An Easy Button for DC Plans?

December 02, 2015 | Retirement Plans

Close your eyes and imagine that there was a button plan sponsors could press that would turn participant inertia into an asset, and help improve sub-optimal asset allocations while simultaneously putting the plan sponsor on more solid fiduciary footing. Luckily there is, it’s called re-enrollment.

To be fair, the process is more involved than pressing a button, but it’s not much different than what’s done each year during the benefits election period. It’s a well-thought-out process that takes time, commitment from the company, and coordination with the defined contribution (DC) record-keeper.

In its simplest form, re-enrollment is the act of engaging each participant in the retirement plan to make an investment election. It’s asking the employees to re-evaluate their investment choices and either re-affirm the choices they have already made or make new choices. For those who do not make an active election during the re-enrollment period, their retirement assets are placed in the QDIA option that best represents their stage, usually defined by age, in the retirement investing process.

Re-enrollment is a tool for plan sponsors that can serve to accomplish four objectives:

  1. Align investor types with an appropriate investment strategy (e.g., delegators move into the QDIA)
  2. Seek to improve asset allocations for participants who are otherwise disengaged
  3. Identify participant ‘cohorts’ to help plan sponsors make future decisions about what is best for the plan (i.e., what percentage of the participants are “delegators” versus those who want to maintain control)
  4. Potentially increase 404(c) safe harbor protections

So is re-enrollment right for your plan? Some questions to ask:

  1. Are a large percentage of my plan’s assets in single asset class investment options?
  2. Has my plan been in existence for a long time? Ten years? Twenty years?
  3. Am I concerned that my participants are more worried about health care planning than retirement planning? Are they disengaged from retirement planning?
  4. Have the results from participant education campaigns fallen short of expectations?

Why is re-enrollment catching on? Well, first it’s because the majority of DC plan participants tell us that they want to delegate the investment decisions to the professionals. Yet, the bulk of DC assets remain in the core menu. In fact, it’s estimated that despite auto-features, such as auto-enrollment into the QDIA, and the tremendous amount of money spent on participant education, about 77% of DC assets remain in the core menu. This disconnect is even greater with long-tenured participants. For participants in their 60s, the average allocation to a multi-asset class strategy is only about 17.5%. What the DC system did was create generations of “accidental investors” – necessitating engagement, interest, and some level of expertise by every day plan participants in order for them to make asset allocation decisions formerly left to investment professionals.

This is important because the investment experience of DC participants plays a large role in the success of (or not) retirement outcomes. Making some fairly conservative assumptions, by the time a participant reaches their mid- to late-thirties, the potential return on investment of retirement savings will outpace the amount that a participant is deferring into a DC plan with pre-tax salary. Additionally, the larger the DC participant’s retirement portfolio and the closer to retirement they get, the more susceptible they are to sequencing of returns risk.

One of the goals of re-enrollment is to improve the investment experiences of DC participants who end up defaulting into the QDIA. Research has shown that the investment experience of target date fund users has resulted in a narrower range of outcomes, higher median returns, and better worse-case scenarios than participants who are left to make asset allocations by themselves. To put it another way, participants who use multi-asset class strategies like target date funds (by choice or default) may have a better chance at a successful retirement outcome than their colleagues who have to moonlight making investment decisions.

Re-enrollment is an initiative done in close collaboration with a plan sponsor’s investment consultant/advisor and DC recordkeeper. Once the decision is made to move forward, a timeline is established for participant communication and implementation date. In most cases, special microsites are established for participants to log on and affirm their investment elections. When the period has lapsed, those participants who have made elections will stay with those elections, and those that have not opted out, will be re-enrolled into the most appropriate QDIA option.

Results have been very positive. Plan sponsors can expect anywhere from 60 to 90 percent of plan assets to be placed in the QDIA post re-enrollment (every plan experience is different, so these are estimates based on experience). Those participants that are not re-enrolled have proactively opted-out, indicating that they are at least moderately engaged in the DC plan. Anecdotally, participant backlash – usually one of the biggest concerns prior to a re-enrollment – is minimal. Over the long run, the belief is that getting the disengaged participants into the age-appropriate, professionally managed, multi-asset class portfolios (usually target-date funds) will improve the investment experience for these participants.

Plan sponsors also have the added incentive that DOL regulations can potentially give plan sponsors greater protection post-re-enrollment. According to ERISA 404(c)5, fiduciaries “…shall not be liable for any loss, or by reason of any breach under part 4 of title I of ERISA, that is the direct and necessary result of (i) investing all or part of a participant’s or beneficiary’s account in any qualified default investment alternative…” provided that conditions are met. Those conditions include “The participant or beneficiary on whose behalf the investment is made had the opportunity to direct the investment of the asset in his or her account but did not direct the investment of the assets.” As always, we would recommend that you consult with both internal and/or external ERISA council, as well as your recordkeeper and investment consultant/advisor, to ensure that all conditions of safe harbor are met.

Despite these incentives to partake in a plan re-enrollment, uptake has been slow. According to a survey by Callan Associates and excerpted in a recent Pensions & Investments article, Callan asked DC plan sponsors “if they ever employed a re-enrollment requiring all participants to make new fund selections or have their assets placed in a qualified default investment alternative.” In 2014, only 11.6% of sponsors responded “yes,” down from 12.2% in 2013, and up from 8% in 2012.

Even though adoption has been slow, we believe it is accelerating in 2015 and will continue to be looked upon as both a onetime step to re-align participant retirement portfolios with participant objectives, as well as an initiative that’s a regular part of DC best practices, such as putting the plan out to RFI or RFP. While the industry waits for that elusive “easy button” that will instantly solve what ails any DC plan, a plan re-enrollment is a step in the right direction.

Sources: Employee Benefit Research Institute, Vanguard, U.S. Department of Labor, and Pensions & Investments.

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