Plan Design White Paper

Recalibrating Your Defined Contribution Plan

06 December 2019
3 min read

What You Need to Know

It isn’t easy to persuade defined contribution (DC) plan participants to take the wheel regarding their asset-allocation decisions. While some participants are actively involved in choosing investments for their account, many participants don’t make the best choices—and some make no choices at all.

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44%
Of plan sponsors
don't think reenrollment is needed
86%
Of plans have target-date funds
as their QDIA
51%
Of plan participants feel strongly
that they want to select their own fund mix

Plan sponsors are eager to improve participants' retirement outcomes by making sure they're properly allocated in a sensible investment, such as a target-date fund (TDF). Reenrollment is a powerful way to steer employees into effective investment options. It's a process that places employees' retirement savings into a plan's qualified default investment alternative (QDIA) on a certain date unless they make an active decision to choose another investment.

Reenrollment improves outcomes for DC plan sponsors and participants. Through this process, plan sponsors can:

  • Remove asset-allocation guesswork for employees by moving their assets into a QDIA—usually a TDF—after a 30-day notification period and an opt-out period.
  • Engage workers who might otherwise never have joined the plan, as well as those participants who may have made a "set it and forget it" retirement plan choice when they were first hired. Reenrollment gives the latter group an opportunity to hit the restart button on their plan and reposition themselves with an asset allocation that will appropriately guide them into their retirement years.
  • Obtain fiduciary coverage: in 2006, Congress passed a law creating a fiduciary safe harbor for QDIAs, protecting sponsors from liability against investment-related losses in participant accounts.

What Is a Qualified Default Investment Alternative (QDIA)?

A QDIA is a default investment fund that the US Department of Labor (DOL) considers suitable for an employee’s long-term retirement savings needs. Plan fiduciaries who invest plan participant assets in a QDIA—in the absence of affirmative investment instructions—can receive relief from investment loss liability, according to the amended Employee Retirement Income Security Act (ERISA), section 404(c). Among other requirements, QDIAs must be diversified to minimize the risk of large losses in investments. QDIAs include TDFs, balanced funds and managed accounts.

In the past, new participants were given information and asked to "opt in" to the investments of their choice during an enrollment period. Today’s plan designs are different. New employees are set on the right track with a QDIA from day one through auto-enrollment, a process that automatically enrolls new hires into the DC plan’s QDIA at a fixed contribution rate. Through reenrollment, existing employees aren’t left behind: they’re given the same opportunity to “start over” when their assets are automatically allocated into the QDIA.

Some plan sponsors have balked at the idea of reenrollment, saying "there's no need to do it" and "it's too much work." Others are worried about perceived fiduciary risk--that some employees might react negatively, or take legal action because investment decisions were made for them against their will. We think plan sponsors should take another look at reenrollment. Implementing this process shows a commitment to acting in plan participants' best interests, helping them improve their chances of financial security in retirement.

Keeping Participants on Track for a Healthy Retirement

Inertia and time limitations hinder some participants from actively choosing the investments in their retirement account, but other participants reveal a different hurdle: their confidence declines as they face the complexities of investment decisions. This lack of confidence isn't a surprise, given that survey results show workers often fall short in their knowledge of investment basics.

Only about half of participants were interested in selecting their own mix of individual funds or were comfortable deciding how much to invest in each fund. Even fewer said they had the time to keep an eye on those investments and make changes as their retirement approaches.

Many Participants Have Issues with Their Investing Capabilities
Many Participants Have Issues with Their Investing Capabilities

Answers were on a scale of 1–10 with 8–10 = agree; 4–7 = mixed; 1–3 = disagree
Source: AB Research, 2018

It's no wonder a significant percentage of participants don't properly allocate their assets. This is especially true for employees who've been at a company for several years. These veterans may think their plans are in good shape because of the investment choices they made when they were first hired, but there's a good chance that their allocations are outdated and need to be realigned.

Getting More Mileage out of Inertia

A small percentage of participants decide to change their plan mix at reenrollment, but most employees defaulted into a QDIA stay put—inertia actually works to plan sponsors' advantage in this case. It’s a win-win situation for participants and sponsors.

Reenrollment shouldn’t be the final step when participants lack time or investment knowledge—or even when they don't. It's crucial to keep employees engaged before, during and after reenrollment—even if they don't need to take action. Employees who get regular, effective communication respond more positively to change. Communication best practices include positive, straightforward language, more visuals and a simple call to action.

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