Retirement Plan Re-Enrollment: A Fresh Start for 401(k) Participants

Commonwealth Staff
Commonwealth Staff

09.25.19 in The Retirement Plan Advisor

Estimated Reading Time: 5 Minutes (925 words)


Getting a second chance to do something better than it was done the first time—like being allowed a mulligan for a sliced tee shot on the golf course or having another opportunity to making a great impression—is something most people would overwhelmingly embrace. As a financial advisor, you likely have firsthand experience working with investors who have regrets about their retirement savings choices. Often, clients wish they had started saving sooner in life or had invested more wisely, and they would jump at the chance for a do-over. Fortunately for those clients, retirement plan re-enrollment may be just the opportunity they need.

Auto Features: The New Normal

Over the years, retirement plan auto features, such as automatic enrollment, automatic deferral, and automatic contribution escalation, have seen a steady adoption rate. They are incredibly effective mechanisms for encouraging employees who participate in a workplace retirement plan, such as a 401(k) or 403(b), to automate their savings efforts. They are successful because they eliminate the psychological barriers that may prevent investors from making the right retirement plan investment choices.

Although the auto features I mentioned above have become increasingly popular, there’s one feature that hasn’t received quite the same recognition: re-enrollment. In fact, according to a Callan survey, only 9.1 percent of plan sponsors report having ever engaged in an asset re-enrollment, despite only 34 percent of plan participants being highly confident in selecting plan investments.

So, advisors, now is the time to educate your plan sponsor clients about this underutilized tool that can help their participants achieve that do-over they’ve been dreaming of. To help you in this effort, let’s break down the details of the retirement plan re-enrollment auto feature.

What Is Re-Enrollment?

Re-enrollment aims squarely at improving participant outcomes. The re-enrollment process allows retirement plan participants to modify their existing (and, in many cases, unsuitable) 401(k) investment choices into a qualified default investment alternative (QDIA). Typically, the QDIA is a professionally managed target-date fund (TDF). Participants receive a notification that their existing assets, as well as future contributions, will be directed to the QDIA on a specified date, unless they choose to opt out. As is the case with other auto features, re-enrollment opt-out rates are surprisingly low.

How Does Re-Enrollment Improve Outcomes for Participants?

Research from J.P. Morgan reveals that employees who choose investments on their own rarely have the expertise or confidence to skillfully select the right asset allocation mix and judiciously manage their accounts over time. Indeed, according to the J.P. Morgan study, more than 60 percent of participants admit to preferring help when it comes to picking investments. How many times have you asked clients or 401(k) participants how they chose their 401(k) investment allocation when they first enrolled in the plan, only to have them sheepishly admit that they simply copied whatever a friend or colleague chose? Do-over time!

Re-enrolling into a TDF removes that guesswork and provides an effective means for retirement savers to achieve a more appropriately diversified portfolio that automatically rebalances—something most participants fail to do on their own. Although employees of any age can benefit from re-enrollment, older employees may find it especially beneficial. Why? Because it will help them guard against too much equity exposure as their desired retirement date approaches.

Plan Sponsors Benefit, Too!

To be sure, re-enrollment is primarily beneficial for plan participants. But there are compelling benefits for retirement plan sponsors as well—not the least of which is the potential mitigation of fiduciary risk. Plan sponsors who conduct a re-enrollment may enjoy safe harbor protections for assets that are invested in the QDIA. In addition, by offering re-enrollment, along with other auto features, plan sponsors can provide their employees with the tools to invest their hard-earned retirement assets most effectively. This leads to a better employee experience, which in turn fosters improved employee morale.

In the past, plan sponsors have objected to conducting a re-enrollment. According to the Callan survey, this is typically because they didn’t believe it was necessary or they feared participants would push back—despite 86 percent of participants being in favor of or neutral to re-enrollment. Sound familiar? That apprehension mirrors the sentiments of plan sponsors years ago when auto features were first made available. Yet today, nearly 93 percent of plans offer automatic enrollment to new hires.

What’s in It for Retirement Plan Advisors?

As a retirement plan advisor, getting a conversation started about re-enrollment options can be a great way to move the needle with the participants in the plans you manage. While your competition may still be focusing on the basics—the three Fs: fees, funds, and fiduciary—what plan sponsors want from their advisor is insight and ideas that will improve how the plan works for participants. According to Fidelity’s most recent Plan Sponsor Attitudes Study, the top priority for plan sponsors is that their plan is preparing their employees for retirement. So at your next meeting, try bringing up the topic of how conducting a re-enrollment could help your plan sponsor clients meet that goal—it could very well lead to a win-win-win situation!

Riding the Re-Enrollment Wave

Advisors play a vital role in educating plan sponsors on the viability of re-enrollment as a potentially game-changing plan design feature. If you think your plan sponsor clients and their participants could benefit from a re-enrollment, let them know! In doing so, you’ll find yourself at the crest of the wave of what could be the next retirement plan movement—and create opportunities for participants to have that fresh start that could lead them to a more enjoyable retirement.

This material is for educational purposes only and is not intended to provide specific advice.

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