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:
- “If I do a re-enrollment, my participants will push back.” Actually, participants welcome the easy path — 82% support a re-enrollment.
- “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.
- “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.
- “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:
- Make sure the plan document gives you the right to do a re-enrollment. If not, amend it before moving forward.
- 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.
- 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.
- 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.
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