Re-enrollment Can Lead to Better Participant Outcomes
Plan fiduciaries devote significant time and resources to educating participants about the importance of saving for retirement.
Despite this effort and the care that goes into making a well-balanced menu of investment options available to all participants, many participant allocations are at odds with their retirement needs.
In this article, we look at what fiduciaries can do to help participants allocate their investments to achieve better retirement outcomes.
Specifically, we believe plan sponsors should consider an investment re-enrollment, an action that requires little effort from participants and can improve their long-term prospects.
To support our view, we provide four case studies that demonstrate how plan sponsors have successfully re-enrolled participants to help improve their investment allocations.
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Improve Diversification Through Re-enrollment
The investment options a plan offers — especially its default option — can significantly influence how participants allocate their assets, according to the Employee Benefit Research Institute (EBRI).1 By offering a qualified default investment alternative (QDIA) such as a target date fund (TDF), sponsors help ensure that participants are appropriately diversified.
TDFs represent a current best practice for new plan design. While new enrollees tend to choose QDIAs, such as TDFs, or end up being defaulted into them, many existing participants remain invested in a portfolio of individual funds that were available when they initially enrolled. Their accounts may not be suitably allocated given their current goals and the options available to them. This can reflect inertia, a lack of understanding or indecision.
To address these issues, leading plan fiduciaries have pursued re-enrollment, a process that is much more straightforward than many realize. The plan sponsor announces that, as of a specific date, current balances and future contributions to the plan will be automatically invested in the plan’s QDIA unless participants opt out by reselecting their current investments. Participants can revisit their selections to correct imbalances or take advantage of investments that were not available when they originally enrolled. In effect, the re-enrollment is more of a reallocation that can help improve the participant’s long-term outcome.
The case studies that follow describe the experience of four companies — representing a range of plan sizes — that have pursued re-enrollment with a high degree of success. (The experience of others may differ.)
1 Jack VanDerhei, Sarah Holden, Luis Alonso, Steven Bass and AnnMarie Pino, “401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2013,” Issue Brief, EBRI.org, December 2014.
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Tips for a Successful Re-enrollment
- Clarify the intent.
Refer to the process as a “reconfirmation of investments” or “selection confirmation” so participants understand the goal. - Announce early and repeat often.
Announce the event 60 to 90 days in advance and explain the benefits with on-site meetings. - Manage the contact list.
Verify current addresses, especially for former employees and beneficiaries. Have a process in place to track undeliverable mail. - Go beyond emails and signs.
Use newsletters, texts and even a confirming telephone call as the re-enrollment period nears its end. - Tell participants they have choices.
Selections can and should be revisited regularly, and participants should consider their nonplan assets as well. - Consider making other plan changes at the same time.
Implement other plan improvements, like updating the investment menu, while you have participants’ attention.
“Re-enrollment into prudently selected TDFs likely will improve participant outcomes and should not increase fiduciary risk if done properly. In fact, it may reduce overall fiduciary risk because sponsors will get QDIA safe-harbor protection for a larger portion of the plan participant pool.
“Sponsors should follow the DOL procedures for QDIA selections, however, and give participants notice and an opportunity to opt out. Making sure the participants get the QDIA and reinvestment notice is critical and helps reduce liability.
“While some sponsors may be reluctant to override the choices participants have made, they should ask themselves if participants have made thoughtful choices or are just riding along on their own inertia.
“The goal is improving participant retirement outcomes and that should be the focus. Obviously, it has to be done in a prudent manner.”
— R. Bradford Huss, ERISA Attorney Director, Trucker Huss
Weigh Participant and Fiduciary Concerns Against Plan Objectives
While some sponsors may wonder how participants will respond, in our experience, they tend to appreciate the help.
- TDFs are a convenient option.
Many participants prefer TDFs because of the diversification and automatic rebalancing they provide. - Participants can still make changes.
Participants retain the ability to change their selections in the future. - Fiduciary protection may be expanded.
Default investments in QDIAs are covered by an ERISA safe harbor. - Popular assets can be included.
Plan fiduciaries often assume that stable value and company stock holdings need to be excluded from a re-enrollment, but both may be able to be included, with additional planning.2 - There is no wrong time.
Because markets rise and fall without warning, plan fiduciaries are not expected to try to time a re-enrollment based on market events.
2 Consider, for example, that the use of company stock may be a settlor function, requiring approval from corporate officers, and that stable value may be subject to a 12-month put.
Re-enrollment in Action
The charts below demonstrate how re-enrollment for a hypothetical plan can help participants to become better allocated. In this example, participant allocations vary greatly before re-enrollment. During re-enrollment, however, most participants elected or defaulted into the QDIA.
Before re-enrollment Level of equity as a percent of total assets
After re-enrollment Level of equity as a percent of total assets
Conclusion
Sponsors are committed to looking out for the best interests of participants. Re-enrollments are an expression of that commitment, since they can help participants positively improve their financial security in retirement.
For more information on how we can help you plan a successful re-enrollment, contact your American Funds representative or call us at (800) 421-9900.
Other Resources
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- Defined Contribution Investment Perspectives
Insights and guidance on DC investment issues for advisors, consultants and sponsors.
- Defined Contribution Investment Perspectives
Related Client Solutions
“Plan sponsors need to realize that they can impact participants’ retirement prospects for the better. If they can, they should.”
— Toni Brown, CFA
“Fiduciaries who are hesitant about conducting a re-enrollment should recognize participants are not forced into an unwanted investment selection. They can choose to opt out long before any change occurs.”
— John Doyle