Many plan sponsors have opted to re-enroll their participants in the Qualified Default Investment Alternative (usually target date funds) in their plans. Why would they do this?
- Concern about participant investment selection at enrollment. Some participants don't do a good job of selecting how to allocate their retirement plan balances when enrolling. Getting advice from a brother-in-law may work when buying a car, but it's not the best way to choose investments for retirement funds. Re-enrolling participants into a target date option allows participants to benefit from professional investment management.
- Lack of re-balancing. After enrolling in the plan, participants should re-balance their accounts back to their initial allocation percentages at least once per year. If this is not done, participants could end up taking on too much risk as their equity allocation increases over time due to rising markets. Many participants are not diligent about re-balancing their accounts. As we move into the fifth year of a bull market in stocks, when was the last time you re-balanced your account?
- Fiduciary liability. Rather than allowing participants to sit the wrong funds (or maybe only one fund) for their entire careers, some plan sponsors believe it makes sense to allocate those balances to a target date fund. Having worked with plan participants for more than 25 years, I can tell you it is not uncommon to sit down with a participant and see that he/she has allocated 100% of their account to only one investment fund.
- Change in the fund line-up. Over time a retirement plan's fund line-up changes. New funds are added and poor performing funds are deleted. Participants who are not diligent about reviewing their allocations could end up with balances that are too highly concentrated in a few funds or allocated into funds that they never selected (as a result of mapping).
- Addition of a QDIA option. The plan may not have had a QDIA option until recently. As a result, some participants may have had their balances defaulted into pre-QDIA funds that are not appropriate.
Keep in mind that with all re-enrollments, participants are allowed to opt-out by choosing their own investment mix. However, studies have shown that more than 80% choose to remain in the QDIA that their assets are allocated into. Re-enrollment is another way of using participant inertia to the participants advantage and can be an important strategy in helping participants achieve retirement readiness.
Contributing Editor Robert C. Lawton is President of Lawton Retirement Plan Consultants, LLC a Registered Investment Advisory firm helping retirement plan sponsors with their investment, fiduciary, employee education and compliance responsibilities. Mr. Lawton has over 25 years of experience working with corporations on their retirement plans and is a Chartered Retirement Plan Specialist (CRPS) and Accredited Investment Fiduciary (AIF). Mr. Lawton may be contacted at email@example.com or 414.828.4015.
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