Broker Check

The Next Wave of Automation

June 13, 2017

In the world of retirement plans, one of the longest running and most used buzz words is inertia. Newtown would tell us that it means something at rest will stay at rest and something in motion will stay in motion, unless an opposite force comes along. In a retirement plan, a participant at rest will generally stay at rest unless something comes along and forces them to act. For the longest time it was always seen as an issue that we needed to fight against.

Do you have employees who didn't elect to participate in the retirement plan when they were first eligible? Good luck fighting inertia and getting them to revisit the idea of enrolling after they've been working at the company for a while.

Have participants who enrolled but only elected to contribute a nominal amount? Probably going to be a while, if ever, that you can convince them to up their contributions.

Or still others who enrolled but didn't properly diversify their investments? Not going to be easy to get them to proactively go through the steps to re-address their allocations.

So why fight against inertia? Why not use it to our advantage? In walks automatic enrollment and automatic escalation, turning the equation upside down and now making people get proactive to get OUT of the plan, instead of in.

All of a sudden, through auto enrollment, we've addressed those employees who, either on purpose or just via laziness, never bothered to enroll when originally eligible. Then with the escalation feature we've addressed those employees who may have chosen to participate but not at a meaningful enough level to ever actually adequately fund their retirement. But what about that third group we mentioned earlier? Those that chose to participate, and maybe even contribute enough, but may not have known how (or received enough information and advice) to properly invest for their risk tolerance and objectives.

Well for that group it may make sense consider a re-enrollment of the plan. A re-enrollment involves the investment elections of participants being "reset" and usually sent to the plan's Qualified Default Investment Alternative (QDIA), often times a Target Date fund (TDF). By being reset into a TDF, a participant that may have been invested inappropriately based off of their age and investor profile can be redirected to a more appropriate investment. Some companies even choose to go through the re-enrollment process on an annual basis, treating it virtually the same way they might treat their other benefits like health insurance. As with their auto predecessors, a participant is always able to opt out of the re-enrollment and stick to their original investments (but, again, inertia) but even just the idea can serve as motivation for a participant to revisit their current investment strategy and see if it is still the right fit.  

At first glance, many employers think the sound of a re-enrollment is, at best, overly paternalistic and, at worst, something bordering on illegal. Not so says ERISA and the Pension Protection Act of 2006, both of which provide the fiduciary protection necessary for a plan sponsor to enact a plan re-enrollment without concern of additional liability.

Ultimately, re-enrollment is probably not going to be a fit for every company sponsored plan but, just like auto enrollment and escalation before it, re-enrollment should be looked at as another plan design tool that a plan sponsor should have in their quiver.         

On a different note: I will keep my musical commentary much more short and succinct for this particular blog post. Later this week Jason Isbell will officially release his newest album The Nashville Sound and the world will be a much better place because of it. I was lucky enough to have my copy show up on my doorstep yesterday and my week was instantly made a good one.

Opinions expressed are those of Matthew Callan and not necessarily those of Raymond James.