The re-enrollment, which is required of all participants and begins this month, is an unusual move for defined contribution plans, especially for public plans, consultants and researchers say.
“It's a best practice (but whether to do it) depends on the makeup of the fund,” such as in terms of lack of diversity of participant allocations, said Brian Wrubel, president and CEO of Marquette Associates Inc., Chicago, the ISBI's investment consultant.
Re-enrollments are designed “to steer (participants) into risk-appropriate funds,” Mr. Wrubel said.
Keith Brainard, Georgetown, Texas-based research director, National Association of State Retirement Administrators, said he hasn't run across any other public DC plans that have conducted auto re-enrollments.
On the corporate side, the number of auto re-enrollments is small, but is “a number that is growing,” said Alison Borland, senior vice president of retirement strategy and solutions, Aon Hewitt, Lincolnshire, Ill.
Jacob O'Shaughnessy, adviser, Arnerich Massena Inc., a Portland, Ore.-based investment consulting firm, said such re-enrollments are rare, although more common among corporate defined contribution plans than public plans.
But re-enrollment is ”more on the horizon for governmental programs” as executives there look more at outcomes as a result, in some cases, of diminished benefits, and at corporate best practices for guidance, Mr. O'Shaughnessy said.
As part of the re-enrollment, ISBI is dropping the Columbia Acorn Z mutual fund, the plan's most popular investment option, for reasons of performance and portfolio characteristics, said Mr. Atwood. He said the portfolio, with $953 million in ISBI assets, “migrated away from a conventional small-cap (growth) fund” as ISBI classified it for participants.
In all, 49% of the 457 plan's participants have some assets in the Acorn fund, Mr. Atwood said.
The Acorn fund is actively managed by Columbia Wanger Asset Management LLC, Chicago. It invests in U.S. small- and midcap growth companies, according to a Columbia year-end 2014 report. The fund returned 0.8% in 2014, underperforming the 5.6% return of its benchmark, the Russell 2000 Growth index, according to a report to the ISBI from Marquette. The fund also underperformed the benchmark for three-, five- and 10-year periods ended Dec. 31, the report said.
Carlos Melville, Columbia spokesman, declined to comment.
ISBI is replacing the Columbia fund with the Franklin Small Cap Group Fund R6, managed by Franklin Templeton Investments. Mr. Atwood estimates the Franklin fund will get a total $150 million of participant allocations, much less than the Columbia Acorn allocation, mainly because many participants driven to target-date funds in the re-enrollment will remain in them.
As part of the re-enrollment, ISBI officials are changing the default option to T. Rowe Price Retirement Active Trusts target-date funds from a stable value fund managed by Invesco Advisers Inc., Atlanta. The stable value fund will remain an option.
“Defaulting to a lifestyle option is considered best practices as defined by the Department of Labor,” Mr. Atwood said, noting ISBI officials look to the DOL for guidance even though the Illinois plan isn't regulated by the department.
Now, the plan has 17 options, managed by 10 managers, and 12 T. Rowe Price target-date funds. After the changes, the plan will have 16 options, managed by 10 managers, and 13 T. Rowe Price target-date funds.
Dropped will be an active small-cap value fund managed by Northern Trust Asset Management, Chicago, which has $46 million in assets. With the anticipated decline in assets from the re-enrollment, the fund couldn't qualify for the lower separate account fee, which is 0.6%compared to an industry average 0.97%.
The re-enrollment will transform the aggregate allocation, Mr. Atwood said.
The current allocation is 47.7% total in eight U.S. equity funds, 20.5% in the stable value fund, 11.9% in 11 target date funds, 9% in the Fidelity Puritan balanced fund, 5.3% in two fixed-income funds, 3.5% in three non-U.S. equity funds and 2.1% in the Vanguard prime money market fund.
Officials at Marquette and Baltimore-based T. Rowe Price Retirement Plan Services, the plan's record keeper, estimate 80% to 85% of plan participants will default to the target-date funds and stay in them, Mr. Atwood said.
