Do Reenrollments ‘Stick’ With It?

Reenrollment – the process of defaulting current plan participants into a qualified default investment alternative (QDIA) – is increasingly common during a change in recordkeepers. What happens when you reenroll current participants when no recordkeeper change is involved?

A new report from Vanguard examines the impact of a reenrollment event within a large DC plan, analyzing participant behavior immediately after the event and then six months later.

The original reenrollment event occurred in two phases, and as a growing number do, during the transfer of the large DC plan’s recordkeeping services (to Vanguard in December 2014). The study evaluates the continuous cohort of participants who were present in the plan on the three key dates: December 2014, June 2015, and June 2016, one year after the completion of the reenrollment process.

What Happened

After one year, the plan menu remained consistent in terms of the styles and number of funds offered, although the bond funds and one stable value offering were changed – changes that Vanguard noted did have an impact on a small percentage of participants.

Over time, the percentage of participants who chose to opt out of the default fund, either in part or in full, increased. Immediately after the first phase (December 2014), 10% of participants partially or fully opted out of the default fund, and after Phase 2 (June 2015), this percentage increased slightly. However, a year later (June 2016), 20% of participants were no longer solely invested in the default fund. Most of the increase occurred with participants who moved part of their portfolio out of the target-date default. However, Vanguard noted that the percentage of participants who fully opt out remains low over the entire one-year period. In fact, after one year, target-date funds were held by 92% of participants and captured 81% of plan assets. A small group, 7% of participants, held what Vanguard described as “extreme” positions, a group that it said was comprised predominantly of participants who fully opted out of the target-date default fund and constructed their own portfolios.

‘Slide’ Paths

The authors noted that what was most noticeable one year later was the change in equity allocations among those age 50 and older. Most individuals stayed at the default, but those who did so deviated by a greater amount from the glide path of the TDF, particularly in the conservative direction. The Vanguard researchers said this might be a response to the change in the menu cited earlier, changes that were communicated to participants. They said it might also reflect a gradual drift away from the default among older investors – effects that might also be at work for younger investors, though to a more limited degree.

Over the year, the study noted some “small but significant” changes in a participant’s opt-out status. The report notes that 3% of full opt-out participants in June 2015 chose to add TDFs to their portfolios in 2016, in the process becoming partial opt-out participants. Four percent of participants who at one point held only the default fund added other funds to their portfolios, again becoming partial-opt-out participants.

That said, the researchers noted that the most interesting shift occurred among 9% of partial-opt-out participants, who dropped TDFs altogether. These participants tend to be older, longer-tenured, wealthier men – on average 51 years old with 12 years of tenure, and with average balances around $133,000 who earned more than $100,000 per year. What made these interesting was that those are the same parameters that characterized participants who fully opted out of the default – participants who initially stayed invested in the “new and popular” option, only to eventually drop it.

Despite those movements, the Vanguard researchers concluded that, over time, defaults remain “sticky,” and that reenrollment proves to be “an effective strategy to improve portfolio diversification.”

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