One of the best ways I’ve found to chart a path forward is always to reflect on where we’ve been and what has been achieved. The retirement plan industry has exponential potential to improve Americans’ financial security, and we can draw insights about where to go next from the significant milestones of the past. This month, we celebrate one of those milestones with the 15th anniversary of the Pension Protection Act (PPA).
In the early 2000s, employees had to navigate a complicated retirement system on their own. Given human behavior, many employees became overwhelmed by the complexity and opted not to participate. The signing of the PPA into law in 2006 was a turning point for the retirement plan industry. Among its provisions, it enabled many “autopilot” features, allowing employers to default participants into balanced funds through automatic enrollment and sanctioning the use of target-date funds as a qualified default investment alternative. So far, both changes have helped millions of Americans save more for their futures.
As much as people may want to be better savers, good intentions don’t always lead to action. We procrastinate. We get overwhelmed by too much information. We revert to the status quo. This is human nature, which is hard to fight. The PPA acknowledged these realities and used the lessons of behavioral finance to make it easier for employees to join, save, and invest in their retirement plans.
The law shifted the decisions of retirement planning from employees to employers, and almost overnight, the retirement landscape began to change. Enrollment numbers started to climb. In 2006, 67% of employees voluntarily joined their plan. In 2020, with the help of autoenrollment, Vanguard’s plan-weighted participation rate grew to 84%.1
At the same time, participants’ investment portfolios grew healthier due to the increased use of target-date funds. A key factor driving the use of target-date funds is their role as an automatic or default investment strategy. The qualified default investment alternative (QDIA) regulations facilitated this under the PPA and continue to influence adoption of target-date funds.
Before the PPA designated these all-in-one funds as qualified defaults, companies would steer employees to conservative investments—money market funds and stable value funds—that did little to help investors’ nest eggs grow. Target-date funds redefined retirement investing, defaulting millions of employees into diversified, balanced portfolios that adjust over time based on when they plan to retire. These funds are now available in almost every retirement plan, and as a result, the segment of participants holding balanced portfolios has grown from 42% to 76% over the last 15 years.1
So, what lessons can we draw from the PPA to guide future policy decisions? First, defaults work and give participants a boost in getting their retirement savings on track. Second, target-date funds have brought more balance to participants’ portfolios, mitigating the risk that comes with investing at the extremes of asset allocation. And, finally, policy is a powerful catalyst for change—I have also seen this play out globally. The PPA accelerated trends that were already starting to take hold in the industry, making automatic features the norm rather than the exception.
We’ve come a long way since the days before PPA. Yet, while we continue to build on the successes of the past, there are still gaps we must fill. Only half of Americans have access to an employer-sponsored retirement plan.2 Small-business employees and those who work under contract or part time are particularly underserved. Also, saving rates could be higher, and participants could use help managing financial goals beyond retirement, such as student loan debt. Taking a holistic approach to financial planning and providing more advice can help all Americans pursue financial well-being.
Legislation is working its way through Congress now that could help address these challenges, and I hope 15 years from now we’re celebrating the anniversary of another key milestone in the journey to giving retirement plan participants an even more secure financial future.
1How America Saves 2021, Vanguard, June 2021.
2401(k)/IRA Holdings in 2019: An Update from the SCF, Center for Retirement Research at Boston College, 2020.