How to reduce risk when doing 401(k) plan re-enrollments

Re-enrolling workers in 401(k) plans has become a prevalent plan-design element over the past decade. But retirement plan advisers should ensure they're initiating re-enrollments in a way that reduces risk both for them and the plan sponsor. During a re-enrollment, the employer defaults participants' assets and future plan contributions into the plan's default investment option, such as a target-date fund. It's a strategy that's primarily used to ensure participants have adequate asset allocations and deferral rates. "It's usually the investment adviser who recommends the re-enrollment," said Phil Troyer, vice president of compliance at Bukaty Companies Financial Services, whose network of advisers oversees roughly $9 billion in DC assets. "[Re-enrollments] are primarily used when it's pretty clear current allocations are not where they should be." The hope, Mr. Troyer said, is that participants will remain in the default fund. The Pension Protection Act of 2006 spurred advisers and plan sponsors to consider re-enrollments. The law established legal protections for plan sponsors (and their fiduciary investment advisers) that default participants into certain types of investments — TDFs, balanced funds and managed accounts. More than 22% of plan sponsors had engaged in a re-enrollment as of 2016, whereas fewer than 10% had in 2010, according to Callan Associates, a consulting firm. "I do a lot of re-enrollments for my clients," said Samuel Haines, a vice president at Centurion Group who oversees roughly $1.2 billion in DC assets. The most popular motivations for re-enrollments are changes to a plan's overall fund lineup, a new record keeper, and poor existing investment elections by participants, according to Callan. However, there are certain precautionary steps advisers should take before initiating a re-enrollment. First, advisers should ensure the 401(k) plan document gives them the right to require a re-enrollment. If that language isn't present, the adviser should amend the document before proceeding, Mr. Troyer said. The key to avoiding liability is giving participants the right to opt out of the transfer. Advisers should require active plan participants to restate their asset allocations, and anyone who fails to do so within a certain time frame can then be mapped into the default investment. "The real liability comes from not ensuring the participants are given the ability to make that investment choice," Mr. Troyer said. Advisers often initiate a phased communication process that begins about 60 days in advance and informs participants about the re-enrollment and what they need to do, he added. Mr. Haines recommends a two-pronged communication approach to target separate participant groups — one line of messaging for participants who'd already actively made fund selections, and another for those who were automatically enrolled. Not everyone knows the re-enrollment rules — even some national record-keeping firms. One record keeper sent a note to a Bukaty adviser saying re-enrollments are "not covered under PPA or under any other standing regulation or ruling and are therefore subject to litigation," Mr. Troyer said, reading verbatim from the communication. "It was kind of shocking the record keeper didn't understand the rules regarding a re-enrollment," said Mr. Troyer, who declined to identify the record keeper. Joshua Yost, an investment consultant at Oakeson Steiner, which oversees around $350 million in DC assets, said re-enrollments function as "preventative maintenance" for participants. "I think probably every five years, at least, every plan should do it," Mr. Yost said, "just because people don't look at these accounts every day." And in his experience, about 90% of participants moved into the default investment stick with their new allocation. The participants who often opt to keep their current allocations intact are higher-income employees, he said. However, re-enrollment can be a tough sell to employers. "Some don't want to be the overseer of the participants' accounts. They don't want to be the parental person," Mr. Yost said.