5 Reasons to Re-enroll Your 401(k) Participants
Published in Employee Benefit News
By Robert C. Lawton
As you work with your investment advisor on the content of your annual 401(k) plan employee education sessions, now is the time to determine whether it makes sense to re-enroll all of your participants into your Qualified Default Investment Alternative funds. A number of employers re-enroll all participants into their QDIA default funds (typically target-date funds) each year for the following reasons:
- Professional investment management. Many participants speak with family and friends or other “investment experts” when they set their investment elections at enrollment. As a result, some of their fund choices may not have been the best. Enrolling participants into the appropriate target-date fund ensures that their account balances are managed by investment professionals.
- Proper diversification. One of the greatest concerns I have is for those retirement-eligible participants who end up having all or a majority of their account balance invested in one or a few funds. It seems that there are always a few participants who end up investing too heavily in the wrong fund at the wrong time. Re-enrollment into target-date funds provides proper diversification.
- Auto re-balancing. Most participants have the best intentions of reviewing their 401(k) plan account each year. However, life tends to get in the way and participants forget to re-balance and review at least once a year. Target-date fund managers adjust exposure in the funds to fixed income and equity investments as time goes by. This eliminates the need for participants to review and re-balance their allocations. Target-date fund investing for many participants is “set-it and forget-it.”
- Risk reduction. Many participants allocated their contributions when they initially enrolled in the plan many years ago. Unfortunately, many have not review and adjusted their allocations as time has gone by. As a result, they may have contribution allocations or investment balance allocations that are too risky for their age. Re-enrollment in target-date funds results in an appropriate level of risk-taking for a participant’s age.
- Not taking enough risk. There are participants in every retirement plan who don’t take enough risk with the investments they select to give themselves a shot at building an account balance big enough to fund their retirement. These participants often elect a more conservative path because they don’t understand investing or are afraid of taking risk. Target-date funds adjust risk exposure to the correct level for these participants as well.
If you have never re-enrolled all your participants into your QDIA default funds, seriously consider doing so this year. Studies have shown that more than three-fourths of all participants accept their re-allocated account balance.