Retirement plans preparing for a re-enrollment in 2021 have more considerations than usual to understand before moving forward, because of the effects of the COVID-19 pandemic.
First, they should consider where their business stands, says Stan Milovancev, an executive vice president at CBIZ Retirement Plan Services. Has the business experienced an impact brought on by the pandemic? If not the business, then have employees personally felt its effects? “If you happen to be one of those organizations where your business is up, you’re hiring more people, workers are doing well, then a re-enrollment might be the perfect thing,” Milovancev says. “But if you have had furloughs—even just temporary—and if people were let go or business was down, those things would make me cautious.”
Plan sponsors implement re-enrollments on an annual basis or as a one-time event for two main reasons: to have employees participate in the plan or defer more of their pay into the plan, and to help participants properly invest their assets. Implementing a re-enrollment defeats employee inertia and encourages these people to make needed changes to their accounts, explains David Swallow, managing director of consultant relations at TIAA. “We fall into this period of inertia, and time just goes by so quickly. I have seen people in my career stop contributing because they took a hardship withdrawal at a certain point in time then forget to go back and restart their deferrals,” he says.
While re-enrollments aren’t as common as automatic enrollment or automatic escalation, they can improve plan participation, savings rates and asset allocation, claims Melissa Elbert, a partner at Aon. “A re-enrollment that includes automatically enrolling nonparticipants and upping the deferral rates forces everyone saving less than the automatic enrollment deferral rate, or not at all, to make an active decision to do so,” she says. “It can be a great way to bring longer-tenured employees into the plan and, by moving everyone to an age-appropriate asset allocation, improve overall investment diversification.”
Auto-enrollment into the plan has sticking power. Michael Knowling, head of client relations and business development at Prudential, notes that Prudential research shows 55% of plans use auto-enrollment, and of those that use the feature, just 5% of participants opt out.
However, deferring more money, especially if a participant was financially affected by the pandemic, is realistically a tough sell to those who are barely hanging on, Milovancev says. Even if a plan sponsor and its employees went through a rocky period during the pandemic but are now better stabilized, it might still be worth delaying a re-enrollment for a year.
Elbert says that, even if employees are receiving a full paycheck, personal matters may still impact their financial stability. Household situations could have changed, other family members may be unemployed or are facing unexpected costs, she says. “If a plan sponsor decides to move forward with re-enrollment, it is worth a review of communications to be sensitive to the situation,” she says.
If plan sponsors are considering a re-enrollment, Swallow urges them to work with a consultant, financial adviser or recordkeeper to guide them and their participants through the process. Recordkeepers especially, support many of the required disclosures and can bring in experts to work out the right path for clients, he says.
Another thing plan sponsors might consider for a re-enrollment in 2021 is re-evaluating investment options. “If they’re considering a re-enrollment, look at the qualified default investment alternative [QDIA], and think about whether this is the right selection in place from an investment standpoint, because that will be a critical aspect,” Swallow says.
Plan sponsors that want to modify existing investment choices and not do a full sweep into the current QDIA can look into other options, notes Elbert. As an alternative, employers can consider a “quick enrollment” campaign instead, asking employees to make an affirmative election, but using an easier, checkbox format to enroll in the QDIA at a default rate.
Before implementing a re-enrollment, ensure the plan document allows for one, or amend it to do so, says Elbert. Employers are compelled to give ample notice to their participants prior to the re-enrollment and must provide a reminder to make sure the default action and ability to opt out are very clear, she adds.
Generally, this can be 30 to 60 days preceding any changes, but considering the distractions in the current landscape, Milovancev recommends extending this to 60 to 90 days, with three communication notices in between. “You’ll want to send a notice 60 days beforehand, one 30 days beforehand, and then a week before, so people have every chance to have the right investments and deferral rates for them,” he says.
Elbert says that, while re-enrollments are relatively safe from a fiduciary perspective, plan sponsors shouldn’t overlook certain circumstances. For instance, if the plan has missing participants, plan sponsors will want to try to track them down and document the approach taken as well as consider the ramifications of making changes without providing notice. Company stock in the plan can also create some unique challenges, she adds. “In the end, clear communication is critical, especially in the current environment with added uncertainty,” she says.
Knowling says plan sponsors must give compelling reasons to encourage participants to remain in the plan, including information about the plan design, contributions and default investment options.