The Pension Protection Act (PPA) was a transformational event in the defined contribution (DC) world, said Dick Davies, managing director of defined contribution at Russell Investments, which created the opportunity to move America’s defined contribution plans from being “good enough” to best-in-class.
However, Davies told PLANADVISER, “we’re disappointed that plan sponsors haven’t done more to take advantage of the protections offered in the PPA. But it’s a great piece of legislation that really offers the potential to dramatically improve 401(k) plans and therefore retirement outcomes for people.”
Auto-enrollment directs new participants to a qualified default investment alternative (QDIA) option, such as a target-date fund (TDF).
But then, after all the time and effort expended by the plan sponsor’s investment committee to improve a thoughtful investment lineup for entrants into the plan, the plan fiduciaries decide to leave the assets of existing participants exactly where they were instead of directing them to the newer core institutional portfolios. Often these portfolios were constructed years earlier, and they remain misallocated, Davies said in a white paper, “Defined Contribution Plan Re-Enrollment: A Fiduciary Imperative?”
Of course there will always be some participants who insist on managing their own investments, but the majority of participants want it done for them. This is good news, Davies said, because “QDIAs in general and TDFs (target-date funds) specifically have offered professional portfolio management to people using those products. Too few people are in them, but we’re making progress,” he said.
One answer could be a re-enrollment campaign, Davies said. Over the past few years, complete plan re-enrollment has changed from a provocative concept to a more broadly accepted strategy. The word “re-enrollment” may be a misleading term: more accurately, according to Davies, participants are simply given the chance to re-select their investment options.
No other single action provides as dramatic an opportunity to transform the investment experience of plan participants as the plan re-enrollment. When done correctly, fiduciaries are provided safe harbor protections through provisions of the PPA.
The plan sponsor’s social contract with employees is possibly the major factor that influences an auto re-enrollment. Some employers are willing to nudge participants toward potentially better retirement outcomes, especially when the company has a defined benefit (DB) heritage. But other plan sponsors may be more libertarian in their philosophy, offering choice and education to participants, but otherwise avoiding any proactive steps to influence their employees’ participation.
Another factor that could stand in the way is the often-mistaken belief that plan participants are as active in their understanding as the plan committee members, who have substantial knowledge of investments and the investment education materials. Many plan fiduciaries are unaware of the growing body of research documenting the irrational decision-making of many participants, as well as the fact that many participants strongly prefer that an employer take a more active role in guiding them to appropriate investment decisions.
One element of the PPA that is not fully appreciated, Davies pointed out, is that plan sponsors are safeguarded if they give participants adequate notice of moving assets into a new QDIA and adequately document that notice. It can be a natural transition when making a change in the investment menu or any change having to do with the recordkeeper.
“In our experience, using negative consent re-enrollment, the magic number has been 80%,” Davies said. A majority of participants (80%) do not select a new portfolio. They are then moved into the new QDIA, often a TDF. Over the course of a weekend, a plan sponsor could go from 10% of plan assets in the QDIA to 80% of plan assets in the more appropriate vehicle.
The best methods to effect the change are communication. Take the time and invest the energy to communicate the process, and provide an adequate notice period to comply with QDIA regulations and maintain safe harbor protections. Documentation of the notice process is critical, Davies cautioned.
Use a positive tone when selling the benefit. No apologies are needed: re-enrollment is a great benefit. Promote the benefit of professional management and the advantages to participants of not having to build, monitor and rebalance their own portfolios.
Make re-enrollment an event. A recordkeeper change, plan merger or major redesign of an investment lineup could suggest a natural time to re-enroll. There is no real reason to wait, Davies said. On its own, a plan re-enrollment is enough of an event to deserve promotion and celebration.
“Defined Contribution Plan Re-Enrollment: A Fiduciary Imperative?” is available here for download.