No matter the reason why a 401(k) plan reenrollment is performed, it’s a great way to either get participants back on track or to provide a needed boost as they head for retirement.
“The auto-everything movement has revolutionized plan design,” said Vanguard spokesperson Emily Farrell. “But for older participants that may have been left out of newer innovations, reenrollment is a great way to revisit retirement saving.”
To illustrate, Vanguard researchers reviewed a “reenrollment event” involving a move from higher fee to cheaper investments undertaken by a large Vanguard 401(k) plan, consisting of nearly 18,000 participants and more than $1.2 billion in assets. The reenrollment process occurred when plan participants were transitioned to Vanguard’s recordkeeping platform with a concurrent streamlining of the plan’s investment lineup. A key change in the investment menu was the replacement of actively managed target-date funds (TDF) as the plan’s QDIA with a passively managed, significantly lower-cost TDF suite.
The result? A 75 percent decrease in annual plan fees and expenses, from 41 basis point to 10 basis points.
The study first evaluated participants’ opt-out behavior, finding that the vast majority of participants remained invested in the new default TDF. Six months after the reenrollment, only 16 percent of participants fully or partially opted out of the TDF, and only 6 percent of participants opted out into a portfolio without any target-date holding. Opt-out behavior varied depending upon participants’ status within the plan. Among inactive participants, who are less attentive to their retirement accounts, the opt-out rate dropped to 4 percent.
Vanguard researchers also reported more age-appropriate participant risk profiles and a decrease in extreme equity allocations. A primary objective of a reenrollment strategy is to address risky or inappropriate allocation choices among participants. Following the reenrollment, 94 percent of participants held an age-appropriate allocation via a TDF, representing 74 percent of plan assets. Prior to the re-enrollment, only 25 percent of participants held a TDF, representing 5 percent of plan assets. Moreover, the percentage of participants holding an extreme equity allocation (i.e., more than 90 percent or less than 20 percent equities) decreased to 7 percent from 23 percent.
Reenrollment provides plan sponsors with yet another catalyst to directly improve the portfolio diversification of its employees. The strategy can be of particular benefit to older, longer-tenured participants who may not have benefitted from the automatic enrollment and inherent diversification of a qualified default fund provided by the Pension Protection Act of 2006.
“Inertia can dominate financial decision-making, and we’ve used that to the benefit of newly hired employees into DC plans through automatic enrollment and default investments,” said Cyndy Pagliaro, the study’s lead author. “However, with all the plan design improvements made over the last decade, longer-tenured employees have been left behind. Reenrollment can help reverse the poor investment decisions made by many older participants previously left to their own devices.”