Getting a well-balanced 401(k) account for participants is like eating a healthy salad: Add the right ingredients and good things happen.
That’s exactly what Bemis Co. wanted to do in 2012. That year, the Neenah, Wisconsin-based packaging company re-evaluated the investment funds in its 401(k) plans. Bemis started its plans several years earlier with only two investment choices: a conservative stable value fund and an equity fund. When the plans grew, Bemis added to the number of investment options. The company transferred or mapped participants into funds similar to what they had in the smaller lineup.
Most employees ignored the new options and kept investments that were too conservative to build adequate retirement savings, said Melanie Higgins, Bemis’ global retirement director.
This time around, Bemis decided to re-enroll everybody into the 401(k) plan. Re-enrollment is a strategy more plan sponsors are using that serves a dual purpose: It puts workers on the right investment track and provides certain protections for plan sponsors.
“We have a lot of long-term employees that had previously been mapped” into the new investments, Higgins said. “The only real way to correct some of those past mistakes was through re-enrollment.”
Today, Higgins said the company’s 8,100 employees are invested more appropriately. Overall, plan assets in stable value shifted to 3 percent from 20 percent. Also, 80 percent of assets are now in target-date funds, as opposed to 20 percent prior to re-enrollment. The average account balance is $80,000.
“Target-date funds are a good way to be diversified, and we felt confident in going this route,” Higgins said.
Re-enrollment is like pushing a reset button. Employers shift workers’ 401(k) money out of their current investments and into a federally approved fund, typically a target-date fund. These diversified funds self-adjust over time, changing to more conservative investments as the worker gets closer to retirement.
Meanwhile, employers can be protected from being sued if they follow the rules of the Pension Protection Act of 2006 when doing re-enrollment. To qualify, companies must give workers 30 days’ notice that funds are being transferred to the approved fund, and workers must be allowed to opt out and make different investment choices.
“Even with prudently selecting mutual funds and providing investment education, many plan sponsors don’t realize they can be responsible for participants’ bad decisions,” said Fred Reish, partner in the Employee Benefits & Executive Compensation Practice Group for law firm Drinker Biddle & Reath. “Adopting a re-enrollment strategy can shield [plan sponsors] from potential liability.”
It’s hard to criticize workers who are participating in company plans, but there’s no doubt some are making investment choices that don’t quite fit their needs, said Jean Young, senior research analyst at Vanguard Center for Retirement Research.
According to Vanguard’s annual report, “How America Saves,” which examines 2013 defined contribution plan data, a five-year look at individual annual return on investments showed wide variations depending upon mix. Workers with managed accounts, like target-date funds, ranged from nearly 12 percent to nearly 16 percent annual return in 2013. In contrast, workers who invested on their own saw investment returns ranging from 2 percent to 19 percent.
“There’s only a minority of participants who are on their own and getting it right,” Young said, adding that Vanguard data show a majority of participants make few investment changes once they make their initial choices. “It’s hard to get participants to take corrective action on their own.”
The good news is that more plan sponsors are re-enrolling participants to make sure the investment structure fits individuals’ working timeline. Callan Investments Institute’s Defined Contribution Trends survey found 12 percent of plan sponsors re-enrolled workers in 2013, and 8.5 percent planned to use the strategy this year. It’s a slight bump from 2012, where 8 percent used re-enrollment and only 1 percent planned on doing it in 2013.
“There’s an increased focus on whether participants are going to retire with adequate assets,” Reish said. “This is one of the [strategies] employers can use to give workers that chance.”
Patty Kujawa is a writer based in Milwaukee. To comment, email firstname.lastname@example.org.