Re-enrollment Can Set Participants on Right Path

The brief, “Understanding Re-Enrollment: Benefits for Participants and Plan Sponsors,” defines the term re-enrollment as a process by which retirement plan participants are notified that their existing assets and future contributions will be invested in the plan’s qualified default investment alternative (QDIA), which is usually a target-date fund (TDF), based on the participant’s date of birth. Participants are automatically moved into the QDIA on a certain date unless they make a new investment election during a specified time period.

“There are three types of QDIAs that plan sponsors can choose from—a managed accounted service, a balanced (risk-based) portfolio, or a suite of target-date funds,” Catherine Peterson, head of Retirement Insights at J. P Morgan Asset Management, tells PLANSPONSOR. She explains that based on industry data, the majority of plan sponsors select the suite of TDFs as their QDIA. In this case, each defaulted participant is mapped to the most appropriate target-date fund based on their age. For example, if a participant was born between 1959 and 1963, they would be mapped to a 2025 fund, assuming a retirement age of 65.

Plan sponsors that use re-enrollment usually see an increased adoption of TDFs, according to the J.P. Morgan paper. With re-enrollment, the adoption rate can be between 55% and 85%, while plan sponsors that just add TDFs as a new option in their investment lineups see adoption rates of 5% or less, even after the passage of several years.

The Benefits of Re-Enrollment

Peterson says re-enrollment has benefits for both plan participants and plan sponsors. “There are a number of reasons why plan sponsors would want to do a re-enrollment, chief among them is the opportunity to help improve the outcomes of their plan participants,” she explains. “For participants that are re-enrolled into a target-date fund, benefits include professional management of their assets, which incorporates age-appropriate asset allocation decisions and provides diversification. Another valuable benefit is the potential for improving participant confidence and engagement in how they are saving for retirement.”

Carrying out a re-enrollment not only helps get participants into a diversified portfolio, according to the brief, but also helps to ensure their asset allocation changes with them over time.

Re-enrollment may benefit plan sponsors in a number of ways, the New York-based Peterson says, including the improved confidence that their participant base is appropriately invested within the plan and an increase in overall participant satisfaction with the plan.

Another key re-enrollment benefit for plan sponsors is the fiduciary protection that plan sponsors receive from conducting a re-enrollment that redeploys participant assets into the chosen QDIA. The fact that many plan sponsors are unaware of this benefit may help explain why re-enrollment is an underutilized strategy, she says.

Executing a Re-Enrollment

According to Peterson, the first step in doing a re-enrollment is clear communication, which may begin with sending employees an e-mail or flyer that announces the re-enrollment and provides information about what to expect and important dates. This initial communication should take place 60 days prior to the default date, she says. That would be followed by more detailed information describing the investment options and process for opting out, which would be sent out 30 days prior. Other required notices would also be sent out at this time.

Sending out a reminder at least one week prior to the default date is recommended to reinforce key messages about saving and investment, Peterson says, as well as to ensure that participants are aware of important deadlines.

Working closely with service providers to capitalize on best practices is important, Peterson says. While the timeline for re-enrollment varies by plan and recordkeeper, it is typically a 60- to 90-day process.

Reactions from Participants

According to Peterson, many plan participants respond positively about re-enrollment, since it simplifies investing decisions for these employees. She says an effective participant communication strategy is critical to prevent participant misunderstanding or dissatisfaction.

The communication process should explain what is happening, what actions participants need to take and what will happen if they do not take action, says Peterson.

“Communication materials should also address different types of investors,” she says. “For those who lack the time or desire to make investment decisions, a target-date fund may be appropriate for them. Those participants will not have to take any action, and can allow their assets and future contributions to default into the age-appropriate target-date fund.”

For those participants who prefer to actively manage their investments, they can either choose to opt out of the re-enrollment process or make a new investment election, Peterson says.

A copy of the J.P. Morgan brief on re-enrollment can be found here.