The Second Take
The 2016 PLANSPONSOR Defined Contribution Survey found that, over the past three years, just 1.9% of retirement plan sponsors had re-enrolled participants in the plan’s default investment at some point, while only 4.0% re-enrolled participants saving below the default deferral rate, and 8.6% re-enrolled nonparticipating employees. As that data reveals, most sponsors have yet to embrace re-enrollment.
But among the plan clients of adviser Russell Warye that have done a re-enrollment, about 90% of their re-enrolled participants have stuck with it. Seeing that growing track record of success, he anticipates more acceptance of the practice among plan sponsors in the next few years. “It’s getting more traction now, as sponsors are looking more closely at their plans from a fiduciary standpoint,” says Warye, president of Benefit Partners Financial Group LLC in Libertyville, Illinois. “They are asking, ‘How can we make the plan better?’”
Advisers working with plan sponsors debating whether to re-enroll their participants may want to consider these suggestions to achieve better results.
Study the Data, and Plan a Targeted
Re-enrollment
Ten years after the Pension Protection Act of 2006 (PPA) spurred a huge increase in sponsors performing automatic enrollment, many 401(k) participants still have problematic asset allocations. One big reason: Most companies that started in the past decade have auto-enrolled only new employees, not employees already working at the company.
“So you have decades of employees who have made investment choices along the way, some thoughtfully and some not thoughtfully,” says Anne Lester, portfolio manager and head of retirement solutions for global investment management solutions at J.P. Morgan Asset Management in New York City. “And most participants are not going back and reviewing their original choices.”
Also, some sponsors performed an auto-enrollment before the Pension Protection Act created qualified default investment alternatives (QDIAs), and many longer-tenured employees remain in the original default. “If a plan previously defaulted employees into something such as a capital-preservation fund, unless the sponsor later went in and did an investment re-enrollment, most of those participants enrolled earlier are still in the capital-preservation fund,” says Toni Brown, senior vice president of American Funds, part of The Capital Group Companies Inc., in San Francisco.
That leaves more-senior employees at an accumulation disadvantage and may delay their retirement—which ultimately costs an employer money. “I always speak up for the ‘legacy’ participants,” says Cynthia Pagliaro, senior research analyst at the Vanguard Center for Retirement Research in Malvern, Pennsylvania. “These people are kind of getting left behind.”
Experience has shown that focusing on investment education alone “does not move the needle enough,” Brown says. “More plan sponsors now are deciding that they will do an investment re-enrollment to get participants to a better retirement, rather than trying to continuously educate them and then rely on them to make their own decisions,” she says.
The vast majority of re-enrollments utilize target-date funds (TDFs) as the default investment, to provide age-appropriate diversification and risk levels, Lester says. “If you have a QDIA you are comfortable using for automatic enrollment, it’s the QDIA you use for re-enrollment,” she says. “Target-date funds are particularly well-suited for these long time periods of investing. If you are going to create an investment for people who are not paying attention to their investments, you need something that will change the allocation over time.”
Some sponsors also utilize re-enrollment to address sub-par savings rates, re-enrolling low-deferring employees at the initial default deferral. Adviser Michele Lantz has a sponsor client currently considering re-enrollment targeted at both investments and deferral rates. After looking at the data, “the consensus is that deferral rates are not where the sponsor would like them to be,” says Lantz, a Palmdale, California-based advisory representative at Pensionmark Financial Group LLC. “So this client, which has more than 1,000 employees, is looking to do re-enrollment every year.”
Further, re-enrollment can help a plan sponsor qualify for the PPA’s safe harbor designation if the sponsor is willing to meet the match level or nonelective contribution level requirements. Adviser James McQuillan talks to employers about how re-enrollment that boosts rank-and-file participation can help testing-challenged plans improve testing results. “These plans are often not safe harbor plans, so testing can be a concern,” says McQuillan, president and founder of RJF Financial Services LLC in Minneapolis.
“As an adviser, I’m helping a plan sponsor understand the natural tension at play here,” he says. “Participants need help [concerning savings rates and investments], and they aren’t getting it. And plan sponsors don’t want to cross into the realm of providing advice. We explain to sponsors why the law provides specific safe harbors for a properly constructed re-enrollment. It gives participants the help they need, while protecting plan sponsors from frivolous lawsuits.”
Study the Data, and Plan a Targeted
Re-enrollment
Sponsors sometimes feel apprehensive about the cost if nonparticipating employees get re-enrolled or low-saving employees get re-enrolled at a higher deferral rate, Warye says. “The employer wants to know, ‘How much will that cost us in additional match dollars? How will it impact the plan’s administrative fees? And will it impact our internal administrative costs to work on the re-enrollment?”
RJF Financial Services probably spends more time talking about cost implications with sponsors considering a re-enrollment than the firm does any other concern, McQuillan says. So, how should an adviser handle the issue? “By this stage, you’re talking to a sponsor that has bought the idea that it wants to improve participant outcomes. When [you] get to that point, there’s no sugar-coating it: There is a cost to doing re-enrollment, and the cost is determinable. You just have to take the cost issue head-on.
“Then it becomes a matter of data analysis: What will likely happen if the plan does a re-enrollment, and what will it cost the employer?” he says. “To do that analysis, we can either use industry data on re-enrollment results, or, if the plan already has auto-enrollment, we can use that data.” Of course, sponsors also have the option of a stretch match, which could keep their matching dollars from increasing.
After cost, employers considering re-enrollment most often worry about a potential backlash from employees who feel forced into participating or who are unhappy with the QDIA. “In that case, some employers send out an employee survey, ahead of deciding to do a re-enrollment. That way, employers can get an initial sense from their employees whether they are in favor of it,” Lantz says. “It does not need to be a complex survey: It can be just two brief questions. The first is, ‘If we increase your automatic enrollment to X%, would you be in favor of it?’ And the second is, ‘If we take this initiative, do you feel we would be forcing you to do something?’” Almost always, those employee surveys show widespread support, she says.
Advisers also can share results their other plan clients have seen with re-enrollment.
“We see a really strong participant ‘stick rate’ if the re-enrollment is done properly, with a match and good communication,” Warye says. “If the re-enrollment is done with no match, the stick rate is much lower. But if you can give them a little incentive and a little push, they will stick in the plan,” he says.
Lester says the re-enrollment stick rate generally ranges from 60% to 80%—however, she adds, employees deciding to opt out of a default investment is not necessarily a bad thing. “If people choose to take a look at their asset allocation and investment choices and make their own decision, we say, ‘Great.’ The material thing is to help participants engage and pay attention. That is really what you want.”
Study the Data, and Plan a Targeted
Re-enrollment
Data analysis can help sponsors focus on why they might want to consider re-enrollment. “When they see the data, particularly a scattergram of participant allocations—and especially when it is their plan data—very often, that will help move the needle with sponsors,” Lester says.
Examine plan data broken down by different demographic groups to get a more specific sense of participants’ investment issues, Pagliaro suggests. “Look at the equity allocations based on age bands. That tends to be very eye-opening for sponsors,” she says. “I recommend looking at their target-date fund family’s equity allocations along [the family’s] glide path and comparing that with participants’ actual allocations by age bands. When you do that, what you typically see is that many younger investors are too conservative and many older investors are too aggressive.” Then, she says, a “targeted” re-enrollment will impact only those participants with problematic asset allocations.
Re-enrollment works best when a sponsor targets it to specific participant groups, based on the participant data analysis, rather than having it automatically implemented in an all-encompassing way. “You want to pick your spots,” says adviser David Hinderstein, president of Strategic Retirement Group Inc. in White Plains, New York. “Every sponsor has a different set of problems that it is looking to solve for. We look at each of those problems differently.
“If the problem is how much participants are putting into the plan, that’s one set of solutions,” Hinderstein continues. “If the problem is asset allocation, that’s another set of solutions. If the problem is participation, that’s another set. I don’t want to lump them all together, unless a plan has all of those problems, in which case a ‘lock, stock and barrel’ re-enrollment sounds like a good thing. But as plans have matured, we don’t see as many that have all of those problems, especially among the larger plans. More likely, a plan may have one or two of those problems.”
Participants accept re-enrollment better when it is “lasered” to help only those who actually need the change to get on track for retirement readiness, Hinderstein says. “Let’s say that a participant has chosen to be in a managed account. Why would we move that participant to the QDIA target-date fund in a re-enrollment? The participant is already in a diversified, tailored investment,” he says.
“But if a younger participant is 100% invested in a money market fund, that’s a problem to solve for,” he says. “To use a medical analogy, if we’re [addressing] an investment-allocation problem, let’s only ‘inoculate’ those people who are at risk, and not inoculate everybody in the plan. With technology, and working with a strong provider, you really can identify who those people are and target them. Otherwise, you have unintended consequences for participants, and that angers people.”
Not every participant needs re-enrollment. “The tough part with re-enrollment is that it is even more paternalistic than automatic enrollment,” says adviser Curtis Farrell, a principal at Financial Management Network in Mission Viejo, California. “If you re-enroll every participant into the default investment, you are basically saying that no one in the plan has the wherewithal to investigate any of the plan’s investments.” So he suggests not doing a re-enrollment into a plan’s default option for participants who previously made an affirmative election on their investments.
“Otherwise, I think you’re going to cause problems,” he says. “These participants made those decisions for a reason.” Similarly, if a participant already has chosen a higher deferral rate than the plan’s default deferral rate, do not re-enroll that participant at the lower default rate, he says.Workers’ Views Toward Automatic Enrollment, Re-Enrollment and Deferral Rates
Study the Data, and Plan a Targeted
Re-enrollment
Sponsors telling employees about an upcoming investment re-enrollment should clearly articulate that they are not being forced into it, Brown recommends. “The sponsor can explain, ‘If you’re happy with the investments you have now and don’t want to change, you should go in and confirm your investment election. If you don’t do that, we will move you into the default,’” she says. “Make it clear that they have a choice and that they can opt out of the investment re-enrollment.”
When employees learn about a coming re-enrollment that includes not just their investments but their deferral rates if they are participants, or their being enrolled as nonparticipants if they never joined the plan, they worry most about whether they can afford it, Warye finds.
“Many employees are living paycheck to paycheck, so saving is a hard idea. They say, ‘It’s going to come out of my check and affect my take-home pay,’” he says. “So you can show them [hypothetical] examples of the impact on the paycheck of employees making $25,000, or $30,000 or $40,000. They can see that it is not a big hit out of their check” because of the tax breaks.
Farrell has seen that showing employees the limited reduction in take-home pay, together with the considerable upside of retirement-savings accumulation, goes a long way toward gaining their acceptance. “We try to show them, ‘Hey, this really is not going to have much of an impact on your paycheck,” he says. “Once they see the lack of impact, together with how quickly the money will grow in their account, they do stay in the plan. You just have to get them over that hurdle.”
Give employees a simple explanation of how they will benefit from a re-enrollment, Pagliaro recommends. “We have found that effectively communicating what the objective of the re-enrollment is will help people understand why their employer is doing this,” she says. “Clearly say, ‘This is why we are doing it, and this is how we think it will benefit you.’”
With the right upfront participant communication, McQuillan finds, achieving widespread acceptance of re-enrollment is fairly easy, even when it increases employees’ deferrals. “First, let them know what kind of deferral rate is needed to succeed in retirement planning. Then share what happens if they continue as they are,” he says. “And then explain, if they follow through with the re-enrollment instead, what happens to their long-term results in saving for retirement. You can show them, ‘Look, here is the pathway. If you want to get in the game and have a reasonable chance of success, this is a great way to do it.’”
Art by Red Nose Studio