Ten years ago, the Pension Protection Act of 2006 was enacted to help plan sponsors take positive steps on behalf of their participants, particularly through auto-enrollment and the designation of qualified default investment alternatives for their plan. Commonly used QDIAs are target date funds, managed accounts, and, to a lesser extent, balanced funds.
The impact has been substantial in terms of plan participation and asset diversification, but that doesn’t mean plan sponsors can or should stop being proactive. In fact, the 10-year milestone for the PPA marks an important time for sponsors to evaluate the overall impact plan design is having on participants’ retirement preparedness.
A number of developments have occurred since 2006. For one, the Department of Labor issued some very specific guidance in 2013 to help plan sponsors using TDFs take prudent action to make sure the TDFs align with their plans’ goals and their participants’ needs.
See also: Post-PPA: What’s in store for plan sponsors
Among the DOL’s suggestions, they underscored the need to establish a process for periodic reviews and encouraged plan sponsors to consider whether non-proprietary open architecture TDFs might be a better fit than fully proprietary products. It’s worth noting that many sponsors originally chose their recordkeeper’s TDF as part of a bundled offer with plan decision and pricing benefits. In the context of the DOL’s guidance, that may merit revisiting.
The DOL also suggested reviewing target date fund fees and investment expenses. This guidance may be one driver in the rise of collective trust funds, which are built exclusively for the ERISA market. In many cases, plan sponsors can cut fees by moving to CTFs, which typically have lower expense ratios. Likewise, the use of index funds, either within a TDF or as part of a managed account offering, can also help to lower investment fees for participants.
To address these and other issues, one option plan sponsors can consider is plan “re-enrollment,” where all participants in a plan are notified and asked to revisit their choices. The default action for all participants following re-enrollment is placement in the plan’s QDIAs, regardless of their current investment elections. Participants who wish to opt out of the QDIAs can do so.
Full-plan re-enrollments offer wide-ranging benefits to participants and plan sponsors. Yet only about one in five sponsors are implementing them, according to Callan Associates. While great strides have been made on the retirement landscape in the last 10 years, today we are facing inertia of another kind.
A Closer Look at the Plan Participant
Millions of participants and employers made retirement choices over the past decade and haven’t revisited them, even as their lives may have changed. Consider a range of circumstances where existing allocations and contribution rates could be out of step with current needs and preferences:
· The participants who opted to be self-directed because it looked pretty straightforward and simple at the time. Now they’re at different points in their lives. They’ve had some experience with market cycles and may have different time horizons and risk profiles.
· The participants who opted to be self-directed but didn’t give much thought to their contribution rates. Perhaps they made their decisions at a time when they were unable to allocate much to retirement savings, so they’ve been contributing at a relatively low rate. Without review, they might think they’re on pace for a comfortable retirement. Checking in might reveal potential implications of their contribution rate, and may make the case for acceleration.
· The participants who were defaulted into the plan with a low contribution rate — for example, 3% — that has never increased. If, as part of re-enrollment, the contribution rate is increased one time or better yet, annually going forward, those participants can benefit significantly from additional savings.
A closer look at the plan sponsor
As the fiduciary environment continues to evolve, plan sponsors may want to take a closer look at the impact of re-enrollment as part of the ongoing evaluation of their plan. Among the reasons why, consider the following:
· It provides a chance to review whether the current QDIA still is the right choice. For example, plan sponsors may want to examine whether the TDF in their plan has a glidepath that overexposes older participants to equities and associated risks. Some difficult lessons were learned about this during the financial crisis. Since then, some firms with more aggressive TDF glidepaths have taken steps to adjust them while others have even introduced a second set of more conservative TDF families. Managed accounts may also deserve another look as their adoption among retirement plans continues to grow.
· It affords an opportunity to address potentially low contribution rates — the result of individuals or the plan sponsor setting them low and never increasing them. Re-enrollment can trigger decisions at the participant level that might lead to increased contribution rates. It also provides sponsors with an opportune time to establish automatic deferral increases.
· It can prompt engagement from participants, which can help correct some known behavioral issues that impact asset allocation and diversification, such as investors using multiple TDFs or TDFs alongside other funds.
· It can help sponsors demonstrate fiduciary responsibility more effectively as part of a process focused on helping participants prepare for retirement.
The call to action
Plan participants can be inappropriately allocated, their contribution rates can be too low and they may have no prompts or triggers to engage with their plan. So if a full plan re-enrollment can help address these challenges, why are so few sponsors doing it?
A common concern we hear from plan sponsors is that participants will react negatively to automatic features, including plan re-enrollment. The opposite is true. When Schwab Retirement Plan Services clients have used full plan re-enrollment, including enrolling all participants into the plan’s QDIA, 87% of plan participants have stayed with the QDIA choice. Participants overwhelmingly accept this automatic approach and rely on plan sponsors to make decisions on their behalf.
Bottom line: Re-enrollment and a concurrent re-evaluation of the QDIA may help plan sponsors as they work to align their plan with what participants need today to achieve desired outcomes in the future.
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