PPA Guidance – Speak Now or Forever Hold Your Peace

As regulators begin to tackle details of the Pension Protection Act of 2006 (PPA), a panel of Washington insiders says that plan sponsors have a perfect opportunity to speak up and offer practical solutions for enforcing its provisions.

conference audio available at

Speak up now was the message of a panel of industry experts at PLANSPONSOR’s 2006 DB Summit last month in Washington, D.C. While the 900+ pages of the PPA legislation offes a framework for improving retirement benefit offerings from US employers, the details necessary for enacting the provisions of the PPA will create an enormous amount of regulations, Judy Schub, Managing Director at the Committee on Investment of Employee Benefit Assets (CIEBA), pointed out.  CIEBA is the voice of the Association for Financial Professionals (AFP) on employee benefit plan asset management and investment issues, and represents more than 100 of the country’s largest pension funds.

The panel, titledNow What? A Legislative Update , also noted that the bill changed the number of amortization periods for making up underfunding of defined benefit plans to one from several prior to the PPA, introduced mortality in the equation for measuring DB plan liabilities, and mandated new interest rates to use in measuring DB plan assets and liabilities. In addition, the Act introduced limits on benefits and distributions for underfunded DB plans affecting plan design, and included provisions that would require plan design changes for defined contribution plans, such as mandated diversification of employer stock accounts and options to implement automatic enrollment and new default investment funds. The IRS and Treasury will provide guidance on funding regulations and the Department of Labor (DoL) will be responsible for guidance on plan design changes. As Schub noted, the guidance issued by the DoL on Qualified Default Investment Alternatives alone was 19 pages (see  DoL Releases Default Investment Option Safe Harbor ).

Comment Letter Comments

Schub suggested plan sponsors let regulators know of problems informally before proposed regulations come out. However, she said  that comment letters that only say a new rule is costly and burdensome is a waste of time. Instead, plan sponsors should be more specific and, where possible, offer practical alternatives.

Panel member William Sweetnam, Principal at the Washington-based Groom Law Group, agreed. He told the DB Summit audience that regulators need people to tell them how the rules will work practically. Comments to regulators should say, “Here’s the rule. It doesn’t work in this situation. How do we get from here to there?” Then, sponsors should suggest a workable solution, Sweetnam said. Comments requesting more time to implement a new rule should specifically state why more time is needed.

A Hidden Message?

Aside from a call to speak up for those who will be responsible for implementing the new regulations required by the PPA, panel members at the DB Summit commented on the unintended consequences of the legislation and answered the question, "Was there a hidden message in the PPA from politicians for employers to focus on DC offerings?"

Schub pointed out that while the bill's provision requiring use of the yield curve when calculating benefits was intended to improve on benefits provided, the yield curve is currently inverted, so the current calculation actually reflects a lower benefit for those closer to retirement. Additionally, Eric Keller, Partner at Paul, Hastings, Janofsky & Walker, LLP, said as participants realize the change in interest rate used to calculate lump sum payments reduces the amount of lump sums, they will be less inclined to take early retirement.

Another unintended consequence Schub noted is plan sponsors will be less likely to advance fund their DB plans as the new rules will effectively penalize them for it. Under the PPA, credit balances can no longer be used to reduce current year contributions to DB plans by employers.

In spite of these consequences, panel members said there was no hidden message in the PPA for employers to focus on defined contribution (DC) offerings. Keller said the DC focus in the PPA was simply in response to the question from employers of how to get employees more involved in funding their own retirement. In fact, he noted, many of the provisions relating to DC plan design were DB-like.

Schub agreed there was no hidden message. People are usually happy with DC changes, she said, while DB changes tend to be more painful and neither plan sponsors nor regulators like them.