In August 2006, President George W. Bush signed the Pension Protection Act (PPA) into law. For Douglas Fisher, senior vice-president of benefit policy development and thought leadership, workplace investing, with Fidelity Investments, it was a proud moment. Five years prior, Fisher —along with his team and other providers in the industry—engaged Congress on ideas for policy improvements that would reflect an important shift in the retirement system at that time: the emergence of the DC plan as the primary employer-sponsored retirement vehicle in the U.S.

One such idea was auto-enrollment. Fisher explains that the industry group wondered if there might be something policy-makers could do to help plan sponsors increase participation in DC plans.

Another idea, he says, was the “growing need to help participants get on a better investment path—to ensure that they have an asset allocation strategy that is age-appropriate, in terms of equity and fixed income mixes.” Research conducted by

Fidelity suggested that many plan participants were not in the right asset allocation for their age. For example, many younger participants surveyed didn’t have enough equity exposure, and many older participants had too much equity exposure. “We

said to policy-makers, ‘Target date funds [TDFs] would be something that—along with auto-enrollment and auto-increase—could get [people] in the plan, get them to the right level and help them invest better,’” Fisher says.

Fidelity sat down with its legal team to draft a limited set of investment options that would qualify as a default for participants in a DC plan.

“We knew that if these changes were going to have an impact on the market, then plan sponsors needed some fiduciary relief from policy-makers to feel comfortable about auto-increasing, auto-enrolling and default investing.”

Since the act’s implementation, the number of plan sponsors offering auto-enrollment and default investing options from the list of qualified default investment alternatives has increased steadily. As of the end of Q3 2011, 61% of plan sponsors with more than 25,000 participants offered auto-enrollment, up from 17% in Q3 2006. And while only 12.1% of plans offered TDFs in Q3 2006, 74.9% offered them in Q3 2011.

Unfortunately, says Fisher, the uptake for auto-escalation is growing at a slower rate. According to Fidelity’s data from 2011, while 76% of plans offered an annual increase option, only 11% of participants chose it. “Some plan sponsors in certain industries worry that participants can’t afford to automatically increase [contributions] because of their wage scale, so you have to be sensitive to that,” he notes.

“If you were to size up the PPA of 2006, it was one of the first major pieces of legislation where Congress recognized the growth of the DC system,” Fisher says. “And that’s no small thing.”

Act three

Australia
1993 Superannuation Industry (Supervision) Act—This act sets the rules that a superannuation fund must follow and regulates the operation of the fund. It also sets penalties for trustees when they don’t meet the rules of operation.

Great Britain
2008 Pensions Act—This act introduces employee opt-out rather than opt-in. From 2012 on, employers will have to automatically enrol all eligible employees into either an employer-based plan or the government’s National Employment Savings Trust.

The Netherlands
2007 Pension Act (Pensioenwet)—The Pensioenwet establishes the concept of “pension administrator.” It also requires that certain implementation aspects of the relationship between the employer, the employee and the administrator be formalized in an agreement.

Brooke Smith is managing editor of Benefits Canada. brooke.smith@rci.rogers.com

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