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A New Cautionary Tale Regarding 401Ks

While sitting in my dentist office the other day, I read an interesting article in one of his old Wall Street Journals. As implausible as this might sound, the article warned it’s readers that their employer might actually making investment choices for them without their consent.

Obviously, having your employer pick your investment strategy is problematic.  As the article pointed out, “Employers don't see an employee's entire investment picture. This forces more-active investors to do a time-consuming activity [of re-selecting their prior investments]… It's dangerously close to interfering with those people's decisions.”  The practice is called a "re-enrollment," and although your employers may tout it as being ‘your own good’ it might be just the opposite– especially if you are older, female or have other unique circumstances.

Re-enrollment is different than "auto-enrollment." Auto-enrollment is a fairly common practice, in which employers automatically enroll workers in a 401(k) plan and defer a certain percentage of their salary into qualified default investment accounts such as target-date funds. Re-enrollment goes beyond that, rather than just pointing new hires in an appropriate direction for retirement saving, re-enrollment involves the employer actually overriding the investment choices of its current employees unless the employee specifically opts out of the company's new investment plan.

Re-enrollments usually are put into effect when companies change their 401(k) record keepers or the available plans change. But this is not the only case, and default plans for re-enrollment also can be used as a means of pushing employees toward certain options in the interest of a diversified portfolio. Re-enrollment may not yet be in effect at your company, but be on the look out for any notice of a change.  According to this The Wall Street Journal article, this practice may well become more commonplace.  After all, as the traditional pension plans fade away, the company’s benefits department needs a new way to justify their existence.

Why should you care? While default options, target-date funds, and diversification may be wise choices for many, your circumstances could warrant a unique investment strategy. If you are older and closer to retirement, female (and with a longer life expectancy), have significant investments outside of your 401(k), or have other unique circumstances, you may be well-advised take a different investment strategy.

You can still opt out of the default by selecting a different plan, but be aware that you will have to do this with every re-enrollment phase.

If you don’t know whether your employer uses re-enrollment, find out. Ask your plan administrator and review your plan statements. Your investments may not be allocated as you thought.

Re: The Wall Street Journal Online (Feb 7, 2011) "Employer Knows Best. Perhaps."

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