This is the second blog in a series focusing on how plan sponsors can improve participant outcomes and simplify participant choices through plan design considerations (read the first blog here).
I would argue that the most important decision facing plan sponsors isn’t who will be the recordkeeper, what investment options to offer to participants, or even whether to offer loans or not. Rather, I believe it is how a plan sponsor will engage with and encourage their participants to contribute to the plan.
One way to simplify the decision to contribute is to institute an automatic enrollment feature. Like most decisions, there are implementation choices for automatic enrollment plans. My colleague wrote a series of blog posts last year on this topic which reviewed considerations from both the employer and employee perspective.
Now that the plan sponsor has considered a plan design feature to get new participants into the plan, they can turn their attention to reviewing the utilization of the plan by existing employees. This is a ‘re-enrollment’ discussion. Re-enrollment has two complementary components:
- Contributions - Increasing contributions up to the automatic enrollment deferral amount. This includes both participants deferring at a lower rate than the automatic enrollment deferral rate and those participants that are eligible but not contributing.
- Investments - Moving participant investments to the default investment[1] selected for the plan.
Re-enrollment can include one of these components, or both. Committees are generally more comfortable with discussing the first item than the second as it is analogous to automatic enrollment.
Support for ‘contribution’ re-enrollment is due to retirement adequacy studies that suggest that a total contribution rate of 10-15% of compensation (including employer contributions) over a career may provide sufficient assets to replace a participant’s income in retirement. When combined with automatic increases, a ‘contribution’ re-enrollment along with annual increase can get participants to this level of contributions over time.
Often, the motivation for committees to consider ‘investment’ re-enrollment is the identification of participants investing at the extremes – either too aggressive or too conservative. Re-enrollment to the Qualified Default Investment Alternative (QDIA) can improve participant investment diversification. During their discussions, a committee may wish to consult with their legal counsel on the risks of investment re-enrollment process.
It is important to note that successful re-enrollment programs have well-crafted communication programs that provide the participants with notifications of what the scheduled action is, when it will take place, and noting the opportunity to ‘opt-out’ of the action well in advance.
Similar to automatic enrollment, re-enrollment is an important ‘nudge’ that plan sponsors can use to help their existing employees move toward a more secure retirement by getting more dollars into the plan with improved investment diversification. As you review demographic reports from your recordkeeper, be on the lookout for participant cohorts that may benefit from re-enrollment.
Note:
[1] The Penson Protection Act of 2006 sought to encourage automatic enrollment retirement plans by providing fiduciary relief for the selection of default investment. The final regulation provided guidance for the investment of participant contributions into an investment option capable of meeting a worker’s long-term retirement savings needs.
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