Automatic Rebalancing: What is the typical procedure?

A participant has one set of elections for a current balance and a different set of elections for new money.

Has anyone ever seen an auto-rebalance procedure that would put all of the current balance into the investments elected for new money?

In other words, rather than rebalancing the current balance according to the current balance elections, this vendor assumes that "rebalance" means to invest all of the current balance as if it were new money. It simply provides no way for auto-rebalance of a current balance to be according to the current balance elections.

This is something I feel I need to alert clients about, but I'm curious if this vendor's practice is as unusual as it seems to be.

7 hours ago, gc@chimentowebb.com said:

A participant has one set of elections for a current balance and a different set of elections for new money.

Has anyone ever seen an auto-rebalance procedure that would put all of the current balance into the investments elected for new money?

In other words, rather than rebalancing the current balance according to the current balance elections, this vendor assumes that "rebalance" means to invest all of the current balance as if it were new money. It simply provides no way for auto-rebalance of a current balance to be according to the current balance elections.

This is something I feel I need to alert clients about, but I'm curious if this vendor's practice is as unusual as it seems to be.

 

I guess I would question why the participant has elections for new money that are inconsistent with elections for existing money?  Actually, we have no "elections" on file for any participant when they reallocate their investments.  It's a one time thing that occurs on demand - and those "elections" are not preserved.  New money is (apparently) where the participant wants the money to go - and we rebalance to that election as well.

Yes, there are many possible ways, and even many widely used ways, to state an instruction for investment allocations.

And yes, it’s not unusual for a regime to align instructions for accumulated balances with instructions for ongoing contributions.

From context, I’m guessing your query is about a participant’s investment direction expressed as a standing instruction—one that regularly and periodically continues, rather than an instruction that’s one-time or episodic.

While it might be useful to consider recordkeepers’ methods, a more immediate question is whether the allocations the particular recordkeeper’s operations produce follow the text of the form the directing participant signed.

If the allocations a recordkeeper produces vary from those that would result by following the standing-instruction form, it’s time to rewrite the form to communicate accurately and fairly what the recordkeeper really does.

Or if the allocations follow the standing-instruction form but are not what a directing participant expected, it’s time to rewrite the form to communicate helpfully to a reasonable reader.

(We know either effort will partially fail because of some participants’ aliteracy. But that doesn’t excuse trying to write a text a reasonable reader could comprehend.)

If the clients you mention are employers that serve as plans’ administrators, you might be on to something to suggest a fiduciary attend to this.

In my experiences, what recordkeepers do often makes good sense, but sometimes is communicated less skillfully than one might like.

I was actually curious about established practices at the major vendors, like Empower, Schwab, Fidelity, etc.

Peter indicates he has seen either approach, and the observation that instructions should be clear is soemthing we all live with. We lawyers and consultants are used to obscure language, but I can see how the average participant, and maybe even the average lawyer, would be surprised that instructions to rebalance would shift all of a current baalance into a new money election.

MoJo asks why a participant would have two sets of elections, and it's a fair question. Some vendors have a one size fits all approach. Personally, I like the flexibility of having different choices for new and old money, but you can overthink these things.

Thanks both for response. If anyone has specific info on the procedures at some of the major administrators, I'd apreciate that.

To help sate George Chimento’s curiosity (and mine), would BenefitsLink neighbors fill us in about the rebalancing methods some recordkeepers use?

ADP? Alight? Ascensus? BPAS? CBIZ? Corebridge? Empower? Fidelity? Infosys? John Hancock? Milliman? Nationwide? Newport? OneAmerica? Principal, PCS, Schwab? TIAA? Transamerica? Voya?

from what've seen - most of the RK platforms offer flexibibility on old money/new money/combined totals and even by source.  There can be a variety of reasons why a participant chooses certain options; some may be tied to various investments - like a guaranteed fund or competing money market funds.... 

3 hours ago, gc@chimentowebb.com said:

IMoJo asks why a participant would have two sets of elections, and it's a fair question. Some vendors have a one size fits all approach. Personally, I like the flexibility of having different choices for new and old money, but you can overthink these things.

Thanks both for response. If anyone has specific info on the procedures at some of the major administrators, I'd apreciate that.

The problem with having two elections as it completely defeats the purpose of automatic rebalancing.  The moment the next contribution comes in - and with each and every "new money" in transaction, you destroy the value of the rebalancing.  And then, when the next rebalance occurs, you destroy the value of your new money election.  As far as I know (and i have personal experience with Fido and Schwab), no one does automatic rebalancing with dual elections.

If someone really wants to do that - do a manual rebalance (fund to fund investment transfers) without changing your new money investment elections.  Not sure why anyone would want to do that, but that's really the only way to do it.

Thanks, everyone. I'm not really looking for financial planning advice or the advisability of rebalancing. This really is just to find out about industry practice and to advise a client.

Our plan at Empower offers three options to move money currently invested: (1)  Transfer existing investments (move money from selected investments to other investments) aka "Direct Transfers", (2) Reallocate your holdings (change holdings percentages for your investments aka "Update Holdings", (3) Rebalance to current investment allocations (adjust your holdings to match your investment allocations) aka "Rebalance Account".  Then, there is an investment allocation choice for new money which may or may not match what you requested when you transferred your existing investments.

John Hancock and American Funds Recordkeeper Direct both allow you to allocate future or to reallocate your entire account. 99% of the time, participants want to reallocate the entire account but I have had a few that only wanted their future contributions to go to a new fund.