Defined Contribution Plans

The provisions of the bill affecting defined contribution plans are not nearly as sweeping as those affecting defined benefit plans. Most defined contribution related provisions are effective in 2007 or 2008. 

Investment advice. To improve participants’ access to professional investment advice, PPA creates a new prohibited transaction exemption that permits fiduciary advisers to recommend their own funds starting in 2007. To qualify for relief, the investment advice arrangement must either (a) provide that the adviser’s fees (including commissions) will not vary depending on the investment option selected, or (b) use an unbiased computer model (certified by an independent expert) to generate a recommended portfolio for the participant’s consideration. This compromise measure includes many additional safeguards against potential self-dealing. If these conditions are met, the plan sponsor would have no duty to monitor the specific advice given to any particular participant or beneficiary but would retain responsibility for prudently selecting and monitoring advisers. DOL is charged with determining the feasibility of applying computer models to individual retirement accounts (IRAs) and health savings accounts. 

Automatic enrollment. The bill offers several different incentives for plan sponsors to adopt auto-enrollment features: fiduciary relief for default investments (see below), more time and flexibility in refunding erroneous automatic employee contributions (effective in 2008), elimination of potential conflicts with state laws barring wage withholding without the employee’s consent (effective upon enactment), and nondiscrimination testing relief for certain safe-harbor designs (effective in 2008). Plan sponsors must follow the withholding guidelines in the law and make matching contributions to qualify for the nondiscrimination safe harbor.

Default investments. Effective in 2007, fiduciary protections are expanded to cover default investments, as long as participants receive advance notice and assets are invested in accordance with pending Department of Labor regulations. 

Plans holding company stock. Diversification rights are expanded for participants in DC plans that hold publicly traded company stock, including ESOPs that have 401(k) features or matching contributions. Generally, these changes take effect in 2007, with a delayed effective date for collectively bargained plans. The maximum bond required for these plans is also increased, from $500,000 to $1,000,000. 

Faster vesting. Faster vesting is mandated for profit sharing and other nonelective employer contributions, generally effective for contributions made in 2007 or later (with a delayed effective date for collectively bargained plans). Participants will vest under either a 3-year cliff or 2-to-6 year graded schedule. Matching contributions are already required to use one of these schedules under current law.

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