Administration September 17, 2020

Managing a Retirement Plan Re-enrollment for 2021

Plan sponsors need to consider the effects of the COVID-19 pandemic on their businesses and participants before implementing a re-enrollment next year.
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Art by Julien Posture

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.”

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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.

Administration September 15, 2020

The Plan Sponsor Time Crunch

With so many recent disruptions to what was ‘business as usual,’ how can plan sponsors ensure their retirement plan gets the attention it needs and the most important obligations get met?
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Approximately half of plan sponsors said they spend less time than they would like on their retirement plans, according to a poll by Mercer.

Preston Traverse, a partner and mid-market solutions leader in Mercer’s Wealth business in Boston, says passage of the Setting Every Community Up for Retirement Enhancement (SECURE) Act—and the associated responsibilities for plan sponsors–and human resources (HR) transitions due to the COVID-19 pandemic have only exacerbated the problem.

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Additionally, “plan sponsors had a lot of questions about the CARES [Coronavirus Aid, Relief and Economic Security] Act and furloughing employees. The topic of outsourcing fiduciary responsibilities has come up more,” he says.

Traverse explains that there are three types of fiduciaries a sponsor can outsource functions to. A 3(16) plan administrator takes on day-to-day operations. “Some providers take on full administration, including approvals of distribution requests, distributing annual notices, performing nondiscrimination testing and filing Form 5500s,” he says. However, not all providers take on all tasks, so plan sponsors should be clear about what duties they want to outsource.

The second group of fiduciaries take on responsibilities for plan investments. These 3(21) investment advisers help mitigate fiduciary risk by providing oversight and ongoing monitoring of investments, Traverse says. However, a 3(21) fiduciary lacks the discretion to make decisions about investment selection or changes. A 3(38) investment manager, on the other hand, can decide what investments the plan should offer or drop. “A 3(38) is an outsourced chief investment officer [CIO] arrangement,” Traverse says.

Of possible interest to smaller plans especially, pooled employer plans (PEPs) will be available starting next year, and pooled plan providers (PPPs) will be full fiduciary delegates, he notes.

According to Mike Cagnina, vice president and managing director of the institutional group at SEI in Oaks, Pennsylvania, some plan sponsors feel like they’re at a crossroads when they consider an outsourced solution. It sounds like a big change, and they’ll need more time than they have to evaluate providers. “But once they make the change, they’ll have a long-term solution to have more resources and not have to commit as many internal resources for their retirement plan,” he says. “They’ll have more efficiency and potentially save some money.”

Making the Most of Current Resources

Plan sponsors in a time crunch could also look to their current providers—their recordkeepers or consultants—to see what they could take on. “If a plan sponsor came to us saying it didn’t have the time to focus on its retirement plan like it wants to, we would gather some basic information about its plan and its providers and give it a best practices checklist for governance, investment strategy, participant education and compliance,” Cagnina says. “We would identify what it shouldn’t do itself, what it should give to fund managers or consultants. Some clients don’t realize what their providers can take on; they don’t realize providers’ capabilities.”

Internally, if a plan sponsor has a second type of plan besides its defined contribution (DC) plan, it could see what current resources could be shared between the two. “Really, it’s a case-by-case situation internally. People are wearing a lot of hats these days, and I don’t see that changing anytime soon,” Cagnina says. “In very large organizations, there are communications and technology to streamline things more. But, in other cases, I’ve seen financial people doing HR [human resources] work and vice versa; it just really depends on who is available.”

Obligations That Should Be Top of Mind

So, with plan sponsors feeling a time crunch, what are the top priorities for their retirement plan? “Something they need to focus on, whether there’s a pandemic or not, is annual disclosures,” Traverse says. “Confirm and document when those go out.”

Plan sponsors also need to make certain the Form 5500 and audit get completed and signed by the deadline: October 15 for calendar year plans that requested an extension from the July 31 due date. If a sponsor has no 3(16) plan administrator, many recordkeepers help with that, Traverse says.

The greatest risk of errors comes when someone falls behind on payroll—depositing contributions and loan repayments as they arrive—or when someone neglects to ensure contributions get allocated as the plan document requires. “A mistake there can compound, and it can be an expensive and time-consuming endeavor to correct,” Traverse says, stressing that HR should confirm the plan operates according to the plan document.

“Especially as we go through these times of volatility, plan sponsors need to make sure all policies and governance procedures are updated and in place,” says Cagnina. “Participants may panic and question what investments are offered in the plan. Policies should support current governance practices. Documents should spell out who has responsibility for what.”

With the market volatility, someone should have access to real-time information about the investments on a plan’s investment menu—whether that’s an adviser or outsourced fiduciary, he adds. “Probably during this time it’s not good enough to wait until the end of each quarter to look at investments.”

“I really think that, with the stresses of this year, HR is running very lean, and plan sponsors should be looking at different types of delegations,” Traverse says. “I think it puts their plan in the hands of professional management, and many times companies can do this at a reasonable cost.

“At a minimum, plan sponsors should have an adviser to help with a compliance checklist, fiduciary checklist and investment policy statement,” he says.

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