Auto re-enrollment adoption gains slowly

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.

“Re-enrollment works best with another catalyst,” said Kendall Frederick, senior manager, finance integration for Hanesbrands Inc., Winston-Salem, N.C. “Otherwise, the conversation with participants is awkward if you're telling them there's no change in investments but that you need to look at re-allocation.”

Seeking to simplify its investment lineup, Hanesbrands converted its $650 million 401(k) plan investment lineup to white-label options in late June. This coincided with a change in record keepers — to Fidelity Investments from Voya Financial — and the re-enrollment of all participants.

Those who didn't make a selection were defaulted into an age-appropriate target-date fund as the qualified default investment alternative.

Executives decided against mapping as part of the 401(k) plan overhaul because “mapping doesn't correct misallocation and it doesn't allow participants access to new asset classes,” Mr. Frederick said.

Mr. Frederick received only a few questions from participants and “very few” critical comments. He attributed the muted response to an education campaign that began in March, which included mail, e-mail and corporate intranet communications, as well as meetings with groups of employees.

Mr. Frederick said 90 days after re-enrollment took effect, stable value accounted for 7.5% of total assets, down from 28.9%, while target-date funds accounted for 66.4% of assets, vs. 23.6% for target-date and balanced funds combined beforehand.

Deluxe Corp., Shoreview, Minn., used re-enrollment in March 2012 as part of an effort to keep participants in the $1.4 billion 401(k) plan andto encourage them to save 15% of pay per year through a combination of auto-enrollment deferrals and auto-escalation, said Dan Holupchinski, manager of retirement plans.

For participants saving at less than the 4% auto-enrollment deferral rate, Deluxe re-enrolled them at 4%, he said. For those saving between 4% and 14%, Deluxe re-enrolled them in the auto-escalation feature (2% of pay per year) that would get them to the 15% goal, he said.

After the re-enrollment, the overall participation rate rose to 92% from 83%. As of September 2014, the participation rate was 90%.

Mr. Holupchinski said the re-enrollment was a one-time event, but added the company sends special communications to people who aren't participating in the plan or who are contributing below the corporate match rate.

Re-enrollments designed to increase participation by certain groups of participants are easier for sponsors to administer than re-enrollments involving changes in investment allocations, said Robyn Credico, the Arlington, Va.-based defined contribution practice leader for Towers Watson & Co. These raise-participation re-enrollments are promoted as improving retirement readiness, she said.

Among approximately 900 clients for which T. Rowe Price Group Inc. offers a re-enrollment service, the adoption rate has advanced slowly, reaching 11% by mid-2014 vs. 10% for year-end 2013. The percentages at the end of 2012 and 2011 were 9% and 8%, respectively.

Those using this service “typically conduct the re-enrollment process once a year,” said Francisco Negron, the Baltimore-based head of client services at T. Rowe Price. It “generally affects” employees who haven't invested in DC plans, those who opted out of the plans or those who stopped contributing.

Plan executives are enacting re-enrollment “for a particular problem,” said Mr. Negron. They are using this strategy “for the same reasons they put in automatic enrollment and automatic escalation.” He predicted that re-enrollment adoption rates will rise slowly.

One T. Rowe Price client is STAR Financial Bank, Fort Wayne, Ind., which started re-enrolling participants in March 2013 to improve participation rates, said Nickolas Mehdikhan, vice president and director of the benefits division of the private company that provides banking, insurance and financial advisory services. STAR has a 401(k) plan and an employee stock option plan with combined assets of $59.2 million.

STAR Financial encourages participation in its 401(k) plan through auto-enrollment (now an initial deferral of 6% of salary) and auto-escalation (now 1% of salary per year), with a goal of getting participants to a 10% savings level.

However, Mr. Mehdikhan said 64 of 700 participants had stopped participating or were contributing nothing on their own. “We had a portion of our population that was affected by the economic downturn,” he said. “A lot of people stopped saving.”

Plan executives decided to re-enroll this group at a 2% deferral rate to “get them back into the plan,” he said. The returnees were encouraged to use auto-escalation to increase their elective deferrals. As a result, 53 of the 64 resumed contributing in 2013.

STAR also conducted a re-enrollment last year, and has plans for another this year, targeting employees who weren't participating or making elective deferrals.

Noting that re-enrollments have brought more people into the plan with relatively few opting out, “we are happy with the success that we've had,” he said. n