associates survey in October 2007: In 2005 19% of companies surveyed automatically enrolled employees in 401(k) plans That number jumped to 34% in 2007. Learn More Hartford Life Group A.M. Best Company # 70116 Distribution: Internal wholesalers, registered representatives, broker-dealers Prudential Financial A.M. Best Company # 06974 Distribution: Direct, advisory and specialized consultants Nationwide Life Group A.M. Best Company # 70350 Distribution: Independent broker-dealers, wirehouses, regional financial firms Lincoln National Group A.M. Best Company # 06664 Distribution: Independent education teams, company advisers For ratings and other financial strength information visit www.ambest.com. |
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