FAAF/EC – Second Chances

Many plan sponsors, worried about poor diversification within their plans, are considering re-enrolling some or all of their participants into a new portfolio strategy with the right to opt out of that transfer if they so choose.

Panelists at PLANSPONSOR’s 2009 Future of Asset Allocated Funds (FAAF) Conference East compared the pros and cons of “re-faulting” participants into their plans’ designated qualified default investment alternatives (QDIAs).

Cathy Peterson, Vanguard Senior Investment Analyst at AllianceBernstein Defined Contribution , began the discussion by pointing out that while the rate of active participant-driven investments in target-date funds – which have recently been described as the QDIA of choice – is rather low, many of those who do make that choice for themselves do so for the wrong reasons. Passive investors, she claimed, take what they believe to the “easy” route when choosing target- date funds, while those who are more active do so because they consider target-date funds to be a better option in the long term than what they might have done on their own. Unfortunately, most participants just do not know how to properly invest in these funds, often using them for just a portion of their asset allocation, not as a comprehensive plan.

Peterson suggested plan sponsors introduce target-date funds to their participants by adding them to their menus before re-enrollment, then defaulting everyone while allowing opt-outs. Communication and education are key, she said, adding that a brochure of one to two pages could be more effective than other, more extensive and time-consuming techniques. In this market especially, she noted, while moving people can be scary, staying in a wrongly-diversified or stable-value fund could prevent participants from enjoying the benefits of the downturn. Going into a higher-risk fund now, when sale prices are low, promises better returns as the market recovers.


Scott Donaldson, Vanguard Senior Investment Analyst at Vanguard, agreed that re-enrollment could help to address diversification issues, noting that only forty percent of participants have reasonably diversified plans for their age and roughly thirty percent the apparent results of wild miscalculations. Moving either the entire population or just a sub-group could help remedy these problems, with the ability to leave the chosen qualified default investment alternative (QDIA) left available to participants. Donaldson described how to go about this procedure, advising plan sponsors not to override the decisions of active participants unless the change would be a definite improvement or they could easily switch back to their chosen plans.

Brian Ward, Senior Institutional Consultant at Ward Financial Advisory , jokingly described one plan that he learned from his clients, the so-called "C.A.S.E." method: Copy Anything, Steal Everything. He also acknowledged the potential benefits of "re-faulting," saying that many people do like target-date funds, but warned sponsors to be prepared that a sub-set of participants will invariably be upset by the change, despite any and all communication and education attempts. He advised careful consideration of new plans and scrutiny of all possible benchmarks, including cost, diversity, and enrollment rates. If the original concern is diversification, he encouraged plan sponsors to make sure they were spread out among asset classes according to their needs.

Dorann Cafaro, Senior Marketing Director at Cafaro Greenleaf, said that while she was not a fan of auto-enrollment, she did like target-date funds an asset allocation. If participants are making active decisions for their portfolios, she said, she would prefer not to override those choices.  

During education sessions, she urged sponsors to use "easy enrollment" cards that participants could sign if they agreed to be moved into their plan's QDIA. Because many participants do not know how much to defer into their investments, she suggested telling participants that a deferral rate of twenty-five percent was recommended, a trick that she noted had lead to a jump in rates from five or six percent to ten or twelve percent. By assuring participants that their plan's enrollment option is the best one for them, they will be more likely to become involved, or at least actively agree to those investments. Letting participants know how much better prepared they are likely to be with a professionally managed portfolio than one they built themselves.

Cafaro admitted that there will likely be a few angry people who could create problems or stop participating altogether if they feel threatened by auto-enrollment, but she reminded the audience that their goal as plan sponsors is to take their participants to a successful retirement, even if a few participants are reluctant to follow.

- Sara Kelly

Second Chances-A Quick Fix for Bad Participant Decisions?

A recent report suggests plan sponsors concerned about poor participant diversification may want to considering reenrolling some or all participants into a new portfolio strategy-namely, the plan's designated QDIA-while giving employees the right to opt out of the transfer. The case for-and against-redefaulting participants.

Moderator:Nevin Adams , Editor-in-Chief, PLANADVISER


Dorann J. Cafaro , Senior Marketing Director , Cafaro Greenleaf
Cathy Peterson/strong>, Vanguard Senior Investment Analyst, AllianceBernstein Defined Contribution
Scott Donaldson/strong>, Vanguard Senior Investment Analyst, Vanguard
Brian Ward , Senior Institutional Consultant, Ward Financial Advisory

Click here to download!

Click here to stream!

Video excerpts from the panel:

Brian Ward

Cathy Peterson