An Introduction to Re-enrollment
Re-enrollment can be one tactic that plan sponsors use to encourage increased participation, more diversified investing and increased savings rates. However the term “re-enrollment” is broad and requires analysis of the plan’s objectives, plan sponsor’s fiduciary duties, plan document restrictions and recordkeeper capabilities. Below is the quick and dirty introduction to re-enrollment and how it could affect your plan.
The Simplified Version
All participants who have account balances in the plan (both active and former employees of the company) will be asked to make an investment election for their current assets and future contributions to the plan. For most participants, the last time they made their investment election was when they first started participating in the plan, which could have been many years ago. Participants have an option to choose their investments themselves, or, if they do not make an election, they will be defaulted into the plan’s appropriate Qualified Default Investment Alternative (QDIA), commonly Target Date Funds (TDFs), based on their date of birth. According to a study conducted by Fred Reish and Bruce Ashton of Drinker Biddle & Reath LLP, using the QDIA as an ERISA Safe Harbor can help fiduciaries protect themselves during the re-enrollment process.
Usually in this situation, the Plan Sponsor’s goal is to have participants re-evaluate their investment elections based on their current situation and risk tolerance. This option would commonly be used for plans that have many participants currently only in one investment, such as a money market fund.
Combining One-time Automatic Enrollment and Re-enrollment
All participants who are eligible for the plan (not just people who currently have an account balance) are enrolled in the plan at a set deferral percentage. New participants and participants that were already enrolled can choose their investment elections or opt out entirely. As described above, if they do not make an election, they will be defaulted into the plan’s QDIA.
Plan Sponsors who are looking for increased participation rates as well as more diversified investment elections for their participants may look into this option. Some recordkeepers may even provide the option to increase deferral percentages for participants currently enrolled to match the automatically enrolled participant’s rate as part of this process to encourage increased savings rates. Usually this tactic would be paired with including automatic enrollment for new hires.
While re-enrollment is not appropriate for every situation, a carefully conducted process can lead to substantial results for both plans sponsors and participants alike.