According to an expert panel speaking at the 2017 PLANSPONSOR National Conference, in Washington, D.C., the concept of re-enrollment should be an exciting one from the perspective of plan sponsors—a strategy that adds another layer of control and direction to a defined contribution (DC) retirement plan.
Panelist Bruce Ashton, partner, Drinker Biddle & Reath LLP, suggested that from the fiduciary perspective, plan sponsors have all the authority they need to enact a re-enrollment. It is really a natural extension of plan design features such as automatic enrollment, automatic escalation and automatic diversified qualified default investment alternatives (QDIAs) that were enshrined by the Pension Protection Act of 2006.
To this point, an audience member asked about laws in her state that seem to prohibit an employer from redirecting any portion of employees’ paychecks without their express written consent. She was concerned that re-enrollments, which employ a negative election opt-out feature, could bring her plan into legal conflict with that type of state-based standard.
“That’s a great question, but remember, the Employee Retirement Income Security Act [ERISA] pre-empts state law,” Ashton observed. “So you do have the authority to do this, to sweep nonparticipants into your retirement plan.”
Kathleen Kelly, managing partner at Compass Financial Partners, wholeheartedly agreed and urged plan sponsors to consider the fact that auto-enrollment is widely appreciated as a powerful and important plan design feature that does a lot of good for new employees.
“Re-enrollment can do just as much good as auto-enroll and auto-escalate, say for older employees who are participating in the 401(k) but whose approach was not optimized by their being auto-enrolled,” she said. “I think about it this way: A 401(k) plan at rest tends to stay at rest. Re-enrollment is an all-important call to action, a wake-up call and an ability to bring a plan back to life. It forces the employees’ hand to make decisions in their best interest. Really, it can shine a spotlight on the under-championed 401(k) benefit.”
NEXT: Successful re-enrollments require vision
Panelist Terry Daugherty, vice president and relationship management consultant for American Century, stressed that the understanding of what re-enrollments can or should accomplish has shifted considerably.
“The meaning of re-enrollment has dramatically changed over the years. It used to be called retro-auto-enrollment by some parties,” he said. “In fact, when I first started in the industry these processes were all done on paper, and they were time-consuming. Today, things are quite different. Now we have very efficient technology-based re-enrollment efforts that can take on various and very specific goals. We see everything from very complex to very simple re-enrollments.”
The panelists noted one of the most common re-enrollment approaches involves a one-time sweep of nonparticipating employees into the retirement plan, exactly as if they had been auto-enrolled as new employees. Other re-enrollments are more targeted, perhaps identifying segments of older employees who have too much equity exposure and mapping them into an age-appropriate default investment.
“This may seem like a dramatic thing to do—to override your employees’ own investment decisions—but remember they can always opt out and stick to their own strategy,” Kelly noted. “What we commonly see is that those who have actually carefully considered their strategy may tend to opt out, while others who have fallen by chance, more or less, into their current approach fully embrace the re-enrollment to the QDIA. It’s a win-win.”
On the frequency of re-enrollments, Ashton said some employers do this every year, perhaps tying it to the health care open enrollment period, while others might make plans to do just a single re-enrollment. The proper approach for a given plan “depends a lot on what’s happening in your company and how well your communication and enrollment process is working right now.” Obviously, if the sponsor has a fantastically performing plan, re-enrollment is not as critical and might not be needed at all. “But even in the highest-performing plans there are always some folks who can slip through the cracks, and so perhaps targeted re-enrollment can work in these situations,” he said.
Ultimately, the panelists concluded, re-enrollment should be viewed as a powerful tool in the expanding arsenal of plan sponsors to ensure their plans function at the highest level possible.
« PSNC 2017: Retirement Security at an Inflection Point