In the context of automatic retirement plan design, which of the following defines the term “re-enrollment”?
a) A one-time procedure to enroll nonparticipating employees into the company defined contribution (DC) plan.
b) Reallocating active participants’ accounts to the plan’s default investment.
c) Mapping participants’ accounts to a new investment when the plan undergoes major change.
d) Periodic sweeps to enroll all employees into the company DC plan.
e) All of the above.
Far from academic, this question sums up a problem confronting the retirement industry regularly as people sit down to do business. A plan sponsor could be hearing a) as its adviser presents b), while the recordkeeper had c) in mind. All the above definitions are widely in use, bogging down planning discussions and the progress of “auto” feature adoption in general, says a milestone study by the Defined Contribution Institutional Investment Association (DCIIA), which it calls the “first of its kind.”
How widespread the confusion became clear in a series of town hall meetings DCIIA held in early 2015. Every few years, the nonprofit meets with its key members to learn what issues it might address, says its president, Lew Minsky. “The one issue people agreed on in those meetings was their disagreement on the terms.”
Even before the town halls, DCIIA knew there was a problem. It had made that discovery in surveying plan sponsors, asking why they were—or were not—adopting various auto-features, says Josh Dietch, now head of retirement and institutional research at Strategic Insight, PLANSPONSOR’s parent company, and vice chair of DCIIA’s retirement research board.
The town halls became an occasion “to discuss as an industry what some of the barriers to adoption are from our understanding of what plan sponsors are telling us, to see if we can find a more effective way of communicating and encouraging adoption of these features,” Dietch says.
DCIIA decided to take action. Eighteen months, two membership surveys and much consideration later, the organization is premiering its solution—a glossary of standardized definitions for the six most troublesome terms—re-enrollment included—used to articulate the features of automatic plan design. The clarified terms, together, create a definitional framework that, Minsky says, will help plan sponsors build “auto” features into their plan—and, DCIIA hopes, effect a needed leap in participation and outcomes.
It is presenting the definitions and rationale for why they are needed in a new white paper, which it plans to follow up with an industrywide campaign to build consensus for the terms, Minsky says.
DCIIA believes the issue is more than just a nuisance, that it has actually stalled proliferation of automatic features, as meeting time is lost while people sort out conflicting terminology. That time would be better spent on “robust dialogues that would allow plan sponsors to focus on the actions they can take,” the white paper says.
“We’re hopeful this will play a part in getting us unstuck,” Minsky says.
As further incentive for adopting standardized terms: In a day when industry professionals are increasingly scrutinized for how well they fulfill fiduciary roles, making wrong decisions due to misunderstood jargon could lead to fiduciary problems, says Robin Green, a member of DCIIA’s retirement research board, a consultant with Anne Schleck & Co. LLC, and a taker of the survey.
The Automatic Features Task Force began by surveying its membership. One hundred-forty of the 170 organizations responded—senior-level investment managers, recordkeepers, retirement plan advisers, and other types of consultants and service providers are typically the actual respondents, Minsky says.
The survey presented five scenarios representing the basic categories of auto-design—each followed by a checklist of 11 automatic plan-design terms. Respondents selected the one closest to how their company refers to that strategy—“even writing in terminology we hadn’t even thought of,” says Cathy Peterson, managing director, global head of Insights programs at J.P. Morgan Asset Management, one the task force’s core group.
Most (70%) respondents agreed on auto enrollment, but that was all. “Within each constituency, there were overlaps and no real pattern,” Minsky says. Re-enrollment was the worst.NEXT: Defining the terms
In deciding on the terms, the task force had several goals in mind. “The thought process we [had was] that the ideal term for each strategy should be as descriptive as possible, so when people use the term it’s obvious what the goal is,” Minsky says.
Nevertheless, it didn’t want to stray far from the vocabulary people knew, so it “refined” the familiar, as Peterson says.
Also, because the definitions were as important as the terms themselves, the group clearly articulated each key concept, or plan design category—“the basic actions or interventions that a plan sponsor can take,” as Minsky puts it—matching those with the more descriptively worded terms.
An ongoing challenge was to ensure their choices would work across the broad diversity of DC plan design—whatever the company size and industry, employee population, business model, etc. “So you develop a framework that’s not so hard and fast that it’s not inclusive of the broader intent of what you’re trying to do,” Dietch says. “I think, at the end of the day, the framework is flexible enough to be inclusive of most of what’s out there.”
There were “some strong opinions” about the definitions, he admits—survey respondents were invited to add their feedback—but not all could be used. Because the terms had to interconnect, changing one might have conflicted with another.
Additionally, legal counsel—part of the task force—answered any legal questions along the way. An editorial review board and finally DCIIA’s executive committee gave their approvals. To confirm that the membership would accept the terms and use them, DCIIA sent out a second survey.
“Response was overwhelmingly positive,” Minsky says. “The general feeling was that if we could get the proposed definitions out there, that people would support them and try to work with us to achieve industry standardization, that people generally agreed with the need” he says. Even those “not currently using the terminology would be willing to adjust if we can build industry consensus.”
The final terminology is as follows:
1) Auto-enrollment – Automatically enrolling new hires into a qualified default investment alternative (QDIA) within the defined contribution (DC) plan, at a fixed contribution rate.
2) Auto-enrollment sweep – Automatically enrolling existing eligible employees who aren’t participating in the plan into the DC plan’s QDIA at a fixed contribution rate, either as a one-time event or periodically.
3) Auto-escalation – Increasing participant contribution rates at regular intervals, by a predetermined amount.
4) Fund-to-fund mapping – Redirecting an existing investment from one fund to a similar, or like, fund.
5) 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 plan sponsor has satisfied the safe harbor requirements, it will be provided with relief under the Employee Retirement Security Act (ERISA) Section 404(c) for investment outcomes related to the QDIA.
6) Non-safe-harbor re-enrollment – Redirecting existing account balances and/or participants’ future elections to a QDIA-eligible fund, without providing participants the opportunity to opt out or make another election prior to the assets being 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).
Minsky points to the way the terms logically build on each other, moving from the most basic—how to automatically enroll new employees in the company defined contribution plan—to, next, how to bring in existing employees, to how to help them all invest more optimally. The most complex action, re-enrollment, is divided into two terms to reflect different plan requirements. “Laying it out clearly with this definitional framework helps plan sponsors think about their plan design choices along a spectrum,” he says.NEXT: The trouble with ‘re-enrollment’
Of all the concepts DCIIA looked at, re-enrollment had the most potential to cause problems. For one, the survey revealed, some firms use the word to describe defaulting all employees into the plan’s target-date fund (TDF), then allowing them to opt out after the plan goes live, Peterson says. “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 target-date fund based on [that] scenario. That was illuminated as a confusion point for many in the industry.”
The difference, obviously, extends beyond phrasing. A sponsor in that situation may think its strategy meets ERISA’s requirements, but it will be wrong. “Many plan sponsors weren’t understanding that nuance—that you have to have an opt-out ability prior to the assets moving to get the fiduciary protection,” she continues.
Dietch concurs. “Often, when companies switch recordkeepers, they do what’s called a mapping conversion, where all the assets are mapped to a QDIA. But that in itself isn’t a re-enrollment designed to qualify for the safe harbor, because more times than not, people aren’t given the option of opting out prior to the mapping of the assets.” In either of these situations, he says, “the safe harbor isn’t applicable, even though the investment is intended to qualify in the QDIA. Many times, neither retirement professionals nor their clients are aware of it.”
“That’s one thing we wanted to make sure was crystal clear for individuals and plan sponsors when they’re making a decision,” Peterson stresses, “that they understand what is fiduciary protection and what is not, and when they get traditional 404(c) protection.”
Further, plan sponsors may misunderstand “re-enrollment” based on their experience with benefits re-enrollment and the need to re-enroll participants every year, Peterson says. That confusion can discourage sponsors from wanting to pursue re-enrollment, as they wrongly anticipate the huge annual effort, she says.
Based on the history of automatic design features, confusion seems almost a given. With passage of the Pension Protection Act 0f 2006 (PPA), recordkeepers quickly moved to develop features that would enable plan sponsors to default employees into the company qualified retirement plan while enjoying the shelter of a safe harbor.
“That’s where the dialogue started,” Peterson says. “You heard a lot of terminology. [As to the concept of re-enrollment alone], you also heard: plan refresh, asset reallocation, investment re-election, target-date mapping conversion. All sorts of terminology that various companies were using to describe what this was. ‘Re-enrollment’ somehow took hold versus some of the other terminologies out there. I think once it started becoming more prevalent, others started to adopt it.”
Over the years, many recordkeeper firms, and to some extent adviser firms, have invested in marketing, educational and other thought leadership materials, using their own variations on the terms, say Peterson and Dietch. So, while companies may accept the new terms in theory, they may hang up on practice, considering the extent of retraining sales force and relationship managers that would have to take place. “If your organization understands [your own] terminology, and that’s the way you’ve trained your entire organization, it’s definitely hard to change,” Peterson says.
“I suspect that it’s either the kind of thing that will take hold and happen relatively quickly, within a year or two, or if it doesn’t, that behavior was pretty entrenched, and it probably won’t happen,” Minsky observes. “Our feeling is this is something worth trying to do, that that part of getting people to hold hands and jump together is always challenging.”
Green, who encounters inconsistent terminology somewhat regularly in her consulting work with recordkeepers, believes DCIIA’s effort can raise awareness among these firms, which, even though “they devote much time and thought capital to ensuring plan sponsors understand [their terminology],” each may not realize it is operating “within its own world.” That in the world outside, advisers may have 10 to 15 such recordkeeper clients whose definitions they need to keep straight, or that 403(b) plan sponsors may have two or three such recordkeepers whose terms stand for different plan features. She sees using the vocabulary as becoming an industry best practice.
NEXT: A grassroots vision
While DCIIA will be reaching out to the industry at large, Green envisions how the change can advance on a grassroots scale. She says she will use the terms in communications with recordkeepers and share the white paper—and its importance—with marketing and communication departments.
Asset managers could discuss the terms with their advisers—the group best positioned to help drive the change, because they serve as a bridge, she says. “You can come to the table and say, ‘Here’s what the industry has decided to call this—here’s the term,’ making sure the plan sponsor’s—everybody’s—clear about what’s going to happen.” This reinforces the idea of the adviser as expert, she points out.
Lee Freitag, senior vice president and senior defined contribution investment strategist, asset management, with Northern Trust, and a member of DCIIA’s executive committee, believes much work will be done at the plan sponsor level. “I think it’s somewhat on us as members of the retirement investment community to share the framework that’s been developed with plan sponsors, at one-on-one meetings, at conferences to get the conversations out there. To get the message out will take a lot of people and work [and time].”
Freitag foresees plan sponsors taking the definitional framework and making it their own. This would include, e.g., engaging their particular group of participants by way of strategies they have determined have worked well in the past and tweaking the message to resonate with them.
Northern Trust, itself, provides trust and custody services to many large plan sponsors in the DCIIA community and, using a framework similar to DCIIA’s, has surveyed its clients’ participants. The results support the importance of auto-features to participants. “What we hear is that plan participants want help—also that a large majority would be satisfied, if not happy, to have an auto-enrollment features in their DC plan to help them build savings for retirement,” Freitag says.
For DCIIA’s marketing outreach, Minsky says, the plan is still evolving and may include a video and/or a summit that will reinforce the value of applying auto-features, while “helping to crystalize what these six different categories are and how to use the terms that identify them.”
Minsky believes that the lexicon could grow, with new terms added as new industry strategies appear. “I for one hope we’ll see some more innovation around behavioral techniques in retirement saving plans. Our goal has been to put out a definitional framework for what is going on,” he says. “I think this catches what’s going on today. But my hope is we’ll have to come up with new categories and new proposed definitions to fully describe the universe of new practices.”
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