The Pension Protection Act (PPA) was a transformational event in the defined contribution (DC) world, allowing plan sponsors to move DC plans from being simply good to potentially great. Re-enrollments were the next step after asset allocation through the use of the qualified default investment alternative (QDIA), allowing plan sponsors to force participants into a plan with fiduciary protection.
According to a panel discussion led by Joe Connell, partner and leader of Retirement Plan Services, Sikich Financial, at the 2018 PLANSPONSOR National Conference, a reenrollment is either an annual or one-time event where the plan sponsor will bring non-savers into the plan or those who were hired before the plan sponsor started auto enrollment. During a reenrollment the employer defaults participants assets and future plan contributions into the plan’s default investment option such as a target-date fund (TDF) at a pre-determined contribution rate.
Kevin Skow, principal at Milliman, is a believer in reenrolling participants one time and revisiting this decision every two to three years, while Bruce Lanser of UBS Retirement Plan Consulting Group believes in encouraging plan sponsors to reenroll each year with the goal of at least 99% participation. Lanser said, “The potential plan sponsor pushback is twofold. Maybe [the employee] was hired before auto enrollment or already said they did not want to be in the plan. But you are auto enrolling new employees, why treat others not as well? When someone says no, they aren’t saying never, just not now.”
What is the best time to do a reenrollment? “Tie the reenrollment to merit increases,” from Show’s viewpoint. Lanser said, “The best time is when employees receive an increase. The second-best time is January 1, a time when people expect changes.
Panelists warned plan sponsors about the costs associated with a reenrollment. “The costs of reenrollment can be mitigated by making adjustments to the plan’s design. For instance, Skow says, “Some recordkeepers get paid per head, therefore plan sponsors need to realize the cost of a successful reenrollment.” Lancer added. “A positive response will cost plan sponsors more in matching dollars but then again a more successful plan means participants will be able to retire leaving opportunities for other employees. He added, “the match cost can offset the risk. If plan sponsors design the plan using a stretch match for instance, that will help reduce costs.”
What legal responsibilities does a plan sponsor take on with a re-enrollment? It’s required that a plan sponsor’s documents are updated with this new operating procedure. Skow said, “I write a lot of plans—be careful by distinguishing between a one-time event and a reoccurring event. You do not want to amend your document every year.”
Skow continued, “Be sure to work closely with your recordkeeper. Employees make changes on their own every day. If you have a reenrollment every May 1 and an employee opted out of the plan on April 15, how are you going to handle that? These are things you need to think through with your recordkeeper. In addition, some recordkeeper systems are flexible and some require manual interventions.”