The most effective and immediate way to get 401(k) plan participants to improve their deferral rates is to “re-enroll” them into the plan, according to a report by Fred Reish of Drinker Biddle & Reath. Re-enrollment means that the plan fiduciaries would restart the plan from an investment perspective. To do that, the plan would notify participants of at least 30 days that they will be required to redirect their investments by set date.
They could leave their investments the same or pick new investments. If they do nothing, their plan assets would default into a qualified default investment alternative, such as a target-date fund.
Reish said that he recently worked with a plan committee that re-enrolled a law firm 401(k) plan and well over 50 percent of the non-attorneys defaulted into QDIA investments. Another type of re-enrollment is where a plan changes providers and the plan requires participants to direct their investments as part of that conversion.
Because many 401(k) plans were started before the advent of target-date funds, lifestyle funds or managed accounts, many long-term participants did not have an opportunity to select those funds when they entered the plans, he said.
“There is evidence that once participants have made their initial elections, they make few, if any, changes— the so-called inertia effect. As a result, a re-enrollment process causes participants to revisit their investment preferences and their objectives and to decide whether to accept the default into QDIAs,” he said.
Re-enrollment improves participant investing, but fiduciaries also receive important protections if they follow the default process as outlined in the DOL regulation. For participants who default, plan fiduciaries are responsible for investing their money and may be liable if they don’t use QDIAs. Also, according to the report, fiduciaries are only protected from imprudent participant investment decisions if the plan complies with the requirements of ERISA 404(c).