A new study has found that re-enrollment into a defined contribution plan can result in better diversification and lower participant fees.
Re-enrollment is viewed as a good idea for a number of reasons, one of which is that it can scoop up longer-term employees who never signed up to participate.
In fact, a J.P. Morgan Asset Management white paper last year recommended reenrollment as a means of encouraging employees to invest appropriately.
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The new study, this one from Vanguard, found that not only are portfolios better constructed under a re-enrollment sweep, but participant fees fall by as much as 75 percent. The case study examined a re-enrollment event from a large Vanguard DC plan.
Researchers found that a key change in the investment menu was the replacement of actively managed target-date funds (TDF) as the plan's qualified default investment alternative (QDIA) with a passively managed, significantly lower-cost TDF suite.
If participants don't specifically opt out, when a plan executes a reenrollment strategy, participants' account balances automatically transfer to the plan's QDIA. That single factor was enough to account for the savings in participant fees.
Prior to the switch, the average participant paid 41 basis points annually, a reflection of the plan lineup's tilt towards more expensive actively managed funds. Following re-enrollment, participants paid an average of only 10 basis points — a 75 percent decrease — a direct result of the new default target-date series' low-cost, passively managed strategy. For this plan, consisting of nearly 18,000 participants and more than $1.2 billion in assets, that adds up quickly.
Over time, the study said, reduced fees are expected to result in significant cost savings for participants. After 10 years, the median participant can save approximately $2,400; after 20 years, the projected savings jump to more than $9,000.
The study also evaluated participants' opt-out behavior, finding that the vast majority of participants remained invested in the new default TDF. Six months after the re-enrollment, only 16 percent of participants fully or partially opted out of the TDF, and only 6 percent of participants opted out into a portfolio without any target-date holding. Opt-out behavior varied depending upon participants' status within the plan. Among inactive participants, who are less attentive to their retirement accounts, the opt-out rate dropped to 4 percent.
Re-enrollment, the study said, offers plan sponsors a chance to improve employees' portfolio diversification, especially older employees who have been at the company the longest "who may not have benefitted from the automatic enrollment and inherent diversification of a qualified default fund provided by the Pension Protection Act of 2006."
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