Millennials reap benefits of Pension Protection Act

When the Labor Department published final regulations resulting from the Pension Protection Act of 2006, regulators made lofty predictions on the impact automatic enrollment and qualified default investment alternatives would have on the country’s aggregate retirement savings.

Those plan design features would result in $70 billion to $134 billion in additional retirement savings by 2034. The majority of that increase “will be attributable to the proliferation of automatic enrollment,” regulators wrote in the Federal Register in October of 2007, when rules proscribed by the PPA were finalized.

Related: Automatic contribution boost seen as ‘benefits opportunity’

Now, 12 years after lawmakers took action, and a decade after safe harbors for auto enrollment, automatic escalation, and QDIA’s were implemented, one record keeper has produced research that underscores the effectiveness of the PPA on defined contribution plans.

Millennials are now on track to replace 75 percent of their working income in retirement, a higher replacement rate than older workers’, according to new research from the Empower Institute, the research arm of record keeper Empower. Gen Xers have a median income replacement rate of 61 percent; boomers have a median rate of 58 percent.

The median replacement rate for all respondents was 64 percent. Empower estimates a monthly income replacement rate from projected Social Security benefits, defined benefit and contribution assets, personal savings, home equity and business ownership, when available.

The research correlates Millennials’ success to the defined contribution plan improvements ushered in by the PPA, which were implemented when Millennials began entering the workforce.

Four in 10 of the Millennials surveyed were automatically enrolled in a defined contribution plan, compared to 38 percent of Gen Xers and 33 percent of baby boomers.

“New features such as auto enrollment and auto escalation have come a long way in making access to retirement savings programs easier for employees and in shaking off some of the concerns of the past with earlier DC plan designs,” said Edmund F. Murphy III, president of Empower Retirement, in a statement. “Millennials are the first generation in the workforce to fully benefit from changes in the law made in 2006.”

For all generations, the income replacement rate is 11 points higher for participants that are automatically enrolled in workplace savings plans compared to savers that opt in on their own, according to Empower’s research.

The average replacement rate for those with access to a workplace plan is 79 percent. For the minority of survey respondents that do not have access to a workplace plan, the average replacement rate is 45 percent. Financial advisors commonly set an 80 percent income replacement rate goal in planning for retirement.