Pension Protection Act of 2006

And then as you get closer and closer to the target date, your retirement date, that fund sponsor is going to dial down the equity exposure, take on less risk, and increase investments in bonds or fixed income, with the idea being attributed to a lot of academic research on lifecycle models.

Now, target date funds have been around for multiple decades, but the rocket fuel that created enormous growth was the Pension Protection Act of 2006.

And under the Pension Protection Act of 2006, target date funds were deemed to be a QDIA, a Qualified Default Investment Alternative.

And what that meant then is that when you started your job and you got auto-enrolled into your 401k, the default investment was no longer a money market account.

It could now be a target date fund, which is good because if you are 25 years old investing in money market, you're not getting any exposure to the equity risk premium and you're not building wealth.

One clear lesson is that plan design really matters.

And I think this is a timely conversation because in August, we just passed the 20-year mark since the Pension Protection Act in the US.

And what this did is helped accelerate some really important innovations in the marketplace.

So things like automatic enrollment, investment defaults like target date funds.

We are effectively being governed by our robot overlords.

This is built into the regulatory environment by the Pension Protection Act of 2006. which changed the retirement system from an opt-in framework in which you had to choose to participate to an opt-out framework in which you have to choose not to participate.

That took 401k participation from about 25% of the working population to about 65% today.

Just to help people parameterize that, at the peak of the 1929 bubble that subsequently led to the Great Depression, Only about 10% of households had any exposure to the stock market.

So that by the early 2000s, defined contribution plans had become a standard.

here in this country, which leads us into now the fourth era where we are in the, I'll call it the innovation era, kind of continuous innovation, where ever since PPA, Pension Protection Act, which has now been 20 years, we have all these auto features, the advancements of auto enrollment now being a mainstay.

the increasing in auto portability, increasing in auto re-enrollment, target date funds.

There is a lot of great innovation going on in the retirement system under this fourth era, which is really exciting.

that

defining this, the innovation area, it's something we've been talking a lot about with our clients too.

We've seen now with 20 years since Pension Protection Act, you've seen the positive impact that has had in terms of plan enrollment, like you're saying, and target date funds have been such a major winner in that regard of collecting assets.

You really are starting to see there was a style of targeted funds.

Rate increases on traditional or standalone long-term care plans were up there too.

The Pension Protection Act and SECURE Act and tax deductions and IRS matters seem to be important to you as well.

Shared benefit plans are a hot topic.

Learning what can be done after a decline from one company stood out, followed by family involvement and being able to choose where you live when help is needed.

So it's just an interesting thing.

Go back to 2006 with the Pension Protection Act.

Auto-enrollment, right? That was a big deal.

Richard Thaler wrote a book called Nudge talking about it, and what he was saying is people just need a little nudge.

The older worker who's maybe in a higher tax bracket may make sense to fund the 401k on a pre-tax contribution.

So since I'm the only person here who remembers the Pension Protection Act of 2006, where the Roth 401k became a thing, do you mostly pre-tax or Roth?

It's a blend.

And that's where I think the Roth contributions make a lot of sense.