You likely already realize that many of your employees may lack the knowledge or confidence to make their own investment decisions. They may also lack the discipline to rebalance their portfolio, update their risk profile, and make appropriate investment changes as they approach retirement.
25-year-old employees with all of their money in money market accounts and/or 65-year-old employees on the verge of retirement with all of their money in equity funds are just two examples of the mistakes employees make with their investment decisions.
There are a multitude of factors that go into making good investment decisions. So more often than not, most employees would be better off selecting a managed account like a risk-based portfolio, a target-date fund, or even a balance fund. But when we see employees making unsound investment decisions, it sometimes makes sense to hit the reset button using auto re-enrollment.
Using auto re-enrollment, another facet of Auto to the 5th Power, it is possible to re-enroll your employees into a qualified default investment alternative (QDIA). Doing this will keep you protected as a plan sponsor and help your employees to invest wisely and create a retirement income for life. Here’s how it works:
Once a year, you will send a notice to all of your enrolled employees informing them that there will be an open enrollment period extending 30 days from the receipt of that letter. If an employee does not respond to the letter by opting out of the investment change within that time frame, 100% of their 401(k) balance will be transferred into the plan’s QDIA—in this case, the target-date fund based on the employee’s age.
Studies by Fidelity, Vanguard and T. Rowe Price (to name a few) indicate that about 60% of your participants will default into the plan’s QDIA, and they’re generally better off as a result. As a plan fiduciary, you will receive fiduciary protection for all of the automatic features included in Auto to the 5th.
Some employers may have concerns about moving their employees’ money out of an investment they have selected. However, it’s important to realize that, again, plan fiduciaries have protection under the Pension Protection Act, so long as they are giving the employees’ adequate notice, employees have the ability to opt out, if the target date fund is the plan’s QDIA, and if the plan sponsor trustees are performing adequate due diligence and monitoring those investment options.
This auto feature is not for every employer, but in the right situation, it may have a positive impact on your employees’ retirement plan health.
If you’re interested in reducing your company’s fiduciary liability while dramatically reducing your administrative headaches, so you can get back to running your business, visit www.selectretirementplans.com.
And if you have any other questions or would like more information, feel free to give us a call or send us an email. We look forward to hearing from you soon.