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Is it Time to Re-Enroll Your Company's 401(k) Plan? |
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July 26, 2008
Scott Thole, HORAN
A new tactic beginning to move through the retirement plan industry is re-enrolling participants in their 401(k) plan. The rationale is to improve the asset allocation of participants and increase their retirement readiness. As is often reported, once participants make an initial investment choice, they tend not to make any additional changes to their allocation. A side benefit of the re-enrollment is fiduciary protection for the plan committee. In a sense, the change will benefit participant investment allocation, and it will benefit fiduciaries regarding legal protections.
Asset allocation problems tend to pile up over the years since the participants initial enrollment. These problems include:
- Younger employees concentrated in conservative investments.
- Participants diversify by investing equally in all funds in the plan.
- Two of every 5 participants in plans that offer employer stock have 20 percent or more of their assets in the company stock, according to a Hewitt Associates study.
- Older participants portfolios are too aggressively invested.
Plan sponsors began recognizing these problems many years ago and responded by adding target date and/or life cycle funds, professionally managed account options, and recently, automatic enrollment for new employees including Qualified Default Investments. Plan sponsors are more comfortable with the new participants remaining in the default investment options than the bad investment decisions historically made by older participants.
The next step may be to re-enroll the whole plan to fix the bad investment decisions made in the past. It may seem radical, but if they are comfortable automatically enrolling new employees in the default investments, why not re-enroll all existing employees to the same options? The participants will have the ability to stick with their current choices by opting out of the re-enrollment, but many will go with the new investments and probably be better off in the long run. Of course, you would want to check with your ERISA attorney for any possible fiduciary risk to the company and trustees.
In a re-enrollment, the plan would provide a notice to participants (of at least 30 days) when they would be required to direct their investments by a specific deadline. Participants are given the information required by the QDIA regulation, including information about the default investments and other plan investments. At the end of the period, the participants who had not re-directed their investments would be defaulted into a QDIA; for example, an age-appropriate target date fund.
Re-enrolments are still rare, usually due to the concern raised by plan sponsors with the unwinding of the active investment choices that participants have made and shifting of defaulted monies. However, the Pension Protection Act contains provisions that provide ERISA Section 404(c) safe harbor protection for fund mapping and investment defaults.
Companies where employees generally are not considered investment savvy are probably the best fit for a re-enrollment. In other words, a manufacturing or retailer may be better suited than a professional services firm to a re-enrollment.
Re-enrollment is another tool for plan sponsors to increase the retirement readiness of their employees. It improves the overall quality of the plan while simultaneously offering a level of protection to fiduciaries.
We invite additional questions about these features and how they relate to your 401(k) plan. Please contact Andrew Sweeny Jr. or Scott Thole at 513.745.0707.
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