He recently took DC Edge through a case study to demonstrate how an advisor can explain the advantages of reenrollment to a plan sponsor, walk the client through the process, and finally line up outside experts, including specialized lawyers, to help.
The goal: Better outcomes for everyone, Anderson says. Reenrollment helps drive retirement readiness by getting workers who never signed up in the first place to start saving for retirement. Second, it helps employers steer workers into investments designed to potentially build their savings more effectively.
And by resetting all of a plan's participants at once into a qualified default investment alternative, known as a QDIA, plan sponsors may qualify for relief from fiduciary liability, referred to in the industry as a "safe harbor." QDIAs typically take shape in 401(k) plans as target date funds offering a mix of investments that take into consideration the individual's age or targeted retirement date. The target date is the approximate date when investors plan to start withdrawing their money.
Reenrollment may also strengthen a plan sponsor's fiduciary position by putting all plan participants on the same playing field. This eliminates having younger workers being defaulted into newer, age-appropriate investments at the same time older workers remain in previous default investments that are often more conservative -- and may have a higher risk of not keeping pace with inflation.
Anderson, along with two colleagues in Troy, Mich., has guided three plan sponsors through reenrollment. The most recent, completed in April, took two years to complete.
They are satisfied with the results but getting the go-ahead took "a lot of debate and a lot of push," Anderson says.
The client, a manufacturing company with 4,700 participants in its 401(k) plan, had a modern enrollment strategy – employing auto-enrollment for its workers since 2000 – and boasted a 93% participation rate; however, it continued to utilize a stable value default investment.
In fact, more than 75% of the participants were in the investment, amounting to approximately 43% of the plan's assets. Anderson says he found the statistic "sobering."
And many of those workers can afford to take more risk, because they have a longer savings horizon: Of the 3,200 participants in the default investment, about 1,800—more than 56%—were between the ages of 18 and 40. These employees, in particular, should consider more equity exposure, Anderson says.
At first, the company's investment committee resisted the change. The pushback started at the top, with a few key executives expressing their reluctance about workers investing too much of their hard-earned savings in equities. Two out of five members of the committee, and the company's president, also worried that plan participants would suffer from being exposed to stock-market risk and potential loss of principal, since the principal value of target date funds is not guaranteed at any time, including at the target date.
Anderson says the president believed that the market was simply too risky a place for lower-income workers with little savings to put at risk. The president also objected to "trying to force" participants into an investment with equity exposure, and out of an investment with none, Anderson says. He tackled the objections three ways. First, he explained that the plan, weighted heavily in fixed income investments, was "out of line with national norms" given historically low interest rates in recent years. He added that part of his strategy, reenrollment, is becoming a standard industry practice.
Second, he explained why he considers target date funds a good option for many employees: Younger workers invested in a diversified portfolio gain equity exposure, allowing them an opportunity to stay ahead of inflation. In fact, having a younger employee invested exclusively in an investment that doesn't keep pace with inflation might open the company up to fiduciary liability later, Anderson contends.
Finally, Anderson drew upon his professional network, bringing in an attorney who specializes in assessing liability for defined contribution plans. They worked together to make the case for the reenrollment. The attorney told the plan sponsor that the reenrollment changes were legal—and that if the default option were switched to a QDIA, such as a target date fund, the plan would have what is known as "safe harbor" relief against fiduciary liability for participant investment decisions.
"That was what pushed them over the edge," Anderson says. Although the president remained somewhat skeptical, Anderson and the attorney were able to sway the rest of the committee and get the okay to begin the reenrollment.
At that point, Anderson and his colleagues rebuilt the plan's investment line-up, replacing some laggards with index funds and several new asset classes, along with a new family of target date funds.
Next, the actual reenrollment process began.
Anderson got the plan's administrator to agree to provide more than 100 educational meetings to ensure that the participants were informed about the upcoming change. "The more you can communicate up-front to employees—preferably face-to-face—the more smoothly it will go," he says.
Doing the Heavy Lifting First
That communication process included three letters to the plan's participants in addition to mandatory meetings over the course of a month. The first letter, explaining all the changes, needs to include all the moving parts, Anderson says: Adding asset classes, adding funds, removing funds, plus the fact that the workers will be enrolled by default into a target date fund if they do not respond by a certain date. In this case, it took a week of back-and-forth among Anderson, the plan sponsor and the administrator to get the wording right, he says.
With workers spread over 17 locations in 10 states and three shifts, getting time face-to-face with the entire workforce was a challenge, but the team managed to pull it off, Anderson says.
In the end, two-thirds of the participants were defaulted into their age-appropriate target date investment, now just over half of the plan's assets. Meanwhile, the stable value balance fell to a 16% share. "So in our minds, it was a successful implementation,” Anderson says.
And only two workers complained, he adds. Still, the target date fund investors fell short of the 80% that Anderson had expected based on two previous reenrollments, he says. Anderson attributes the shortfall to the employer's emphasis to the workers that they had to take some action by the deadline. In fact, the workers did not have to do anything and would be defaulted into the target date funds unless they responded.
Anderson suggests one additional strategy for advisors working with a skeptical plan sponsor: Emphasizing that employees can always opt out. "It's not like I'm being forced," he says. "You're not taking my money. You're not putting me someplace that I can't move from."
And some employers are starting to take on reenrollment enthusiastically, he adds. He's working with an employer now that's considering doing a reenrollment every year in an attempt to get 401(k) accounts set up for any workers who have opted out in the past.
"If done the right way, it's a great opportunity for the advisor to demonstrate his/her value and bring real results to the plan," Anderson says. Advisors benefit because reenrollment gives them the chance to shine by bringing in expertise and perspectives that plan sponsors may not have access to in-house. And, of course, plan participants are given a second chance to save and invest for retirement.
"We all know there's a savings crisis in America, and saving 3% or 4% or 5% isn't enough. So auto-enrollment, auto-escalation, default target date--I think it's the answer," Anderson says.