As the author of “The Retirement Bullseye,” I’ve been talking for the last couple of months about courageous plan design and a concept we call Auto to the 5th Power.
Before we dive into today’s topic, “automatic re-enrollment”, there are a few things you should keep in mind about automatic features.
First, you need to make sure that you review your plan document to ensure it reflects that automatic features are elected.
Second, do you have a process in place to implement and monitor these automatic features?
Most importantly, you have to give your employees notice.You can lead them to water, but they decide whether to drink. The notices lets them know what their options are.
When you follow proper procedures, the Pension Protection Act of 2006 and the Department of Labor regulations that have since happened relieve you from the fiduciary liability of making those decisions—which is critical for plan sponsors.
Ultimately, you want to give your participants and employees the best chance to save for the future. What I find is approximately 80% to 90% of the people I speak with are unaware that these automatic features exist—particularly automatic escalation.
Automatic escalation can increase your employee’s contributions each year. You can read more about that here.
Employees are often surprised when they learn they can have access to these automatic features, so make sure they are informed. Think about implementing all of the automatic features, courageous plan design, and changing your employees’ mindsets to help them get that paycheck for life.
Now, how can you utilize automatic re-enrollment of investments?
Automatic re-enrollment of investment options is a radical idea. You take the dollars people have invested today and the contributions they are going to make and reinvest those dollars into the qualified default investment alternative which is typically a target date fund.
Why would you do this? There are three circumstances where I think automatic re-enrollment of the investments works.
The first is when you do an analysis of demographic data, taking the age of the individuals in your plan and looking at how they are invested, basically looking at how much they have invested in stock-based mutual funds.
We tend to find two areas which cause us to use automatic re-enrollment.The first is when younger employees tend to be vested too conservatively. The second is when your older employees tend to be invested too aggressively.
By using automatic re-enrollment, you are putting your employees back on the proper glide path per their demographics. Then you know exactly how your employees are using their investment options based on their age.
Now, investing per the glide path may or may not be exactly what’s right for each person, but it does give them a fighting chance to be demographically invested appropriately.
The second circumstance is when a plan has been in place for 10 to 20 years. First, those employees are 10 or 20 years older, and they’ve never changed their investment selections. They’ve never changed their investment elections or rebalanced their account.
What tends to happen in that time? Stocks tend to outperform bonds. The investments they have in the stock market tend to be a higher percentage of their portfolio than they originally intended them to be. While that’s great when the market is up, it’s not so great when it’s down. Now that they are closer to retirement, it could have a more meaningful impact on their paycheck for life.
Automatic re-enrollment forces them to take a look at it,and they always have the choice to opt out.
Finally, the most common circumstance where automatic re-enrollment is helpful is upon a plan conversion. You’ve gone through a prudent process to select a new record keeper or custodian. Upon that conversion, most investments just get mapped over to like investment options. What a great time to do automatic re-enrollment of the investments!
Again, you give notice and your employees can take control of their situation. You put them on a path that’s demographically correct from an age perspective.
I strongly encourage you to consider automatic re-enrollment of the investments. You may do it every year or every other year, but again, you are putting your employees on a proper glide path for their age.
If you have any other questions, please feel free to give me a call or send me an email. I look forward to hearing from you.