LOWER FEES EQUALS HIGHER RETURNS THROUGH 401k REENROLLMENT
A study released by Vanguard on Tuesday shows that a strategy of 401k reenrollment of participants into a plan’s qualified default investment alternative (QDIA), a passive target date fund (TDF) series, reduced annual fund expenses paid by participants by 75%.
The lowered fee regime in indexed TDFs resulted in “significant cost savings for participants,” according to Vanguard. The report projects that after 10 years, the median participant should save about $2,400, and that figure jumps to over $9,000 after 20 years.
The study was conducted in 2014 after a large DC plan transferred recordkeeping services to Vanguard. The plan included 18,000 participants and more than $1.2 billion in assets. Participants whose investments moved into the default TDF saw a reduction in annual fees to 10 basis points versus 41 basis points for actively managed accounts.
Reenrollment is a plan design strategy whereby participant’s account balances are transferred automatically to the plan’s qualified default investment alternative. Participants are given advanced notice of their right to opt out of the transfer. Sponsors also receive fiduciary protection under the Department of Labor’s QDIA regulations
IMPROVED, AGE-APPROPRIATE ALLOCATIONS
In addition to cost savings, the study revealed improved, age appropriate allocations. Vanguard reports that one of the benefits of reenrollment includes optimized portfolio allocation, especially among longer tenured participants.
In terms of equity allocations, before the enrollment, 23% of all participants held extreme equity positions; 14% had equity allocations exceeding 90% of their portfolios and 9% had equity allocations of 20% or less. After reenrollment, the occurrence of extreme allocations was significantly reduced and overall portfolios became more age-appropriate.
The study concludes by acknowledging that “some plan sponsors are reluctant to override the individual investment choices of their participants and regard reenrollment as an intrusive plan design strategy…The evidence that most participants remain in the default option confirms the notion that many participants lack strong views on portfolio construction and prefer to cede these detailed choices to the professional portfolio manager…”
