In the worlds of behavioral economics and defined contribution, automatic re-enrollment isn't a nudge — it's a shove.
Plan executives who use this strategy — and others in the DC industry who support it — say re-enrollment can offer important benefits for participants, moving their accounts into more age-appropriate, better-allocated investments such as target-date funds. Otherwise, affected by inertia, participants would keep excessive amounts of their retirement money in equities or in stable value and money market funds.
Re-enrollment also is used by DC plans to target specific groups of participants, such as those who have stopped contributing or never have contributed.
Despite the potential benefits, however, surveys and research show automatic re-enrollment has had a modest takeup among defined contribution plans.
Major reasons for DC executives eschewing re-enrollment include fear of potential fiduciary liability, a concern that participants would object and a belief that re-enrollment isn't necessary, said Lori Lucas, the Chicago-based executive vice president and defined contribution practice leader for Callan Associates Inc. “It's very rare that participants object,” she said.
However, fiduciary protection remains a difficult issue. “Some plan sponsors believe that you will have ERISA protection under the Pension Protection Act so long as you map people to the qualified default investment alternative and adhere to proper notification requirements, etc,” Ms. Lucas said. “Other plan sponsors do not believe re-enrollment is necessarily protected in this way.”
Annual surveys by Callan ask DC plan executives if they ever employed a re-enrollment requiring all participants to make new fund selections or have their assets placed in a qualified default investment alternative. In its survey covering 2014, to be published Jan. 14, Callan says 11.6% of respondents answered “yes” compared to 12.2% in 2013. The re-enrollment use among DC plans was 8% in 2012 and 9.3% in 2011.
In this survey, covering 144 plan executives, the biggest reasons for re-enrollment were changes in the fund lineup and a concern about participants' poor investment selections, Ms. Lucas said.