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

Photo (cc) by Biker Jun

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.

Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.

Read Next
The 5 States With the Worst Health Care for Retirees
The 5 States With the Worst Health Care for Retirees

All of these states are located in the same region of the nation.

60% of People With This Disease Don’t Know They Have It
60% of People With This Disease Don’t Know They Have It

Millions of people overlook this potentially potent condition that tends to strike women and older adults.

10 Bad Money Habits That Are Robbing You Blind
10 Bad Money Habits That Are Robbing You Blind

Here’s how to change those bad behaviors.

11 Expenses to Cut Now If You Want to Retire Early
11 Expenses to Cut Now If You Want to Retire Early

Like the idea of financial independence? Part of the FIRE equation is cutting costs.

12 Products to Keep Your Car Clean and Organized
12 Products to Keep Your Car Clean and Organized

These items will help put your vehicular mess to rest — and each is available for less than $20 on Amazon.

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Most Popular
9 Things You’ll Never See at Costco Again
9 Things You’ll Never See at Costco Again

The warehouse store offers an enormous selection, but these products aren’t coming back.

11 Things Retirees Should Always Buy at Costco
11 Things Retirees Should Always Buy at Costco

This leader in bulk shopping is a great place to find discounts in the fixed-income years.

Over 50? The CDC Says You Need These 4 Vaccines
Over 50? The CDC Says You Need These 4 Vaccines

Fall is the time to schedule vaccines that can keep you healthy — and even save your life.

11 Senior Discounts for Anyone Age 55 or Older
11 Senior Discounts for Anyone Age 55 or Older

There is no need to wait until you’re 65 to take advantage of so-called “senior” discounts.

11 Household Items That Go Bad — or Become Dangerous
11 Household Items That Go Bad — or Become Dangerous

When you get the impulse to stockpile these everyday items, pay close attention to their expiration dates.

8 Things You Can Get for Free at Pharmacies
8 Things You Can Get for Free at Pharmacies

In this age of higher-priced drugs and complex health care systems, a trip to the pharmacy can spark worry. Freebies sure do help.

7 Ways to Boost Your Credit Score Fast
7 Ways to Boost Your Credit Score Fast

Your financial security might soon depend upon the strength of your credit score.

These Are the 4 Best Medicare Advantage Plans for 2020
These Are the 4 Best Medicare Advantage Plans for 2020

Medicare Advantage customers themselves rate these plans highest.

The 10 Most Commonly Stolen Vehicles in America
The 10 Most Commonly Stolen Vehicles in America

A new model parks atop the list of vehicles that thieves love to pilfer.

19 High-Paying Jobs You Can Get With a 2-Year Degree
19 High-Paying Jobs You Can Get With a 2-Year Degree

These jobs pay more than the typical job in the U.S. — and no bachelor’s degree is required.

The 15 Worst States for Retirees in 2020
The 15 Worst States for Retirees in 2020

Based on dozens of metrics tied to affordability, quality of life and health care, these are not ideal places to spend retirement.

5 Ways to Get Amazon Prime for Free
5 Ways to Get Amazon Prime for Free

Hesitant to drop $119 a year on an Amazon Prime membership? Here’s how to get it for free.

10 Reasons Why You Should Actually Retire at 62
10 Reasons Why You Should Actually Retire at 62

If you can, here are several good reasons to retire earlier than we’re told to.

26 States That Do Not Tax Social Security Income
26 States That Do Not Tax Social Security Income

These states won’t tax any of your Social Security income — and in some cases, other types of retirement income.

3 Ways to Get Microsoft Office for Free
3 Ways to Get Microsoft Office for Free

With a little ingenuity, you can cut Office costs to zero.

5 Keys to Making Your Car Last for 200,000 Miles
5 Keys to Making Your Car Last for 200,000 Miles

Pushing your car to 200,000 miles — and beyond — can save you piles of cash. Here’s how to get there.

5 Things That Make Life More Meaningful for Retirees
5 Things That Make Life More Meaningful for Retirees

Retirees agree: These are the things that give them purpose and fulfillment in their golden years.

14 Things That Are ‘Free’ With Medicare
14 Things That Are ‘Free’ With Medicare

These services could save you money and help prevent costly health problems.

15 Amazon Purchases That We Are Loving Right Now
15 Amazon Purchases That We Are Loving Right Now

These practical products make everyday life a little easier.

View More Articles

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Add a Comment

Our Policy: We welcome relevant and respectful comments in order to foster healthy and informative discussions. All other comments may be removed. Comments with links are automatically held for moderation.