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Help participants succeed with an investment re-enrollment

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.



Investment re-enrollment in action


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.


Before re-enrollment



Level of equity as a percent of total assets


Shown is the “before” scatter plot chart that indicates a range of equity allocations among plan participants prior to investment re-enrollment. The hypothetical chart shows the equity allocations (as a percentage of total assets) for more than 200 plan participants between the ages 25 and 75, along with what the equity allocation for each would be if they were enrolled in a target date fund. The equity allocation for the target date fund is represented in a line indicating the “glide path,” which starts out at about 85% equity allocation at age 25, before declining to around 75% of assets at age 55, to around 55% of assets at age 65, and then to around 40% of assets at age 75. The “before” chart shows that equity allocation can vary by age for those who choose to invest outside a target date fund. For example, the range of equity allocations for participants between the ages of 55 and 60 could be as high as 100%, which would be inappropriate for an older participant looking to lower market risk in retirement, to as low as 0%, which would be inappropriate given the potential for participants to live 30 years after retirement. Source: Capital Group, based on hypothetical data.

 


After re-enrollment


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


Shown is the “after” scatter plot chart that indicates the potential benefits of an investment re-enrollment. The hypothetical chart shows the equity allocations (as a percentage of total assets) for plan participants between the ages 25 and 75, along with what the equity allocation for each would be if they were enrolled in a target date fund. The equity allocation for the target date fund is represented in a line indicating the “glide path,” which starts out at about 85% equity allocation at age 25, before declining to around 75% of assets at age 55, to around 55% of assets at age 65, and then to around 40% of assets at age 75. The “after” scatter plot shows equity allocations if participants were automatically re-enrolled in a target date fund unless they chose to opt out. Assuming that few participants opt out, the allocations become more age-appropriate for the great majority of participants following the re-enrollment as their equity exposure aligns with the target date glide path (the line in the chart). Source: Capital Group, based on hypothetical data.




Case studies


These case studies spotlight two plan sponsors that said their investment re-enrollment efforts were successful.


Case study: A global car manufacturer

 

Car

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)




Case study: Auto parts small business2


 


Automobile parts

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)


 


Re-enrollment is easier than you might think


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?

  • Re-enrollment may lower fiduciary risk. Investment re-enrollment usually involves transferring account balances into the plan’s qualified default investment alternative (QDIA).
  • If certain conditions are met, default investments in QDlAs are covered by an ERISA safe harbor that provides relief from liability for investment outcomes.

Will participants react negatively?

  • Real-world examples and our own experience have shown little negative reaction. 3
  • Participants may appreciate the opportunity to review their current choices. 
  • Well-timed and effective communications can help address the problem.

Will the administrative burden be too high?

  • The workload can be within the normal range of what a sponsor would do to maintain and promote a retirement plan.
  • The plan‘s consultant or recordkeeper may be able to help prepare communications, conduct meetings, collect paperwork and process online elections. 4


Tips for success


 

  • Clarify the intent. Refer to the process as a “confirmation of investments” or “selection confirmation” so participants understand the goal.
  • Go beyond emails and signs. Use newsletters, texts and telephone calls.
  • Announce early and repeat often. Announce the event 60 to 90 days in advance and explain the benefits with on-site meetings.
  • Tell participants they have choices. Investment selections can and should be revisited regularly.
  • Consider making other plan changes at the same time. For example, update the plan menu while you have your participants‘ attention.
  • Be mindful of existing investment options. Plans need to consider how to effectively handle assets based on potential restrictions, such as stable value, company stock, managed accounts and/or brokerage accounts.



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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