By Robert C. Lawton, AIF, CRPS, President, Lawton Retirement Plan Consultants, LLC
As you work with your investment adviser on the content of your annual 401k plan employee education sessions, now is the time to determine whether it makes sense to re-enroll all of your participants into your Qualified Default Investment Alternative (QDIA) funds. A number of employers re-enroll all participants into their QDIA default funds (typically target date funds) each year for the following reasons:
1. Professional investment management
Many participants spoke with uncles, brother-in-laws, spouses, dads or other “investment experts” when they set their investment elections at enrollment. Some of those fund choices may not have been the best. Enrolling participants into the appropriate target date fund ensures that their account balances are managed by investment professionals.
2. Proper diversification
One of the greatest concerns I have is for those retirement-eligible participants who end up having all or a majority of their account balance invested in one or a few funds. It seems that there are always a few participants who end up investing too heavily in the wrong funds at the wrong time. Proper diversification is achieved when you re-enroll these participants.
3. Rebalancing automated when you re-enroll
Most participants have the best intentions of reviewing their 401k plan account each year. However, life tends to get in the way and participants forget to rebalance and review at least once a year. Target date fund managers adjust exposure in the funds to fixed income and equity investments as time goes by. This eliminates the need for participants to review and rebalance their allocations. Target date fund investing for many participants is “set-it and forget-it”.
4. Risk reduction
Many participants elected to allocate their contributions when they initially enrolled in the plan many years ago. Unfortunately, many have not reviewed and adjusted their allocations as time has gone by. As a result, they may have contribution allocations or investment balance allocations that are too risky for their age. Re-enrollment in target date funds results in an appropriate level of risk taking for a participant’s age.
5. Not taking enough risk
There are participants in every retirement plan who don’t take enough risk with the investments they select to give themselves a shot at building an account balance big enough to fund their retirement. These participants often elect a more conservative path because they don’t understand investing or are afraid of taking risk. Target date funds adjust risk exposure to the correct level for these participants as well.
If you have never re-enrolled all your participants into your QDIA default funds, seriously consider doing so this year. Studies have shown that more than 3/4 of all participants accept their re-allocated account balance. Talk with your investment advisor if you would like more information on whether re-enrollment is the right approach for your plan this year.
About the Author
Robert C. Lawton, AIF, CRPS is the founder and President of Lawton Retirement Plan Consultants, LLC. Mr. Lawton has over 30 years of retirement plan consulting and administration experience and has provided consulting services to many Fortune 500 companies including: Aon Hewitt, Apple Inc., AT&T, First Interstate Bank, Florida Power & Light, General Dynamics, Houghton Mifflin Harcourt, IBM, John Deere, Mazda Motor Car Company, Northwestern Mutual, Northern Trust Company, Trek Bikes, Tribune Company, Underwriters Labs and many others. Mr. Lawton may be contacted at (414) 828-4015 or firstname.lastname@example.org.
About Lawton Retirement Plan Consultants, LLC
Lawton Retirement Plan Consultants, LLC is a Milwaukee, Wisconsin-based independent, objective Registered Investment Advisory (RIA) firm providing investment advisory, fiduciary compliance, employee education, vendor management and plan design services to 401(k) plan sponsors. The firm currently has contracts in place to provide consulting services on more than $400 million in plan assets. For more information, please contact Robert C. Lawton at (414) 828-4015 or email@example.com or visit the firm’s website at: http://www.lawtonrpc.com. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser.
This information was developed as a general guide to educate plan sponsors and is not intended as authoritative guidance, tax, legal or investment advice. Each plan has unique requirements and you should consult your attorney or tax adviser for guidance on your specific situation. In no way does Lawton Retirement Plan Consultants, LLC assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations. Investors should carefully consider investment objectives, risks, charges and expenses. The statements in this publication are the opinions and beliefs of the commentator expressed when the commentary was made and are not intended to represent that person’s opinions and beliefs at any other time. The commentary does not necessarily reflect the opinion of Lawton Retirement Plan Consultants, LLC and should not be construed as recommendations or investment advice. Lawton Retirement Plan Consultants, LLC offers no tax, legal or accounting advice and any advice contained herein is not specific to any individual, entity or retirement plan, but rather general in nature and, therefore, should not be relied upon for specific investment situations. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser and accepts clients outside of Wisconsin based upon applicable state registration regulations and the “de minimus” exception.