It's hard to do business if you don’t understand the language—even when you think you do. Such is a problem pervading the retirement plan industry when people meet to discuss automatic plan features. “Re-enrollment,” “auto-enrollment sweep” and other familiar terms can have very different meanings to the different players involved, bogging down discussions and the progress of auto-feature adoption in general, says the Defined Contribution Institutional Investment Association (DCIIA). DCIIA spent almost two years exploring the problem and developing a fix it believes will work for all—a language reboot, of sorts: It has standardized definitions for the most troublesome terms. These it recently presented in a white paper and is now working to gain support for, through an industrywide campaign.
The extent of the confusion became clear in a series of town hall meetings that DCIIA held with its key members in early 2015, says the nonprofit’s president, Lew Minsky. “The one issue people agreed on in those meetings was their disagreement on the terms.”
DCIIA created a task force representing its broad membership to address the problem. One-hundred-forty mostly senior-level investment managers, advisers/consultants, recordkeepers and legal professionals responded to a membership survey, which presented scenarios of auto-plan-design strategies and checklists of terms from which to identify them.
“Responses were all over the map,” Minsky says. “There was no pattern, no consensus within different constituencies.” Re-enrollment was the worst, he says.
And that term could be plan sponsors’ worst source of problems, he and other sources agree. For example, the survey showed some firms use the word to describe defaulting all employees into the plan’s target-date fund (TDF), letting them opt out after the plan goes live, says project core group member Cathy Peterson, managing director, global head of Insights programs at J.P. Morgan Asset Management. “That’s more like target-date mapping, because the plan sponsor actually doesn’t get fiduciary protection for the assets that are put into the TDF based on [that] scenario,” she says. “That was illuminated as a confusion point for many in the industry.”
Josh Dietch, vice chair of DCIIA’s retirement research board, and head of retirement and institutional at Strategic Insight, concurs. “The safe harbor isn’t applicable, even though the investment is intended to qualify as a QDIA. Many times, neither retirement professionals nor their clients [realize] it,” he says.
“That’s one thing we wanted to make crystal clear for individuals and plan sponsors when they’re making a decision,” Peterson says, “that they understand what is fiduciary protection and what’s not, and when they get traditional 404(c) protection.”
The issue dates back to the explosion in automatic features with the passage of the Pension Protection Act of 2006 (PPA), Dietch observes.
Recordkeeper companies hurried to bring out products, coining terms in the process. “Re-enrollment” was one that stuck, with companies writing their own interpretation into communications and educational materials, Peterson says.
If they follow the framework laid out by the terms, plan sponsors should find auto processes more logical and accessible—and easier to add to their plan, Minsky says. Through that simplification DCIIA hopes to effect a needed leap in participation and outcomes.
DCIIA’s Automatic Feature Lexicon
Auto-enrollment: Automatically enrolling new hires into a qualified default investment alternative (QDIA) within the DC plan, at a fixed contribution rate.
Auto-enrollment sweep: Automatically enrolling existing eligible employees not participating in the DC plan into its QDIA at a fixed contribution rate, either as a one-time event or periodically.
Auto-escalation: Increasing participant contribution rates at regular intervals, by a predetermined amount.
Fund-to-fund mapping: Redirecting an existing investment from one fund to a similar, or like, fund.
QDIA re-enrollment: Redirecting existing account balances and future participant contributions from existing investment allocations to a QDIA, unless participants opt out or make another election before assets are moved. Provided that the sponsor has satisfied the safe harbor requirements, it will have relief under Employee Retirement Income Security Act (ERISA) Section 404(c) for investment outcomes related to the QDIA.
Non-safe-harbor re-enrollment: Redirecting existing account balances and/or participants’ future elections to a QDIA-eligible fund, without giving participants the opportunity to opt out or make another election before the assets are moved, or otherwise not satisfying the safe harbor requirements. In this instance, the plan sponsor will not be provided with relief under ERISA Section 404(c).