Outside voices and views for advisers

4 questions to ask before doing a 401(k) plan re-enrollment

A re-enrollment is a large undertaking, but advisers can easily determine if one is warranted

Dec 22, 2017 @ 12:44 pm

By Aaron Pottichen

Having a process to help plan sponsors with 401(k) plan re-enrollments is becoming table stakes for retirement plan advisers.

Employers do re-enrollments to make sure plan participants have appropriate asset allocations and savings rates. During a re-enrollment, plan sponsors default participants' assets and future contributions into a default investment option, often a target-date fund.

The number of plan sponsors doing re-enrollments is increasing. More than 22% of plan sponsors say they plan to engage in a re-enrollment in 2017, almost double the number in 2014, according to Callan Associates, a consulting firm.

Deciding to do a plan re-enrollment can be a monumental task for a plan sponsor and retirement plan consultant, but the following questions may help more easily determine if one is warranted.

Are existing employees invested incorrectly?

On occasion, plan participants exhibit classic bad-investor behaviors.

For example, at one company (a former client) we identified that every age cohort (20s, 30s, etc.) had their highest investment allocation in the mid-cap sector. We began our review in spring 2014, following a strong year for mid-cap returns. We discovered that a high-ranking and highly educated employee had allocated a large percentage of his account to mid-cap funds. This information was shared with many rank-and-file employees, who exhibited herd mentality by emulating his investment allocation.

In this situation, it was easy for us to make the case that the employees lacked some major basic financial education and were incorrectly invested. If employees are invested incorrectly or are chasing returns, it may be time to consider re-enrollment.

Are employees defaulted into model portfolios?

We often witness scenarios in which the incumbent adviser or adviser firm prefers model portfolios over target-date funds. (Model portfolios are pre-allocated portfolios with different risk profiles utilizing a plan's investment options.)

In many of these situations, we've identified that employees defaulted into static model portfolios have an allocation that is too aggressive over time unless they had taken some prior action. If a large chunk of employees are using model portfolios and the plan is changing record keepers, which sometimes helps reduce conversion time, we recommend the employer consider a re-enrollment.

This gets participants who last rebalanced their allocations years ago to invest in a diversified portfolio, as well as one appropriately based on their age.

Will there be a considerable change to available asset categories?

Some clients we've helped convert to a new record-keeping platform have had more than 60 funds in their existing 401(k). There were multiple funds for regular assets classes (e.g., large-cap, mid-cap) and many sector funds (health care, utilities, etc.). We'd cut the number of funds considerably, but in doing so eliminated the ability to do a like-to-like fund conversion. In these scenarios, re-enrollments make sense.

The same logic applies when working with a plan maintaining its record keeper, but reducing the number of funds on the menu.

Is the company culture conducive to a re-enrollment?

Some clients treat their employees like unique snowflakes that should be handled with delicate care, and others don't. What's interesting about this question is it can only be answered by the plan sponsor or the investment committee. They will have a better notion of what would be welcomed change versus Big Brother behavior.

At the end of the day, it comes back to asking better questions and getting better results. These questions may help some of your clients land on a better decision for their retirement plan.

Aaron Pottichen is the retirement services president at CLS Partners, an Austin, Texas-based financial advisory firm.


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