Re-Enrolling the Enrolled
Employers who hope to positively impact their worker’s lives in retirement know they have a few levers to pull. Getting as many employees as possible into the plan is an obvious step, as is increasing deferral rates, and including the best investment options possible.
But what if you achieve all three objectives through thoughtful plan design and investment selection, yet your employees don’t invest properly? It is a self-directed plan after all.
Often, I have seen plans which have prudently-chosen investment options end up with 40% of plan assets in the cash option - arguably the worst investment type for the long-term retirement saver. In other cases, participants properly selected a diversified investment option such as a target date fund or asset allocation model portfolio years ago, but have since experienced changes to personal finances that make the original investment selection no longer appropriate.
Unfortunately, it is a rare participant who will voluntarily revisit their investment selections from time to time, or as their financial situation evolves. More likely, with most participants inertia will set in, and an appropriate investment scheme five years ago may not be the right answer for them today.
This begs the question: how can you help encourage your employees to make better ongoing investment decisions without stepping over the line of offering investment advice? It may seem unintuitive at first, but your best solution is to re-enroll your employees into the plan. “But wait,” you may say, “my employees are already enrolled. How will asking them to enroll again (and potentially again in the future) help improve their investment selections?”
For this reason: the process forces them to reconsider their current investment options. If their current options are still right for them, they will simply select them again during re-enrollment. If not, they will act, and change their investment options and/or allocations.
What happens if some employees ignore the instruction to re-enroll? In this case they would be automatically invested in a Qualified Default Investment Alternative (QDIA). These are age or otherwise appropriate diversified portfolios such as a Target Date Fund, Asset Allocation Model Portfolio, or Life Style Fund. The participant who lands in the QDIA due to inaction can always revisit their selection anytime they choose.
The re-enrollment process is easier than many employers may initially suspect. The plan sponsor must give participants a 30-day notice that they will be defaulted into the QDIA if they have not opted out in the meantime. The participant opts out of being re-enrolled in a QDIA by making their own investment decision during this 30-day window. Although not required, it is best practice to follow up on the initial notification with weekly emails to remind participants and prod then into action. If your plan has an advisor this is an ideal time to bring them in to review proper investment technique.
How frequently a plan should re-enroll participants depends on the plan itself. The right answer may be never, once, or on a recurring schedule every few years. If the plan sponsor believes that most participants are already properly invested, then re-enrollment is not necessary. A plan with a recently adopted QDIA would likely benefit from a one-time re-enrollment to encourage employees who enrolled prior to the addition of the QDIA to now select the QDIA. Additionally, if a sponsor suspects that participants, as a group, are in set-and-forget mode they may facilitate a re-enrollment every five years.
As a side note, although Target Date Funds (TDF) are marketed as set-and-forget investments, it’s unfortunately too common that participants are in the wrong TDF from the get-go simply because the only criteria most participants use to make their investment decision is their retirement date. Even if the participant selected the best TDF on day one, the TDF will morph over time into a very different investment which may eventually no longer meet the participant’s investment objectives.
Re-enrolling participants is not forcing them to reinvent the wheel, but rather encouraging them to do what they should already be doing anyway: periodically looking at their investments with a “fresh set of eyes” rather than coasting.
There are many processes employers can establish that, while not an ERISA fiduciary requirement per se, nonetheless follow the spirit of what it means to be a plan sponsor and have measurable success. Even though company processes should be ERISA-compliant at minimum, we should always keep our mind open to best practices or more effective solutions. When it comes to helping participants become more retirement-ready - a key reason the plan was established in the first place – we often find that re-enrollment is an effective and appropriate method.