The pension protection act of 2006
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The Pension Protection Act of 2006. Emerging Trends… One Year Later! October 3-5, 2007 Beach Cove Resort North Myrtle Beach , South Carolina. The passage of PPA –August 2006 Filing of class-action lawsuits – Sept. 2006 DOL releases proposed rules for QDIA – Sept 2006

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The Pension Protection Act of 2006

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The pension protection act of 2006

The Pension Protection Act of 2006

Emerging Trends… One Year Later!

October 3-5, 2007

Beach Cove Resort

North Myrtle Beach , South Carolina


401 k s in the spotlight

The passage of PPA –August 2006

Filing of class-action lawsuits – Sept. 2006

DOL releases proposed rules for QDIA – Sept 2006

Report by the U.S. Government Accountability Office (GAO Report) – November 2006

Congressional hearings on 401(k) Plan Fees – March 2007

DC Circuit Court Overturns Broker-Dealer Exemption – March 2007

Proposed legislation for Fee Disclosures – July 2007

401(k)s in the Spotlight


401 k version 2 0

401(k) Version 2.0

  • Not simply a response to regulatory and competitive environments

  • More than procedural changes

  • Rather, a completely re-designed approach to sponsoring a retirement plan


401 k version 2 0 why

Social Security is $13,600,000,000,000 (trillion) in the hole.

The number of traditional Defined Benefit Pension plans decreased by more than 80% over the past 20 years.

The number of people covered by retiree health care has been cut in half over the past 10 years.

401(k) Version 2.0… Why?

A few facts about our retirement system…


401 k version 2 0 why1

Low 401(k) Participation Rates

25% - 33% of eligible employees do not participate in their company’s 401(k) plan.

Low Contribution Rates

Poor Investment Decisions… Poor Results

Lower returns and with higher risk

Failure to re-balance portfolios

Many invest way too conservatively

401(k) Version 2.0… Why?

A few observations about Version 1.0…


Even 1 can make a difference

Even 1% Can Make a Difference!

Returns…

Expenses…

The GAO Report and others have shown that paying 1% more in fees can reduce a participant’s balance at retirement by 17% to 23%...


401 k version 2 0 why2

Hidden (High?) Fees

Potential drain on account balances

Early Withdrawal Provisions

Loans and hardships impair accumulation efforts

Lump Sum Distributions

Expose participants to increased longevity risk

401(k) Version 2.0… Why?

A few observations about Version 1.0…


401 k version 2 0 why3

401(k) Version 2.0… Why?

98

90

$454

84

$364

73

$303

70

$173

3%

Contri-

bution

Start

Age

21

Start

Age

26

$

Mrkt

Inv

$104

All

3


Decisions for retirement plan managers

Assume responsibility for plan funding

Determine proper contribution amount

Adjust contributions periodically as necessary

Determine appropriate asset classes for investment

Determine correct investment mix

Choose investment managers for each investment class or style

Monitor the manager’s performance

Re-balance the portfolio periodically

Monitor investment expenses

Budget benefit distributions to ensure payments continue for life

Decisions for Retirement Plan Managers


Ppa s key 401 k provisions

PPA’s Key 401(k) Provisions

  • Automatic Participant Enrollments

  • Automatic Savings Escalations

  • Automatic Investment Options

These are the building blocks for Version 2.0


Lessons learned from v 1 0

Lessons Learned From V 1.0

“The lesson here for the next generation workplace defined contribution plans is that we should structure decision points in these plans to default workers toward participation, higher contribution rates, and better age-based asset allocation through changes in plan design practices. Inertia, then, can be made to work to the advantage of participants.”


Example automatic enrollment data

92% of participants automatically enrolled at a 6% contribution rate remained in the plan.

89% of participants automatically enrolled at a 5% contribution rate remained in the plan.

88% of participants automatically enrolled at a 3% contribution rate remained in the plan.

87% of participants automatically enrolled at a 2% contribution rate remained in the plan.

Example- Automatic Enrollment Data

Not what you would expect…


Another lesson learned from 401 k v 1 0

Another Lesson Learned From 401(k) V 1.0

“Keep it simple!”


401 k version 1 0 too many choices

In 1998, the average number of investment options was 10.

In 2004, the average number of investment options had increased to 18.

Some plans literally have a 100 or more options.

Evidence suggests that too many choices overwhelms and paralyzes decision making efforts

401(k) Version 1.0... Too Many Choices!

Consider this…


New qdias target date funds

Simple automated investment option.

Improves participant investment diversification through asset allocation.

Provides professional investment management.

Investment allocation automatically rebalances periodically.

Investment allocation adjusts as participant approaches retirement age.

New QDIAs… Target Date Funds


Potential for significant improvement in retirement readiness

Potential for Significant Improvement in Retirement Readiness

% of pre-retirement income replaced

63%

58%

55%

52%

Increase from 6% auto-enrollments; target date fund

Workers without auto-enrollments


Add in social security and the results are promising

Add in Social Security and the Results are Promising

% of pre-retirement income replaced

104%

86%

81%

79%

Social Security

Increase from 6% auto-enrollments; target date fund

Workers without auto-enrollments


Key features of version 2 0

Automatic Participant Enrollment.

Target-Date Default Investment Options.

Customized, managed, pre-mixed, diversified investment portfolios.

Participant advice for those whose needs go beyond the Target-Date fund option.

Deliberate use of fiduciary advisors.

Fee disclosure and monitoring requirements

Key Features of Version 2.0


Most brokerages avoid the f word

Most Brokerages AVOID the ‘F’ Word


Key features of version 2 01

On-Track Reporting to Participants.

Investment recommendations

Contribution rate suggestions

Plan sponsor reports to track the plan’s effectiveness in providing retirement income goals for employees.

Post-retirement annuity products to meet the lifetime monthly income objective

Anticipate stricter enforcement rules for loans and hardships

Key Features of Version 2.0


401 k version 1 0 versus 2 0

401(k) Version 1.0 versus 2.0


Contact information

Chip Hunt

1140 Woodruff Rd

Suite 106 - 120

Greenville, SC 29607

W: 864.627.401k

F:  864.627.4025

C: 864.350.1523

Chip Hardy

4840 Forest Drive #303

Columbia, SC  29206

W: 803.787.401k

F: 803.787.4081

C: 803.261.3402

Contact Information

www.primetrustadvisors.com


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