The Underlying Problem of 401(k) Re-enrollment

There was a recent article in the Wall Street Journal regarding 401(k) plans re-enrolling plan participants. Re-enrolling plan participants usually occurs when there is a change of the plan’s third party administrator (TPA) or a significant change in the plan’s fund lineup.  At that point, the plan sponsor may change plan participants’ investment selections to a qualified default fund if they deem employees are not properly diversified,

While most plan participants may opt to keep their current investment election, the thought of re-enrollment is to help plan participants who never change their investment allocation or don’t have the time, background, or knowledge to make changes.

Of course, the default fund is usually going to be a Target Date Fund and we can argue all we want, but a Target Date Fund is not the best fit for everyone.

My problem with this whole idea of re-enrollment is that it is really just a tacit admission by the plan sponsor that plan direction of investments doesn’t really work.

The idea behind directed investments by plan participants was that it was going to limit the liability of plan sponsors as long as plan participants received education and the plan sponsors followed the prudent process of selecting plan investments according to an implemented investment policy statement.

I think if a plan sponsor thinks that plan participants do a poor job of selecting investments, and then perhaps it’s as a result of poor employee education or the belief by plan sponsors that many or most plan participants can’t make investment elections on their own. If that’s the case, perhaps a trustee directed 401(k) plan may be an option for those concerned plan sponsors. Also, if they are so concerned, I was wondering if the plan sponsors that institute re-enrollment actually pay for the administration fees of the plan or is that borne by the participants. Just wondering.

There is nothing wrong with a participant directed 401(k) plan as long as the plan fiduciaries fill their role in selecting investments and educating participants. If a plan sponsor thinks that the investment decisions of a plan participants that should be overridden, I think there is a larger underlying problem for the plan sponsor. That problem is either a fiduciary breach or a lack of confidence in the idea of participant directed investments.