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401(k) Plan Re-enrollment Lowers Investor Costs: Vanguard Case Study

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A Vanguard study of defined-contribution retirement plans finds that re-enrollment into a plan’s qualified default investment alternative (or QDIA) reduces costs paid by investors by 75%.

The study, released Tuesday, tracked the results when a DC plan with $1.2 billion in assets and 18,000 participants moved to Vanguard’s platform. When participants’ investments moved into default target-date products – passive funds – the investors paid an average of 10 basis points a year vs. 41 for actively managed funds.

Over time, these reduced fees should provide “significant cost savings for participants,” according to the fund family. The Vanguard research predicts that after 10 years, the median participant should save about $2,400, and that figure jumps to over $9,000 after 20 years.

Re-enrollment is when plan sponsors move employees from their current allocations into a QDIA, usually a target-date fund. Plans may conduct re-enrollments after changing plan sponsors or making big changes to their investment menus, or when they are concerned about their employees’ asset allocations.

“Vanguard is working closely with plan sponsors to improve savings and participation rates, and we’ve seen sponsors initiate vast improvements in retirement savings behaviors with widespread adoption of automatic features and the choice of target-date funds as the default option,” said Martha King, managing director of Vanguard’s Institutional Investor Group, in a statement. “Re-enrollment is the logical next step on the path to improving Americans’ retirement readiness.”

The case study found that that six months after re-enrollment, just 16% of participants fully or partially opted out of the target-date funds. Only 6% chose to invest in a portfolio without any target-date holding. Among inactive participants, who tend to be less attentive to their retirement accounts, the opt-out rate dropped to 4%, according to Vanguard.

Better Allocations

The Vanguard study reveals that participants in re-enrollment make more age-appropriate risk profiles and invest less in extreme equity allocations, which may be risky or inappropriate.

Following the re-enrollment, 94% of participants in the case study held age-appropriate allocation via a TDF, which accounts for 74% of plan assets. Before re-enrollment, just 25% of participants held a TDF, representing 5% of plan assets.

“Moreover, the percentage of participants holding an extreme equity allocation (i.e., more than 90% or less than 20% equities) decreased from 23% to 7%, the fund family says.

“Inertia can dominate financial decision-making, and we’ve used that to the benefit of newly hired employees into DC plans through automatic enrollment and default investments,” said Cyndy Pagliaro, the study’s lead author, in a statement.

“However, with all the plan design improvements made over the last decade, longer-tenured employees have been left behind. Re-enrollment can help reverse the poor investment decisions made by many older participants previously left to their own devices.”

— Check out 6 Ways to Prevent Going Broke in a Long Retirement on ThinkAdvisor.


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