Re-Enrollment Can Benefit More Than Participants
Many argue that re-enrolling 401(k) participants into target date funds (TDFs) benefits them and their beneficiaries. But a recent blog entry argues that it’s also good for a plan itself.
In “Seven Reasons to Re-enroll Your 401k Participants
,” Robert Lawton outlines reasons why he believes re-enrolling participants into a TDF is beneficial. “Re-enrollment is another way of using participant inertia to their advantage and can be an important strategy in helping participants achieve retirement readiness,” he writes.
Lawton argues that such re-enrollments can benefit participants by helping to: Improve investment selections.
Lawton posits that some participants make poor investment elections when they enroll in 401(k) plans. “As a result, he says, “some of their fund choices may not have been the best” and cites a JP Morgan study
that said three-quarters of plan participants are not confident about making such choices. Lawton suggests that re-enrollment offers an opportunity for participants to choose better options and benefit from professional investment management and oversight. Achieve more appropriate diversification.
“One of the greatest concerns I have is for those retirement-eligible participants who have all or a majority of their account balance invested in one or a few funds,” writes Lawton. He adds that here are always some participants “who end up investing too heavily in the wrong funds at the wrong time” and that re-enrollment provides an opportunity to better diversify. Rebalance accounts.
Lawton suggests that rebalancing accounts can mitigate risk, and that many participants are not diligent about performing such a function. TDF managers, Lawton argues, can make adjustments as time passes. Respond to changes in the plan’s fund lineup.
The funds in which plan assets are invested changes over time, Lawton notes, and that can result in inattentive participants’ assets being invested in just a few funds, or even ending up in funds they never affirmatively selected. Update QDIA elections.
Lawton notes that if a plan only recently added a qualified default investment alternative, some plan participants’ balances ma have defaulted into funds that are not appropriate any more. Ensure investments better meet and incorporate risk.
Participants are not always attentive to adjusting their investments as they age and as a result may have assets in funds that are riskier than are wise given their age, writes Lawton. Conversely, he says, others may invest too conservatively.
Lawton is not alone in making such arguments. In the Fall 2014 issue of Plan Consultant
, Catherine Peterson also stressed that re-enrollments can have beneficial effects. She also noted
that inertia can be persistent and that “there is a general lack of confidence that participants are appropriately diversified within their 401(k) portfolios.” One way to address this, she wrote, is “by incorporating target date funds into their investment menus. These vehicles, which provide age-appropriate diversification, can potentially provide participants and plan sponsors alike a greater comfort level with how assets are allocated.” Plan Benefits, Too
And re-enrollment can benefit plan as well, Lawton argues — by reducing its fiduciary liability. “It’s not uncommon to see lawsuits from participants who haven’t invested properly and end up at retirement with much less than they feel they need,” says Lawton. He contends that many such suits arise when participants have concentrated their balances in few investment options and have not balanced their allocations, and allege that their employer did not give them sufficient education and guidance.