Erika Kirchner won an Excellence & Innovation Award for giving 401(k) plan participants a choice.
As vice president of human resources for Bertelsmann Inc., Ms. Kirchner instituted a design change in the company's $1 billion-plus 401(k) plan that allowed participants 45 and older to continue investing in their traditional 401(k) plan's target-date fund or move to a managed account offered by Financial Engines.
The Bertelsmann plan offers a target-date fund from Fidelity Investments as the qualified default investment alternative.
Participants who had been defaulted into the target-date fund now are defaulted into the managed account QDIA when they reach age 45.
There is an opt-out provision, but the company has found that most of those who don't opt-out initially, end up staying with the managed account option.
When implemented, there were 701 employees eligible to be defaulted into the managed account QDIA. Of that group, 553 didn't opt out. And of that group, 96% stayed with a managed account.
“We gave them choices,” said Ms. Kirchner. “We explain the resources, and we tell them to talk to Financial Engines.”
Although some Bertelsmann executives worried that there might be pushback by employees, Ms. Kirchner said the participant response was generally positive.
To build support, “we had to speak to our ERISA counsel to determine if we could do this administratively,” Ms. Kirchner recalled. “We involved our human resources and benefits colleagues.”
Her company also had to coordinate with its record keeper, Fidelity, and Financial Engines, to integrate the new option into the 401(k) plan.
For company executives, “we walked them through the process,” said Ms. Kirchner, adding that her company is “agnostic” about managed accounts vs. target-date funds. “We emphasized this as a positive because we offered a choice.”
It took about 18 months from when company officials began reviewing the concept in early 2013 to when it was approved in mid-2014, plus several more months before the new plan design took effect in fall 2014.
Ms. Kirchner said the strategy was prompted by a comment from a member on the plan's investment committee, an executive from her company's parent, Germany's Bertelsmann SE & Co., KGaA. During a committee meeting, he wondered why the 401(k) plan couldn't have more than one QDIA, she said.
Bertelsmann's effort struck a responsive chord among judges, who said it's an idea that other 401(k) plan executives might consider to accommodate the investment strategies of certain participants.
“This is something that other employers could do and it is a thoughtful approach to preparing plan participants for retirement as it approaches,” one judge wrote.
“Implementing a personalized default strategy for its near-retirement and midcareer employees should result in these employees enjoying financially secure retirements,” another judge wrote.
