Vanguard Says Re-enrollment Could Help

Participants in defined contribution plans might benefit from re-enrolling into a qualified default investment alternative (QDIA), according to a Vanguard study.

Vanguard said that as a result of the QDIA regulations issued in late 2007, re-enrollment has emerged as a way to improve the diversification of participant portfolios. The report suggests plan sponsors may choose to reenroll some or all participants into a new portfolio strategy—namely, the plan’s designated QDIA—while giving employees the right to opt out of the transfer.

Aside from when converting to a new plan provider or changing the plan investment menu, the plan sponsor may decide to reenroll some or all participants into the QDIA because of concerns that many participant portfolios are not adequately diversified, Vanguard said.

Considerations before proceeding with a re-enrollment strategy offered by the report include:

  • Consider whether re-enrollment should extend to all participants or to a targeted group, for example, those with particular diversification issues or those invested in a fund that is no longer available.
  • Examine the decisions participants have made about asset allocation and fund selection to determine whether re-enrollment is needed.
  • Review investment contract holdings in the plan to identify any potential penalties for, or restrictions on, early liquidation.
  • Evaluate the potential market impact on the company stock, particularly if a large amount of company stock is in the plan.
  • Look at whether plan fees may be affected by re-investing participant accounts into a QDIA.
  • Be aware that some employees may be sensitive about having their investments moved, even though they can opt out of the transfer.

    “Improving Plan Diversification Through Reenrollment in a QDIA” can be accessed here.