Reharvesting

Art by Tomi Um

Re-enrollment is a plan design strategy that improves employees’ retirement outcomes by increasing participation and deferral rates and/or improving investment allocations. And yet, 89.3% of sponsors surveyed for the 2016 PLANSPONSOR Defined Contribution (DC) Survey said they had not re-enrolled any employees or participants in the past 12 through 18 months. Among those that had, 1.9% re-enrolled participants not invested in the default investment, 4% re-enrolled participants saving below the default deferral rate, and 8.6% re-enrolled nonparticipating employees.

For many plan sponsors, re-enrollment remains a relatively new concept, says Lynda Abend, chief data officer at John Hancock Retirement Plan Services in Boston. “Automatic enrollment really started with the PPA [Pension Protection Act], so it’s about 10 years old. It took four or five years before employers got comfortable with it, and then most automatically enrolled new employees at 3%,” she says. “In the past five years, we’ve made good progress in working with plans that had auto-enrolled at 3%, [prompting them] to move to a higher initial deferral, and getting sponsors comfortable with auto-increases. Now, the next step in this evolution is re-enrollment.”

Re-enrollment really only resonates among proactive plan sponsors, says Jerry Patterson, senior vice president of retirement and income solutions at Principal Financial Group in Des Moines, Iowa. “If a plan sponsor cares about the financial well-being of its work force, [it] should care about this,” he says. “And if a plan sponsor cares about employees transitioning into retirement in an orderly way, [it] should care about this.”

Re-enrollment in its earliest form focused on reallocating the balances of a plan’s current participants to its qualified default investment alternative (QDIA), says Cynthia Pagliaro, senior research analyst at the Vanguard Center for Investor Research in Valley Forge, Pennsylvania.

In a paper Vanguard released in March, “Re-enrollment: One year later,” the firm presented a follow-up to a 2016 case study of a large-plan client’s investment-focused re-enrollment. Over that year, diversification improved considerably, with just 7% of participants still holding an “extreme” position of 0% or 100% equity. Eighty-one percent of plan assets remained in the default target-date funds (TDFs).

The original, February 2016 paper on the case study, “Reshaping Participant Outcomes Through Re-enrollment,” also showed how re-enrollment into a passive TDF family can lower participant fees substantially. The average expense ratio paid annually by the large plan’s participants decreased from 41 basis points (bps) to 10 basis points after re-enrollment.

The current paper shows that 80% of re-enrolled participants stuck with the default as their sole plan investment, and 20% did not. Of that 20%, 12% of participants did a partial opt-out—still holding the default but also moving some money to one or more other plan investments—and 8% did a full opt-out from the default. Pagliaro characterizes that opt-out pattern as typical for an investment-focused re-enrollment. “Over time, we see a small percentage of people leave the target-date funds altogether,” she says. “And sometimes participants take a smaller position in a target-date fund, where they are not 100% allocated to it.”

When re-enrolling current participants into a QDIA, Pagliaro says, it is important to make clear that they can opt out of the change. The opt-outs mostly fall into the “do-it-yourself” group that feels more confident about investing, she says. “They tend to be people who are older and wealthier, and they have a preference for building their own portfolio,” she says.

But the vast majority of participants do not want to build their own portfolio, Pagliaro says. “They’d prefer that investment professionals make those decisions,” she says. “Through re-enrollment, you’re helping those folks to get a better-diversified portfolio. The vast majority of re-enrolled participants stick with it, to their benefit.”

Boosting Deferral Rates
Another approach to re-enrollment focuses on improving deferrals. Sponsors sometimes re-enroll employees saving below the default deferral rate, raising them to that rate, or to the rate needed to collect the maximum match. To determine whether taking this step makes sense, advisers should perform a participant retirement readiness study for the plan, recommends Tom Foster, assistant vice president, strategic relationships at MassMutual Financial Group in Enfield, Connecticut. The study can look at the percentage of participants on track to retire at an appropriate age—say, 65% or 67%— with a sufficient percentage of their pre-retirement income—say, 75% or 80%, including Social Security.

Some employers do that study and find that their work force saves sufficiently and does not need re-enrollment to the plan’s default savings rate. “But, in many other cases, many employees are woefully underprepared for retirement,” Foster says.

T. Rowe Price Retirement Plan Services often sees plans implement this type of re-enrollment when they do a recordkeeper conversion or have corporate mergers/acquisitions, says Aimee DeCamillo, head of retirement plan services for the firm, in Baltimore.

Asked to cite a best practice for re-enrollment that includes the deferral rate, Patterson says a 6% rate, with 1% auto-escalation, is emerging as a good number. “The experience of our plan clients shows that if you auto-enroll employees at 8% or above, you begin to see a meaningful fall-off in the ‘stick rate,’” he says. “More employees say, ‘That seems like a lot.’”

The biggest argument for sponsors increasing the deferral rate in a re-enrollment is simply because it works to help participants save enough for retirement, says Nathan Voris, managing director of business strategy at Schwab Retirement Plan Services in Richfield, Ohio. “You build in these positive participant behaviors every time you do a re-enrollment,” he says.

On the challenging side, a re-enrollment that includes deferral rates could increase an employer’s match costs significantly, if a plan has many very low-saving participants. “It depends on the plan design,” DeCamillo says.  “You have to do an analysis and look at, what are the incremental costs to the employer? And what are the ways to offset those?”

A T. Rowe Price white paper, “Getting Beyond Ordinary—Managing Plan Costs in Automatic Programs,” discusses some of the ways an employer can offset the potential cost increases accompanying automatic features. These can include making changes to the employer contribution’s structure, such as shifting to a stretch match or moving the timing of the employer contribution to the end of the year so employees who depart before that do not get that year’s match. An employer also can control its costs by changing the vesting design, such as requiring longer service for 100% vesting. Additionally, by altering a plan’s eligibility rules, the employer can limit the financial impact: Potential moves include changing eligibility timing for new hires to let them enroll immediately but get no employer contribution for one year.

Doing the Backsweep
When Schwab Retirement Plan Services’ plan clients perform a re-enrollment, they typically include current participants and nonparticipating eligible employees—and both re-enroll them into the QDIA and increase deferrals for those saving below the default deferral rate up to that rate. “It gets more people closer to success,” says Voris. “And we see very little, if any, participant backlash.”

Aon Hewitt’s biennial Trends and Experience in Defined Contribution Plans Survey shows that the percentage of employers doing a backsweep—re-enrolling eligible nonparticipants—has held steady in the past several years in the 14% to 16% range, says Rob Austin, director of retirement research at Aon Hewitt in Charlotte, North Carolina. “About half of those companies do it as a one-time sweep, and the other half keep re-enrolling people every year,” he says.

Principal Financial Group strongly believes in plans doing a backsweep of eligible employees every year, because employees’ reasons for not saving often get eliminated over time, Patterson says. “We did some participant research, and it found that 80% of participants said they had a neutral or positive reaction to plan sponsors re-enrolling employees who had opted out of the plan,” he says. “They said it didn’t upset them.” Likewise, Schwab finds the “stick rate” of a backsweep usually runs in the 85% to 95% range of employees, Voris says.

According to Abend, opt-out rates over the long term for a backsweep follow an interesting pattern. “We find that, when our clients use a default deferral rate of 3% in a sweep, the long-term opt-out rate is 10%,” she says. “If a sponsor does a sweep at 6%, the long-term opt-out rate is 4%.” She attributes the lower opt-out rate accompanying a higher-deferral re-enrollment to the tendency of participants to get more enthusiastic about saving for retirement once they start accumulating a substantial account balance. A higher initial deferral builds the balance more quickly.

Among Principal’s plan clients, the average participation rate runs 7% higher for plans that implement a backsweep along with auto-enrollment of new employees, versus only auto-enrolling new hires, Patterson says. “And we see a 17% higher average deferral rate for plans that implement a sweep,” he says.

Re-enrollments that include both low-deferring participants and nonparticipating employees substantially boost the percentage on track to, when including Social Security, replace at least 70% of their pre-retirement income, John Hancock finds. Among its plan clients that do re-enrollment that way, “There is a 10-percentage-point improvement, on average, in the percentage of participants being ready for retirement,” Abend says.

Pointing out these benefits to participants can dramatically lessen their resistance, Patterson says.

Key Takeaways:

• Re-enrollment is seen as the next step plan sponsors are taking following their embracement of auto escalation, but to date, implementation is in the single digits.
• A re-enrollment can reallocate balances into the plan’s QDIA, increase deferrals up to the default deferral rate, sweep in employees who are not participating in the plans—or combine one of these initiatives with another or do all three.
• Some plan sponsors do a re-enrollment annually, while others do it only every few years.