January 2, 2007

Source: InsuranceNewsNet

The Pension Protection Act of 2006 (PPA) gives insurers a lot to be excited about. The recently enacted 900-page law lists many provisions that are widely anticipated to strengthen the defined-contribution plan market, encourage Americans to plan for their retirement and protect public interest with regards to defined-benefit plans and its funding rules.

One of the great benefits that the new law guarantees is the noticeable increase in the limits of annual contributions for qualified plans, as well as for Individual Retirement Accounts, 401(k)s, 403(b)s and 457s.  Many plans provided by financial-service firms and other insurers have experienced a strong surge of asset inflows, primarily due to the lifting of their limits.  With the implementation of the law, the raised limits offer some cushion, that is, until 2011 when the limits will revert back to levels in effect from the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). 

A major benefit that the PPA brings is the resolved permanency of retirement-plan provisions found in  EGTRRA – causing raves among insurers.

Consequently, new provisions in the PPA could increase revenue in the defined-contribution market.  Specifically, provisions like:

• Starting 2007, the inflation of IRA contribution limits will be indexed.
• Employees will be able to reject automatic increases in their contributions throughout the years of their employment.
• 401(k) plan participants now have the right to improve diversification and divest their employer’s stock.
• Employees can now be enrolled for membership – automatically – by their employers into qualified plans.  Employees, though, can exercise the right not to be enrolled.
• Default investment options have now been created for plan participants who cannot or will not express their ability to choose.
• A safe harbor for automatic 401(k) contribution arrangements from 3% to 10% of employee salary with employer matches on certain amounts of money has now been created.

It is anticipated that the new PPA provisions provide plan sponsors and providers a degree of latitude representative of the golden age of defined benefit plans. This is reflected in automatic enrollment for the future savings of employees, the support of an advisor and strategically planned investments based on a risk-based portfolio. The PPA law likewise implemented a number of additional changes like:

• Starting 2010, plan sponsors and providers will be given the right to merge elements of defined-contribution and defined-benefit plans into a single trust, thus developing a so-called DB(k) plan with just a single filing.
• The PPA provides non-spouse beneficiaries the right to extend distributions from a roll-over IRA beyond their durations.  Before, they frequently required lump-sum or all distributions within five years since they were limited to a plan's distribution options.  Non-spouse beneficiaries can now also roll over assets from inherited qualified plans into IRAs.
• Long-term-care insurance riders can now be added to life insurance and annuities with payments for these riders from cash values excluded from gross income.

At a time when consumers are saving less and less, the industry welcomes the dawning of such a law like the PPA with open arms. (* Note:  The percentage of all American employees enrolled and active in defined-benefit pension plans shrunk from 35% in 1990 to 21% in 2005, while employees enrolled in defined-contribution plans grew from 34% to 42%. Source: the Bureau of Labor Statistics)

Assets in private defined-contribution plans, private defined-benefit plans, retirement funds, IRAs and local, state and federal retirement funds, as of year-end 2005, grossed around $12 trillion, compared to assets of financial-services sectors which totaled $49 trillion. (Source: Insurance Information Institute.)

It has been said that in order to prepare a retirement that’s secure and worry-free, people need to save at least 12% to 15% of their net take-home pay for at least 30 years. 

Sadly, majority of Americans today are slaves to complacency. Most of them don’t start saving until they reach their late 30s. And most really only save with a sense of urgency when they've reached their 50s.

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