Don't Miss

Re-Enrollment: Know the Myths and Risks

Re-Enrollment

Re-Enrollment: Know the Myths and Risks. Retirement plan sponsors are embracing re-enrollments as a way to help ensure participants have sufficient asset allocations and deferral rates. More than 22% of plan sponsors did a re-enrollment as of 2016, according to Callan Associates. But before you embark on a re-enrollment, it’s important to be aware of the misperceptions and risks.

In a re-enrollment, participants’ assets and future plan contributions are defaulted into the plan’s default investment option, like a target date fund. Sponsors typically opt for re-enrollments when participants’ asset allocations aren’t where they should be. The objective is to get a majority of participants to remain in the default fund, where their assets are likely to be allocated appropriately.

According to Callan, most sponsors choose to do a re-enrollment when they make changes to the plan’s investment fund lineup, start to work with a new recordkeeper, or again, to help improve participants’ investment allocations.

Nonetheless, according to research from J.P. Morgan Asset Management, sponsors have some misperceptions about re-enrollments, including:

  1. “If I do a re-enrollment, my participants will push back.” Actually, participants welcome the easy path — 82% support a re-enrollment.
  2. “I’m worried about the fiduciary risks.” Nearly 40% of plan sponsors aren’t aware of the fiduciary protection benefits of defaulting assets into a plan’s qualified default investment alternative (QDIA) during a re-enrollment.
  3. “My plan is well-diversified in the aggregate, so why do a re-enrollment?” Not quite. In reality, 44% of sponsors aren’t confident that their participants’ assets are allocated appropriately, and 3 in 4 participants isn’t sure they know how to allocate their contributions. Actual allocation trends bear this out: 88% of participants fall outside of the equity exposure considered appropriate for their age.
  4. “Just because I offer a target date fund (TDF) doesn’t mean participants will use it.” Re-enrollments can dramatically increase TDF usage — to the tune of 1% to 4% when simply adding a TDF to the investment menu, and 49% to 97% as a result of a re-enrollment.

With those common myths busted, it’s also important to consider and check on the following before doing a re-enrollment:

  1. Make sure the plan document gives you the right to do a re-enrollment. If not, amend it before moving forward.
  2. Give participants the chance to opt out of the re-enrollment. One way to do this is to require plan participants to restate their asset allocations. If they don’t do so within a certain amount of time (which must be clearly communicated in advance of the re-enrollment), then their assets can be mapped to the default option.
  3. Communication early and often. Make sure participants understand what the re-enrollment means to them and the steps they must take to participate or opt out. An effective approach might be a phased communication over a set amount of time — say 2 months before the re-enrollment begins — where you communicate this information to participants and give them plenty of time to make an informed decision. Consider separate communications — one for participants who actively selected funds, and one for automatic enrollees.
  4. Make sure your provider is knowledgeable. It’s important that your recordkeeper and/or retirement plan advisor, if you work with one, knows the rules about re-enrollments and follows them by the book to protect you from any fiduciary liability.

Some experts say a good rule of thumb is to conduct a re-enrollment every five years to ensure participants’ asset allocations remain on track. It may seem like a lot of work and responsibility, but when it comes to helping improve participants’ overall retirement readiness, it’s worth it.

Fred Barstein

Fred Barstein

Founder & Editor-in-Chief at 401kTV | TRAU | TPSU
Fred Barstein is the Founder & Editor-in-Chief of 401kTV. Fred is also the Founder and CEO of The Retirement Advisor University (TRAU), a collaboration with UCLA Anderson School of Management Executive Education and The Plan Sponsor University (TPSU).Mr. Barstein was also Founder and Editor-in-Chief of NAPA Net.
Fred Barstein
x

Check Also

401k Court Cases

401k Court Cases Alarm Plan Sponsors.

401k Court Cases Alarm Plan Sponsors 401k court cases have been noticed by many plan sponsors over recent years.  It is less expensive for a plan fiduciary to be aware of plan requirements than to argue the facts during a ...