Defined contribution (DC) plan sponsors want to improve their participants’ retirement outcomes and keep their plans in good health. But it takes a lot more than keeping the lights on to boost those basic success measures. One move can help in both cases—a reenrollment.
Reenrollment is a one-time process that puts employees’ retirement savings into a plan’s qualified default investment alternative (QDIA) unless they actively choose another investment. It can be a powerful way to steer employees into effective investment options.
Reenrollment can also help engage workers who might otherwise never have joined the plan. And it can help current participants who may have made a “set it and forget it” choice when they were hired. The “set it and forget it” group is inclined toward inertia, so a reenrollment gives them an opportunity to hit the restart button on their plan, repositioning themselves with an asset allocation that’s appropriate to guide them into their retirement years.
Myths and Misperceptions About Reenrollment
What are some of the biggest roadblocks for plan sponsors considering a reenrollment? We surveyed over 1,000 plan sponsors to ask that very question. Among those who hadn’t conducted a reenrollment, just under half (44%) didn’t feel that they needed to. Almost as many of them (43%) also voiced concern that there would be a negative reaction from participants.
That concern may be misplaced, because the opposite is usually the case. In fact, most employees appreciate the help. In our survey, nine in 10 participants are happy with a reenrollment; only one in five opt out in order to choose their own investment options. And of those who select their own investments, 30% end up choosing the default, anyway.
Some plan sponsors (28%) hesitate because of a perceived fiduciary risk. But a proper reenrollment using a prudently selected target-date fund (TDF) won’t increase fiduciary risk, because TDFs meet the Department of Labor’s requirements for a QDIA. In fact, plan sponsors will gain “safe harbor” protection under ERISA guidelines for a larger portion of the participation population if there’s a reenrollment. Also, the age-appropriate diversification of TDFs may help improve retirement outcomes for more participants.
Over the course of a decade of research, we’ve found that only about half of plan participants want to select their own mix of individual funds—or are comfortable deciding how much to invest in each. Even fewer say they have time to keep an eye on those investments and make changes as their retirement approaches. It’s no wonder a significant percentage of participants don’t properly allocate their assets—especially employees who’ve been with a company for several years.
A reenrollment, used in conjunction with auto-enrollment and auto-escalation, can improve diversification for participants who haven’t touched their asset allocation in years—or who don’t make wise choices when they do touch it.
What’s Involved in a Successful Reenrollment?
Here are four steps plan sponsors can take to ensure a successful reenrollment process.
- Send clear, concise employee communications. Let your participants know they have choices, they can make changes before the reenrollment date and they can still adjust their investment selection in the future. Use communication best practices including positive, straightforward language, more visuals and a simple call to action. And employ all available communication formats to convey information—including letters, emails, newsletters and internal websites.
- Create a communication timeline and specify deadlines. When it comes to communications, start early and repeat often. Release announcements 60 and 30 days in advance of the event. In the final weeks, hold employee-education sessions. And with all plan changes, document the process through the plan’s investment policy statement and conduct regular meetings with members of the plan’s committee. It’s crucial in managing a healthy plan.
- Review your plan’s design and investment options. Look closely at your plan’s investment lineup and your current TDF. Designate a QDIA as your plan’s default investment and couple that with automatic enrollment. It’s also good to include automatic escalation, which increases participant contribution rates at regular intervals by a predetermined amount or percentage.
- Discuss the timing and costs with your plan provider. Create clearly defined roles and responsibilities for both you and your provider. Once sponsors have their reenrollment strategies in place, it’s vital to stick to the communication timeline. It’s very important to make sure employees get the necessary plan information—even if they choose not to read it. Employees who get regular, effective communication respond more positively to change.
A plan reenrollment is the fastest, most effective way to improve participant allocations and enhance retirement outcomes, while strengthening plan sponsors’ fiduciary commitment and gaining ground on their plans’ measurements for success.
For more information about reenrollments, including case study examples, please explore AB’s publication, Recalibrating Your Defined Contribution Plan: How Reenrollment can Help both Plan Participants and Plan Sponsors.
Source: AB, Inside the Minds of Plan Sponsors, June 2019 and Inside the Minds of Plan Participants, May 2018.
