By Jane Meacham, Contributing Editor

Most defined contribution retirement plan participants who are reenrolled in a plan’s default fund remain in that investment a year later, with only a few partially opting out, a recent Vanguard case study of reenrollment found.

Vanguard in early 2016 looked at participant behavior related to reenrollment at a large defined contribution plan for which it serves as recordkeeper, both immediately after the reenrollment event and 6 months later. It then continued its study of the same participants 1 year after the reenrollment event, and found that most still had not shifted out of the designated default option chosen for them.

“Over time, investment defaults remain ‘sticky,’” a report on the Vanguard case study said.

Automatic Asset Transfer

Reenrollment is a plan strategy in which participants’ account balances are transferred automatically to the plan’s qualified default investment alternative (QDIA). Participants are given advance notice of their right to opt out of the transfer. Plan sponsors receive fiduciary protection under the Department of Labor’s (DOL) QDIA regulations that include safe-harbor provisions.

Vanguard concluded in the study that reenrollment is a way to quickly improve participants’ investment diversification, especially when taking into account the fact that financial decision-making inertia often leads them to leave a beneficial reenrollment asset transfer alone for a long period.

Reenrollment proved particularly valuable for longer-tenured participants who had made portfolio choices under previous investment menus on their own, or those who did not benefit from automatic enrollment into a diversified default fund, Vanguard said.

Reenrollment also helps when participants lack strong conviction about their original portfolio choices because it can ensure appropriate levels of risk and asset balance without requiring decisions from the participants, the report on the case study said.

In the study, reenrollment originally occurred starting in December 2014 during the transfer of a large defined contribution plan’s recordkeeping services to Vanguard. Full reenrollment was not completed until June 2015 because of the presence of a stable value investment fund that required advance notification to the insurer of the fund. The Vanguard study looked at the same cohort of participants present in the plan on three key dates: December 2014, June 2015, and June 2016.

A year after the reenrollment, the plan menu remained consistent in styles and number of funds offered. However, the bond funds and one stable value offering were changed, which had an impact on a small percentage of participants.

While the percentage of participants who chose to fully opt out of the default fund remained low over the entire 1-year period, the limited percentage who chose to leave the fund, either in part or in full, did increase over time, Vanguard reported.

Opt-Out Rates

Immediately after the first changeover phase in December 2014, 10% of participants fully or partially opted out of the QDIA and elected to allocate their own portfolios. After the second phase, in June 2015, the percentage that had left the fund rose slightly. One year later, 20% of participants were no longer solely invested in the reenrollment default fund. Most of the increase was observed in those who moved part of their investments out of the target-date default.

After 1 year, 92% of participants held target-date funds (TDFs), and these funds comprised 81% of plan assets. One of the main goals of reenrollment into a TDF series is to address both extreme and age-inappropriate allocations, Vanguard said.

The money management firm said most noticeable among changes 1 year after the reenrollment were alterations in equity allocations among participants aged 50 or older. Of those changing from the default option, a shift toward a more conservative investment direction was seen by Vanguard.

Nine percent of participants partially opting out of the default dropped TDFs altogether. They tended to be older, longer-tenured, and wealthier men with higher-than-average plan balances, the report said. The same parameters characterized the small number of participants who fully opted out of the reenrollment default.