Plan re-enrollment may not be as life-changing as Fleming’s discovery of penicillin, but it can be every bit as effective in putting your small business retirement plan back on track to success. It’s cheap and simple to implement, and it can improve the quality of participant investing. It can also provide a fiduciary safe harbor from liability for imprudent participant investing. This is as close to a 401(k) wonder drug as we can get.
What is a re-enrollment?
Re-enrollment refers to a process where participants affirmatively “re-select” investment options for their accounts, or alternatively, be defaulted into a Qualified Default Investment Alternative (“QDIA”). A re-enrollment forces employees to take a fresh look at their investments, giving them a “nudge” toward a more suitable investment allocation.
What is a QDIA?
A QDIA is a type of “default” investment fund. The Pension Protection Act (“PPA”) amended ERISA section 404(c) to provide relief for plan fiduciaries who, in the absence of affirmative investment instructions, invest participant plan assets in a QDIA.
Among other requirements, QDIAs must be diversified to minimize the risk of large losses. Target date retirement funds (“TDFs”) are the most common type of QDIA used today. TDFs offer a diversified mix of investments that take into account the individual’s age or retirement date.
Why should I consider a re-enrollment for my plan?
In a nutshell, most plan participants do an absolutely awful job at putting together their 401(k) investment portfolio. Several studies conclude that the average participant’s investment portfolio is essentially a random allocation of investments. Young investors are underweight in equities and older investors are overweight in riskier investments. In addition, participants often misuse TDFs. TDFs are meant to hold 100% of a participant’s assets, thus providing appropriate asset allocation and diversification. But many participants combine the TDFs with other investment options. The result is a mashup that is usually not in the best long-term interest of participants.
Plan sponsors are protected from liability for losses resulting from employees’ investment choices when ERISA 404(c) requirements are met. When a QDIA is used, 404(c) protection extends to situations where a participant fails to choose investments for their account and you must step in and invest the account on the participant’s behalf.
Will my plan benefit from re-enrollment?
Plan re-enrollments have become much more popular with the advent of TDFs. TDFs represent an easy way for participants to achieve professionally-managed portfolios and for employers to increase their fiduciary protection. Take a look at your plan’s investment line-up and your employees’ investment elections. Answer these questions:
- Review the percentage of plan assets in equities, money markets, and fixed income securities. Are you comfortable with the mix?
- Is your plan’s default fund a QDIA?
- Does your plan offer TDFs?
- Review the plan’s investment educational materials. Have you offered investment education within the last year?
- If you answered “No” to any of these questions, you and your employees are likely to benefit from a plan re-enrollment.
Implementing a Plan Re-enrollment
Review your plan’s investment options. Make sure participants have appropriate investment options. If changes need to be made, get with your advisor and/or recordkeeper. Employees need to have a clear, uncluttered investment lineup. Making changes is your prerogative. Consider adding TDFs if they are not available in your plan. Ensure your default investment fund meets QDIA requirements.
Prepare employee communication materials. Educational materials should be clear and concise and tailored to your plan. The investment alternatives – especially the QDIA – should be appropriately highlighted. Forms should be clear and not confusing. The procedures required to make elections should be clearly stated. Your plan advisor or recordkeeper should have access to these materials, and can guide you through customizing the materials for your plan.
Plot a timeline for communications and employee deadlines. Put out the first communications 60 days prior to the re-enrollment deadline. Lay out the process and the key dates. At 30 days out distribute required notices, forms and procedures. (Your plan provider can help with this step.) Complete educational meetings 7 days prior to deadline. Give employees final notices of the re-enrollment window at this time.
Treat the process as an employee benefit, not a chore. Your employees will be appreciative of the process. They are looking for guidance. Treat the process as the additional benefit it is. Be enthusiastic.
Re-enrollment can be cheap, but not always free. Get with your plan provider and discuss the process in advance. Lay out the costs and roles for you and the provider. Be wary of push back from your provider. If they are unable or unwilling to participate, know why. If they quote an unreasonable fee, make them justify it. Remember the cost of shopping your plan may be less than what they may want to charge you for their services.
A frugal “win-win.” How often do we see those in business?