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If at First You Don’t Succeed—The Case for 401(k) Re-enrollment

DC Plan Design

You can lead a horse to water, but you can’t make it drink. But when it comes to retirement savings, there is a way—automatic enrollment. And a new plan design is growing in popularity with plan sponsors and advisors—re-enrollment.  

Automatic enrollment has long been shown to transform the negative influence of inertia of participant behaviors into a positive force for retirement plan participation and, in the process, helping to make dramatic improvements in retirement security. Implementing re-enrollment typically boosts 401(k) plan participation rates from two-thirds or three-quarters of eligible workers to levels generally over 90%. The remaining one in ten (and frequently fewer) take the time and effort to “opt-out” of participation for various reasons—perhaps they can’t afford to just then, or maybe they have another family member who is shouldering that responsibility. 

But circumstances change—and that’s where a process called “re-enrollment” can play an influential role. Re-enrollment provides a second chance for those who may have opted out previously to participate in the plan. Let’s face it, just because circumstances weren’t right for joining the plan a year ago doesn’t mean they should be overlooked forever. Said another way, if at first you don’t “succeed” in enrolling them in the plan, this presents another opportunity to do so. The increase in participation rates proves the success.

More Than Participation

Participants that are automatically enrolled not only receive the benefit of participation—they are also nearly always invested in a qualified default investment alternative (QDIA), generally a target-date fund or managed account. It’s a fund option developed and monitored by professional investment managers that provides those participants access to a diversified investment mix that considers key elements like age or risk tolerance (and sometimes both). Professional investment management is essential for participants, even those who have (or think they have) a certain investment acumen but generally lack the time (or expertise) to keep up with their investments, mainly when markets are volatile. Let’s be honest; most individuals buy high and sell low because they react emotionally.

But what about the participants who do take it upon themselves to make those investment choices? How do you, as a plan advisor or a plan sponsor, feel about their ability to make, monitor and update those choices—to keep up with the markets and to rebalance those investments at the appropriate time? And did you know that, outside specific 404(c) provisions in ERISA, the Labor Department considers many advisors and all plan sponsors, as plan fiduciary, responsible for those?  

A Second Chance

Based on those factors, why wouldn’t you want to help ALL of your participants take advantage of a portfolio overseen and managed by investment professionals? The good news isthere’s an easy solution. You can do this by automatically re-enrolling those who are not already invested in the plan’s QDIA into that investment. Like automatic enrollment, nothing says this can only happen once and at the point of initial enrollment—though you may find it easier to implement during open enrollment, at the beginning of the plan year, or coincident with a change in the fund menu.  

Whether borne of legal concerns, an appreciation for the relative lack of investment acumen of your participants, oryour comfort and familiarity with the qualified default investment alternative you and/or your investment committee have prudently chosenre-enrollment is an effective way to help your participants take advantage of professional money management for their retirement savingsand for you to better fulfill your fiduciary obligations as well.

It Works

Just as with automatic enrollment, you can allow them to opt-out and redirect those investments if they so choose. But odds are, once they appreciate the advantages of access to professional money management, they’ll not only remain therethey’ll thank you. In fact, according to a study administered by JP Morgan, plan sponsors have seen a 49% to 97% increase in the adoption rate of the plan’s QDIA when a re-enrollment is conducted.

We all know that auto-enrollment does an excellent job of getting more employees to save for retirement. Re-enrollment helps ensure that they don’t miss an opportunity to have their savings professionally managed on an ongoing basis throughout their working career. Ultimately this will help Americans meet their retirement goals. In sum, it is an easy way to help them—and you—succeed.

About the Author

Todd Kading is CEO of LeafHouse, an experienced, national discretionary investment manager and consultant. LeafHouse specializes in creating investment solutions for the retirement plan industry including investment fiduciary services, manufacturing investment vehicles, managed account programs and enterprise technology solutions.

The views expressed in this article are the opinions of the author and may not reflect those of the American Retirement Association or its affiliates. 



All comments
Thane Walton
6 months 3 weeks ago
Great article Todd!! ARA needs a better disclaimer... instead of "do not reflect"... they should say "MAY not reflect." Because I'm sure they agree with much of what you said!!
6 months 3 weeks ago
Hi Thane, your point has been duly noted.
John Towarnicky
6 months 1 week ago
More than 15 years ago, when adopting automatic features in 2006, effective April 2007, we adopted a five year implementation strategy - where the initial default rate was 3% of pay, and, where we re-enrolled everyone who opted out every subsequent year. Starting in 2009 through 2011, we raised the default percentage from 3% by 1% per year, for three straight years until it was 6%. When folks started to complain about auto-reenrollment, some would say: "just how many times do I have to tell you that I don't want to participate in this plan", our response always was, "just once a year". When the PPA 2006 automatic regulations were first drafted in 2007, some requested minor changes to ensure they did not preclude perennial (re)enrollment - so a decision to opt out at hire or a later year did not preclude future solicitations/defaults/"nudges".