Administration March 2, 2016

Reenrollment Gets Participants’ Portfolios on Track

It also can result in much lower investment costs for participants, a Vanguard case study shows.

 

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One of Vanguard’s largest plan sponsor recordkeeping clients, a company with nearly 18,000 participants and more than $1.2 billion in assets, did a reenrollment to get more of its employees invested in an age-appropriate target-date fund (TDF). A key change in the investment menu was the replacement of actively managed TDFs as the plan’s qualified default investment alternative (QDIA) with a passively managed, significantly lower-cost TDF suite.

Following the reenrollment, 94% of participants held an age-appropriate allocation in the TDFs, representing 74% of plan assets. That was a marked improvement from holdings prior to the reenrollment, when only 25% of participants held a TDF, representing 5% of plan assets. In addition, the percentage of participants holding an extreme equity allocation (i.e. more than 90% or less than 20%) decreased from 23% to 7%.

Six months after the reenrollment, only 16% of participants fully or partially opted out of the default TDF, and only 6% of participants opted out into a portfolio without any target-date holding. The opt-out rate for inactive participants was only 4%.

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As a result of the change in the QDIA to lower-cost funds, participants now pay only 10 basis points in investment fees, a 75% decrease from the 40 basis points they paid previously.

Vanguard notes that reenrollment is another tool at advisers’ and sponsors’ disposal to improve participant outcomes, and that it is particularly helpful for older investors who may not have been automatically enrolled into their plan following the Pension Protection Act of 2006.

“We’ve seen sponsors initiate vast improvements in retirement savings behaviors with widespread adoption of automatic features and the choice of target-date funds as the default option,” says Martha King, managing director of Vanguard’s institutional investor group. “Reenrollment is the next logical step on the path to improving Americans’ retirement readiness.”

Compliance March 2, 2016

High Court Denies Review of N.J. Pension Contribution Case

This leaves in place a New Jersey Supreme Court decision that contributions agreed upon in 2011 pension reform are not enforceable.
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The U.S. Supreme Court has denied a request to review a case about whether New Jersey Governor Chris Christie violated the law by making pension contributions in an amount less than what was agreed upon in 2011 pension reform.

Previously, a New Jersey Superior Court judge ruled the state’s failure to make promised contributions into its pension systems was a substantial impairment of public employees’ constitutionally protected contract rights, and ordered the state to pay approximately $1.57 billion to the pension funds. This amount was previously approved in a fiscal year 2015 budget by the legislature, but removed by Governor Chris Christie.

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However, the New Jersey’s Supreme Court ruled the legislature and governor were without power, because the pension contributions promised in 2011 reform are not part of an enforceable contract without voter approval.

The court said the promised contributions are enforceable only as an agreement that is subject to appropriation, which under the New Jersey constitution’s Appropriations Clause renders it subject to the annual budgetary appropriations process.

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