Investment refresh is becoming a best practice is the 401(k) plan industry. It is also called a ‘re-enrollment’, though the term is misleading as the participant does not actually repeat those steps needed for his or her initial enrollment. Instead, it refers to a process whereby participants are notified that as of a certain date their current investment allocation will be transferred to the plan’s qualified default investment alternative (QDIA) investment. The QDIA is frequently an age/risk appropriate target date fund (TDF). Any participant may opt out of this action prior to or at any time after the transfer date.
The premise underlying investment refresh is that participants do not always make prudent investment decisions. Frequently, employees’ investment allocations are too risky or too conservative because elections were based on an incomplete understanding and/or they are outdated. There is often a mismatch between the level of risk participants tell us they are comfortable with and the risk level in the actual portfolio they have constructed. We often find that although the vast majority of participants are deferring into the plan’s TDF, participants’ prior assets often do not get transferred to the TDF. This is an interesting but contradictory fact that can be attributed to a conscious act, simple neglect, or potential loss aversion, but the reality is, that it may be detrimental to the participant’s actual intent or their best interest. Clearly, many participants would benefit from additional assistance.
Contact our office if you want to review your plan’s TDF and discuss whether your participants could benefit from an investment refresh.