After just a year on the books, the Pension Protection Act of 2006 has changed life for defined contribution plan executives.

The number of DC plans that have — in remarkably short order — adopted automatic enrollment and picked target-date funds as their qualified default option has shocked some industry experts.

“We expected it to be fairly significant, but we are surprised at just how much plan sponsors have moved,” said Robyn Credico, senior consultant at Watson Wyatt Worldwide, Arlington, Va. “There has been a substantial increase in auto-enrollment. Many of our clients are implementing or have implemented auto-enrollment. The PPA has simplified the whole process.”

The landmark law offers a safe harbor from discrimination testing for companies that automatically enroll employees in their 401(k) plan and meet certain other requirements, such as the use of a qualified default option. For defined benefit plans, the PPA provided clarity on funding rules, minimum required contributions, funding “at-risk” plans and cash balance plans.

According to the Investment Company Institute, Washington, corporate, public and union defined contribution plans hold $2.7 trillion in assets on behalf of 47 million active participants and millions of former employees and retirees.

The biggest story on the defined contribution side is how quickly target-date funds have become the qualified default investment option of choice — especially surprising because the Department of Labor has not yet issued final regulations on the subject.

Last September, the DOL proposed target-date funds, managed accounts and balanced strategies as appropriate default options for automatically enrolled employees. Excluded were stable value and money market funds, the traditional default options for many DC plans.

TowerGroup, Needham, Mass., estimates that allocations to target-date or lifestyle default options will grow to 56% of assets in all defined contribution plans by 2011, up from 11% this year. They currently hold some $370 billion of retirement plan assets, according to Financial Research Corp., a huge increase from $150 billion at the end of 2004.

In response, numerous money managers have rolled out target-date options, including UBS Asset Management, New York, AllianceBernstein Inc., New York, and New York Life Retirement Services, Boston.

“More assets are going into target-date funds. Some clients have done a re-enrollment process so a huge amount of assets are rolling into those funds,” Ms. Credico said.

Auto-enrollment

Thanks to the automatic enrollment and deferral increase provisions of the new law, participant contributions to defined contribution plans are expected to double from previous projections — to $204 billion in 2011, up from $103 billion now. Without the auto-enrollment incentives, projected contributions would have crept up to only $109 billion in 2011, the TowerGroup report said.

Amy Reynolds, a Richmond, Va.-based consultant for Mercer Human Resource Consulting Inc., said the timing was right for the PPA, and it facilitated investment decisions among plan executives who were hesitant about automatic enrollment.

“The PPA opened the door where plan sponsors had reservations about some changes like auto-enrollment. And yes, there has been faster movement than we expected. Some organizations were more conservative and wanted that encouragement from the government,” she said.

According to Callan Associates Inc., San Francisco, 85% of surveyed plan executives said they will implement automatic enrollment in 2007 or are considering it. Callan surveyed executives at large 401(k) plans in March for its 2007 QDIA survey.

“(The PPA) dominates conversations with clients,” said Lori Lucas, defined contribution practice leader for Callan. “With almost every client that I work with, they are talking about moving forward on auto-enrollment. They are very eager to move forward on this because they see the value.”

Callan also found that 30% of surveyed plans have stable value or money market funds set as the default for automatic enrollment. If the proposed regulations are adopted without changes, participants in stable value or money market default options will have to be re-enrolled and their assets shifted to an option approved by the Labor Department.

Callan also found that 70.6% of surveyed plan executives considering auto-enrollment were most likely to use target-date funds as the default option, said Ms. Lucas.

Corporate and public DC plans alike are making plan changes in light of the PPA, even though the law doesn’t govern public funds.

Officials at Verizon Communications Inc., Stamford, Conn., implemented automatic enrollment and increased the company’s match to one dollar for every dollar contributed by employees up to 6% of salary, from a dollar-for-dollar match up to 5% of salary (Pensions & Investments, April 30). Verizon also added target-date funds managed by Russell Investment Group, Tacoma, Wash., making them the $9.5 billion fund’s default option.

Executives for Cadence Design Systems Inc., San Jose, Calif., said the company’s $450 million plan will add automatic enrollment in January, also defaulting into target-date funds.

Rogers Corp., Rogers, Conn., also decided to add automatic enrollment for its $85 million 401(k) plan after the PPA passed.

“We started a project to look at our whole retirement benefits package and really focused on the DC plan,” said Jack Richie, vice president of human resources. “We are rolling out significant changes as of Jan. 1, with automatic enrollment for new employees and re-enrollment for current employees.”

Rogers participants will be automatically enrolled into target-date funds offered by Prudential Retirement Inc., Newark, N.J.

The Employees Retirement System of Texas, Austin, added the Wells Fargo Advantage Dow Jones Target Date Funds to its combined $1.3 billion 401(k) and 457 plans. A new state law requires that employees hired after next Jan. 1 be automatically enrolled in the state’s deferred compensation plans at 1% of monthly salary, unless they opt out.

The funds will become the default option for both plans on Jan. 1, according to a report on the board’s Aug. 21 meeting.

“PPA changed the landscape. Many plan sponsors were waiting for the blessing from the government,” said Mercer’s Ms. Reynolds.