Pension Protection Act

 

 

The Pension Protection Act was passed to help pension and retirement plan participants and promote higher savings. The legislation was aimed at restoring stability to the traditional pension plans and incorporated some of the provisions from the Economic Growth and Tax Relief Reconciliation Act of 2001. This act enhances retirement and educational savings options. This pension reform enables people to take greater control of their financial security and planning.[br]

 

Pension Protection Act implications

The PPA brought some major tax code changes and some of the major implications were:

 

·        Direct IRA tax return deposits: Taxpayers now can have their tax returns deposited directly into the IRA account.

·        529 College savings plan: An individual can withdraw a specific amount from the 529 college savings plan without suffering any tax penalty.

·        Increased contribution: It allows rollovers among plans such as the 410K, 403(b), 401a, 457b and IRAs for people aged 50 years and above.

·        Automatic 401k sign up: Employers are allowed sign their employees for the 401K plan. The contribution can be either 50% or 100% matching.

 

The Pension Protection Act takes into account various risk factors and validates them with different investment portfolios. Pension models under this act:

·        Apply generally accepted investment theories that take into account the historic returns of different asset classes over defined periods of time.

·        Utilize relevant information about the participant, which may include age, life expectancy, retirement age, risk tolerance, other assets or sources of income, and preferences about certain types of investments.

·        Utilize prescribed objective criteria to provide asset allocation portfolios comprised of investment options available under the plan.

·        Operate in a manner that is not biased in favor of investments offered by the fiduciary adviser or a person with a material affiliation or contractual relationship with the fiduciary adviser.

·        Takes into account all investment options under the plan in specifying how a participant’s account balance should be invested and is not inappropriately weighted with respect to any investment option.[br]

 

Advantages of the Pension Protection Act

·        Higher deduction limits

·        Cash balance plans

·        Automatic enrollment

·        401K contribution and other defined benefit contribution

·        Non spouse rollovers

 

The Pension Protection Act also contains some important changes, such as executive compensation, prohibited transactions, plan assets, hybrid plans, reporting and investment advice.