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RESOURCES / INVESTMENT MENUS

Help participants succeed with an investment re-enrollment

8-minute read

THE TAKEAWAY

Move plan participants into age-appropriate target date funds

Overview

Target date funds (TDFs) have grown rapidly, but not all participants have benefited

The Pension Protection Act of 2006 provided a safe harbor for plan fiduciaries investing participant assets in certain types of default investment alternatives (such as TDFs) in the absence of participant investment direction. Yet some employees have missed out.

The problem

Many plan sponsors enrolled new hires in TDFs — but not employees who joined the plan before the act took effect.

The solution

To help them, plan sponsors can do an “investment re-enrollment” by moving all plan participants’ assets into age-appropriate TDFs unless they opt out.

Impact

See investment re-enrollment in action

These two charts show how re-enrollment can result in a more age-appropriate equity allocation for participants not previously enrolled in a target date fund.

Before re-enrollment

Scattered equity allocations

Shown is the “before” scatter plot chart that indicates a range of equity allocations among plan participants prior to investment re-enrollment. The hypothetical chart shows the equity allocations (as a percentage of total assets) for more than 200 plan participants between the ages 25 and 75, along with what the equity allocation for each would be if they were enrolled in a target date fund. The equity allocation for the target date fund is represented in a line indicating the “glide path,” which starts out at about 85% equity allocation at age 25, before declining to around 75% of assets at age 55, to around 55% of assets at age 65, and then to around 40% of assets at age 75. The “before” chart shows that equity allocation can vary by age for those who choose to invest outside a target date fund. For example, the range of equity allocations for participants between the ages of 55 and 60 could be as high as 100%, which would be inappropriate for an older participant looking to lower market risk in retirement, to as low as 0%, which would be inappropriate given the potential for participants to live 30 years after retirement.

Source: Capital Group. Examples are hypothetical.

This first chart shows that before re-enrollment, allocations to equities may be wide-ranging, often falling far outside of an age-appropriate range (i.e., proximity to retirement).

After re-enrollment

More age-appropriate equity levels

Shown is the “after” scatter plot chart that indicates the potential benefits of an investment re-enrollment. The hypothetical chart shows the equity allocations (as a percentage of total assets) for plan participants between the ages 25 and 75, along with what the equity allocation for each would be if they were enrolled in a target date fund. The equity allocation for the target date fund is represented in a line indicating the “glide path,” which starts out at about 85% equity allocation at age 25, before declining to around 75% of assets at age 55, to around 55% of assets at age 65, and then to around 40% of assets at age 75. The “after” scatter plot shows equity allocations if participants were automatically re-enrolled in a target date fund unless they chose to opt out. Assuming that few participants opt out, the allocations become more age-appropriate for the great majority of participants following the re-enrollment as their equity exposure aligns with the target date glide path (the line in the chart).

Source: Capital Group. Examples are hypothetical.

The second chart shows that more participants become invested in TDFs after re-enrollment. This change typically brings participants to a more age-appropriate level of equities.

Questions

Re-enrollment is easier than you might think. Some common re-enrollment concerns stem from misconceptions. These clear answers provide a reality check for frequently asked questions.

Re-enrollment may lower fiduciary risk. Investment re-enrollment usually involves transferring account balances into the plan’s qualified default investment alternative (QDIA).

If certain conditions are met, default investments in QDlAs are covered by an ERISA safe harbor that provides relief from liability for investment outcomes.

Real-world examples and our own experience have shown little negative reaction.¹

Participants may appreciate the opportunity to review their current choices.

Well-timed and effective communications can help address the problem.

The workload can be within the normal range of what a sponsor would do to maintain and promote a retirement plan.

The plan‘s consultant or recordkeeper may be able to help prepare communications, conduct meetings, collect paperwork and process online elections.²

Tips for success

Clarify the intent

Refer to the process as a “confirmation of investments” or “selection confirmation” so participants understand the goal.

Go beyond emails and signs

Use newsletters, texts and telephone calls.

Announce early and repeat often

Announce the event 60 to 90 days in advance and explain the benefits with on-site meetings.

Tell participants they have choices

Investment selections can and should be revisited regularly.

Consider making other plan changes at the same time

For example, update the plan menu while you have your participants‘ attention.

Be mindful of existing investment options

Plans need to consider how to effectively handle assets based on potential restrictions, such as stable value, company stock, managed accounts and/or brokerage accounts.

Explore more investment menus resources

Investment Menu

How to evaluate target date funds
Investment Menu

Measure how well a target date fund has surfed the highs and lows

Back to collection

¹Defined Contribution Institutional Investment Association, “DCIIA plan sponsor survey on automatic plan features: Responses to selected webcast Q&A,” September 2015.

²Qualified Plan Advisors White Paper Series, “Investment Refresh: Improving Participant Outcomes Through Re-enrollment.” Accessed January 3, 2020 at https://qualifiedplanadvisors.com/whitepapers/

Statements attributed to an individual represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Capital Group or its affiliates. This information is intended to highlight issues and should not be considered advice, an endorsement or a recommendation.

All Capital Group trademarks mentioned are owned by The Capital Group Companies, Inc., an affiliated company or fund. All other company and product names mentioned are the property of their respective companies.

Use of this website is intended for U.S. residents only.

Capital Client Group, Inc.

This content, developed by Capital Group, home of American Funds, should not be used as a primary basis for investment decisions and is not intended to serve as impartial investment or fiduciary advice.

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