World Markets Review
Investment insights from Capital Group
Target date funds (TDFs) have grown rapidly since The Pension Protection Act of 2006 provided a safe harbor for plan fiduciaries investing participant assets in certain types of default investment alternatives (such as TDFs) in the absence of participant investment direction. The problem? Not all participants have benefited. Many plan sponsors have enrolled new hires in TDFs — but not employees who joined the plan before automatic enrollment was adopted. To help them, plan sponsors can do an “investment re-enrollment” by moving all plan participants’ assets into age-appropriate TDFs unless they opt out.
The two charts below show how re-enrollment can result in a more age-appropriate equity allocation for participants who are not yet enrolled in a target date fund. This first chart shows that allocations to equities may be wide-ranging despite participants’ proximity to retirement. These allocations often fall far outside of an age-appropriate range.
Level of equity as a percent of total assets
As the second chart shows, after re-enrollment, more participants become invested in target date funds. This change typically brings participants to a more age-appropriate level of equities.
Level of equity as a percent of total assets
These case studies spotlight two plan sponsors that said their investment re-enrollment efforts were successful.
Re-enrollment date: March 1, 2013
Total plan assets: $4.5 billion
Prior participant assets: Included 26% in money market funds, which was reduced to 10%
Default option: Custom TDF or managed account
After re-enrollment: Approximately 60% in default option
The lesson: “All in all, for such a big change, surprisingly it wasn’t that difficult … [It] actually turned out to be quite doable, and we are very happy with the results.” — Head of risk management and investment operations, as told to Pensions & Investments (2013)
Re-enrollment date: April 5, 2019
Total plan assets: $15 million
Prior participant assets: 30% of participants in stable value, remaining 70% in other non-TDF options
Default option: TDF (added concurrently with re-enrollment)
After re-enrollment: 83% of participants enrolled in TDFs
The lesson: The sponsor’s focus on communication made the re-enrollment successful. In addition to the required communications, the sponsor sent reminder emails, issued flyers and used other means to make sure participants were aware of the re-enrollment. — The plan’s retirement plan professional, as told to Capital Group (2019)
There are some common concerns with re-enrollment that, in our view, represent misconceptions. These concerns, along with what we have observed to be a reality for plans, include:
Will it increase fiduciary risk?
Will participants react negatively?
Will the administrative burden be too high?
1Pension & Investments. All information except quote from: "Buk made Chrysler's huge re-enrollment look easy,” November 11, 2013. The quote is from a video interview available at Pensions & Investments.
2 Jamie Wagenbach, president, Navitas Group, LLC, Santa Monica, CA, in an interview with Capital Group.
3 Defined Contribution Institutional Investment Association, “DCIIA plan sponsor survey on automatic plan features: Responses to selected webcast Q&A,” September 2015.
4 Qualified Plan Advisors White Paper Series, “Investment Refresh: Improving Participant Outcomes Through Re-enrollment.” Accessed January 3, 2020.
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