Check your latest 401k statement to see if your allocations reflect what you want, as opposed to what the fund company wants. The fund company wants you to be in target date funds, because they collect very hefty fees on top of more hefty fees, for doing nothing useful.
It is a very stupid idea to be in target date funds.
Businesses are taking more control of workers' 401(k)s, retreating from the 30-year experiment with employees running their own accounts.
Barclays PLC's Barclays Global Investors now urges employers to automatically direct 8% of workers' pay into 401(k) savings and build from there. T. Rowe Price Group Inc. in the past year has seen a sharp increase in plans moving all participants into target-date retirement funds -- even if those participants previously selected their own investments. Prudential Financial Inc. on Monday plans to announce a sweeping 401(k) package that, among other things, encourages employers to prohibit workers from borrowing against their retirement savings.
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401(k) Tim Foley 401(k) 401(k)The moves are a more-aggressive version of the employer intervention that has taken hold in 401(k) plans in recent years. Many employers already automatically enroll workers in 401(k) plans and divert money from employee paychecks into retirement savings. Workers can typically opt out of the employer-directed moves. But they rarely do.
The greater employer control is a philosophical shift in 401(k)s and other defined-contribution plans, which held $3.5 trillion at the end of last year. The new, more-paternalistic approach, with employers making most of the decisions, resembles a defined-benefit pension plan. But unlike a pension plan, individuals bear all the investment risk.
Fund firms and plan providers say the moves are necessary to get hands-off 401(k) savers on track for a secure retirement. Left to their own devices, some workers invest far too conservatively, others too aggressively, and many don't save nearly enough. Nearly one-third of participants who are offered access to company stock, for example, have put more than 20% of their balances into this relatively risky option, according to Vanguard Group.
Automatic plan features will help workers save enough for retirement and improve their diversification, says Stephen Utkus, director of the Vanguard Center for Retirement Research.
Employers introducing some of the more-aggressive automated features are finding that workers generally go along for the ride. Laboratory-equipment maker Thermo Fisher Scientific Inc. recently overhauled its 401(k) plan's investment lineup, giving participants a two-week period to select their own investments. Those that didn't make a choice were moved to target-date funds early last year.
Nearly three out of four participants were automatically shifted to the default funds, says Susan Gagne, vice president of employee benefits. Early this year, the company started automatically enrolling all new hires in the plan, directing 6% of their pay to 401(k) savings. More than 80% of those automatically enrolled stay in the plan.
But the move toward employer decision-making can present risks for participants. The steps are driving more savings into target-date funds, which hold a broad mix of investments and become more conservative over time. Many target-date funds were walloped last year in the market slide, sparking scrutiny from lawmakers and regulators. The Senate Committee on Aging this month plans to examine fees, risks, and potential conflicts of interest in these funds.
In a recent analysis of investment options in nearly 13,000 plans,
401(k) data and analytics firm BrightScope Inc. found that expenses charged by target-date funds are significantly higher than those levied by other funds on plans' core investment menus. 'Financial Malpractice'Automatically putting a big chunk of workers' pay in stock-heavy, relatively high-fee funds is "a form of financial malpractice," says Laurence Kotlikoff, a Boston University economics professor. Podcast
- Reporter Eleanor Laise discusses how companies are taking control of employee 401(k)s and why.
Pension legislation passed in 2006 ignited the 401(k) automation trend, encouraging employers to automatically enroll workers. Employers jumped on board but generally directed only 2% or
3% of workers' pay toward plans.Now many employers have decided to boost workers' saving rates. Nearly one-third of plans recently surveyed by consulting firm Hewitt Associates plan to automatically direct a bigger slice of workers' paychecks toward 401(k) accounts. And employers aren't stopping there
-- an increasing number are automatically raising workers' contributions each year.
Employers are also taking steps to correct what they see as poor investment diversification, even if participants have previously chosen their own investments. More than half of plans signing up for T. Rowe's 401(k) recordkeeping services in the past year have used this "re-enrollment" strategy, defaulting all participants into target-date funds unless they opt out. That is up from roughly 30% a year earlier. Creating Losses?
Market volatility raises new questions for employers shifting around workers' savings. Employers run the risk of moving participants out of funds at a market bottom, creating losses in their accounts, says Stacy Schaus, defined-contribution practice leader at Allianz SE's Pacific Investment Management Co., or Pimco. What is more, workers may be moved into aggressive strategies without understanding the risk they're taking on, Ms. Schaus says.
Indeed, many participants were moved from conservative stable-value funds to stock-heavy target-date funds last year as their employers switched default investments, exposing people to losses that they may not have otherwise suffered, says Pamela Hess, director of retirement research at Hewitt. Many companies made the switch because 2006 pension legislation encouraged employers to use broadly diversified vehicles such as target-date funds as the default investment.
Some financial-services firms are pushing for employers to limit workers' ability to tap their 401(k) savings. Prudential plans to urge employers to prohibit 401(k) loans and limit the circumstances allowing hardship withdrawals. "When we see people using their 401(k) plans as checking accounts, we get concerned," says Christine Marcks, president of Prudential Retirement.
Yet the availability of loOffice report.
Write to Eleanor Laise at eleanor.laise @ wsj.com