Should You Let Your Boss Make Your 401(k) Picks?

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How would you like it if your company started overriding your 401(k) investment choices? Well, your employer may be doing just that.

A number of companies, concerned that their employees’ retirement investments are too risky or not risky enough, are overriding some employees’ investment picks and substituting the company’s choices.

The appeal of autopilot

The ease of letting an employer take the wheel appeals to some investors who feel they haven’t got the nerve or knowledge to make investment decisions or can’t find the time.

But putting the boss in the driver’s seat isn’t the only solution. There are downsides, as you’ll see in a minute.

Instead, there are simpler ways to pick 401(k) investments that earn a better return. Watch the video below to see Money Talks News founder Stacy Johnson explain them. After that, keep reading to learn why your company is not the best investment adviser and, if you still decide to let the boss drive, how to protect yourself.

Why the boss steps in

A company’s substitute choice, typically, is a target date fund — a portfolio of stocks and bonds whose investments become increasingly conservative as the employee’s retirement target date draws nearer.

The employer tactic of substitutions, called re-enrollment, helps boost the safety and growth of employees’ investments and can ward off lawsuits over 401(k) plans’ performance or fund choices, says the Journal of Pension Benefits.

With re-enrollment, an employer can even change the size of the contribution from your paycheck to your retirement fund.

A company is most likely to re-enroll employees when it selects a new 401(k) plan provider or changes its lineup of investing options. If your employer is about to change your investments, you’ll get a couple of notices of the impending change and a time window — 30 days, for example — to make new choices. If you don’t respond, your money is put in a default investment option chosen by the company.

Big Brother invests for you

Re-enrollment can sound paternalistic, but employees generally seem OK with it. The Journal of Pension Benefits writes: “When the motivation for the change is carefully explained to the employees, for example, to help them and their teammates save more, usually benefiting the lower income, young, and less educated employees, it can result in a big win.”

But maybe they should worry more. Companies can make five mistakes when they impose investment choices on employees, either through re-enrollment or by automatic enrollment of new plan participants. They may:

1. Set your savings rate too low

Depending on when you started saving and how much you’ve amassed, you may need to put aside 10 to 15 percent of your monthly salary or more to prepare for a decent retirement. If you let your company make decisions for you, the company could set a much lower savings rate than you need, meaning that you’ll come up way short in retirement. Better to choose your own savings rate based on your individual needs.

The IRS lets you save $17,500 a year tax-free in a 401(k). If you’re 50 or older, you can add $5,500 more to a 401(k). Here are IRS contribution limits for 401(k)s and other plans.

2. Make you miss out on free money

If your employer doesn’t set your savings rate to earn all of the company’s matching contributions, you’re losing out on free money.

Say your employer matches employee contributions up to 5 percent but it sets your 401(k) contribution at 3 percent: You’ll lose company contributions worth 2 percent of your salary. If you make $4,000 a month, that’s an extra $80 a month — $960 a year — in matching contributions, or nearly $10,000 you’d miss out on over a decade, not counting the growth you’d enjoy from investing it.

Check with your human resources department to learn your company’s maximum match and set your savings rate to capture every penny of it.

3. Select expensive funds

Most companies’ default options are target date funds (also called life cycle funds). Their fees may be steep.

The fees charged on 401(k)s may look small, but they can add up to a substantial loss. Try to keep fees at or below 0.5 percent.

Index funds — baskets of stocks or bonds programmed to represent a broad share of a market — are a cheaper way to earn returns that generally beat stock funds managed by stock pickers.

4. Select the wrong target date for you

Your financial situation may require you to work longer than the target date the company selects for you, especially if your balance is low from getting a late start saving or if you’ve borrowed from your retirement plan.

Women, especially, with their longer life expectancies and lower earnings, need to choose target dates with care. Don’t let the company make this choice automatically for you.

5. Select the wrong investments for you

Some target date funds invest heavily in bonds. That may be fine when you’re older. Younger investors, however, need the growth that stocks offer and have time to recover if their investments lose money. They should put a larger proportion of their portfolio in stocks.

Here’s an easy, rough guide: Subtract your age from 100. That’s the highest percentage you should have in stocks. If you’re 40, for example, put 60 percent of your portfolio in stocks. If you’re nervous, reduce your stock exposure a bit. Or crank it up a little if you want more growth and can handle more risk. But not so far up or down that you take on too much or too little risk.

If you decide to let the company drive

If you nevertheless want to sit back and let the company drive, protect yourself:

  • Talk with your HR department to learn your target date and the maximum company match.
  • Contribute at the very least 6 percent of your monthly paycheck.
  • Set your savings contribution to automatically grow by 1 or 2 percent a year until at least 10 percent of your paycheck goes into your 401(k).
  • Hire a fee-only certified financial planner for a few hours to review your investment plan and your target date and make certain they meet your particular needs.

Has your company re-enrolled your 401(k) plan to take charge of your investments? Do you think it’s OK if the boss does take charge? Post a comment below or on our Money Talks News Facebook page.

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Comments & discussion

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  • Harlan

    This is alarmist. The reason many companies have stepped in is because most employees either never begin to save, save at rates that are far too low, or use investment choices that are inappropriate. It would be great if all employees did all the things you suggest on their own, but they don’t. A few employers may take advantage to screw their employees, but the vast majority are acting altruistically.

    • Don Lowery

      Altruism has NOTHING to do with this. The vast majority of companies do it because they are legally required to do so. If it had to do with altruism…the companies would have replaced whatever the employees lost during the past recession.

  • Don Lowery

    You mentioned the employer match for a 401(k). What do you do if the company decides to do away with the match for their employees to save them money or to be able to keep the match or sweeten it for their executives? Don’t believe it can happen? I previously worked with a gaming corporation who did this exact thing with gutting or cutting back many of their employees benefits…but making sure their executives benefits weren’t touched.

    • grandmaguest

      If they no longer do a match, by all means fund a Roth IRA or regular IRA to the maximum amount allowed before you hand over anything to the company for a 401K. In fact, I would recommend to most people to add to their company only to the amount of matching and put the rest into a Roth then if you still have more to invest you can always go back and put more into the company 401K.
      My place of employment never did a match, so I always fully funded my Roth before I put anything into my 403b. And as soon as I retired I rolled my 403b over into my IRA so that I could invest it in companies (mutual funds) that my employer never offered but that I liked better and offered lower investment charges.
      Hopefully you at least had some years (or time) where they did do a match. Just don’t give up on saving for your retirement.

      • Don Lowery

        As with many others…I wasn’t doing anything…because the cost-of-living was eating much of what I attempted to bring home after taxes and whatever benefits were still given to the employees. About six months after this happened…I moved to another state. You wind the clock forward to today…I’m a classified employee working in the public school system. This means I get an 8% match from the district for a pension. It’s tough…since the cost-of-living here is even worse than the location with the gaming corporation.

        • grandmaguest

          I too was a classified employee, but working for a state university which saddly didn’t match anything. I would have loved an 8% match and would have cut as much as possible from my budget to get it…”free money” as far as I’m concerned. But do what you can do and afford. You won’t regret it in the long run. Good luck.