Pros and Cons Of New 401(k) Auto-Enrollment Rules

Employees who do not specifically choose to do anything with the retirement plans offered by their employer are being targeted by the Labor Department. Under new rules, individuals who do not make their own choice will be automatically placed into 401(k) plans in which their investments will be allocated in a mix of stocks and bonds, theoretically pertaining to their intended retirement horizon.

Not only are new employees targeted, but the Labor Department is also looking to automatically enroll employees who are simply not taking advantage of their companies’ retirement plans.

Many companies who auto-enroll their employees create a portfolio containing only money market funds or other investments designed for safe capital preservation rather that long-term growth.

There are some benefits to these new rules:

• There is a good chance that the average employee who doesn’t pay attention to their retirement plan will be better off at retirement.
• More investment in stocks will be good for everyone all ready invested in the stock market.
• Studies show (according to the New York Times) that the fewer choices left for the employee, the better the investment results.
• More investments mean those who manage those investments will still have jobs.

I can think of some related down sides:

• More investments, especially in stocks, means more fees paid by investors, many of which may be hidden.
• Employees with no investment experience may be better off in plans that resemble traditional pensions.
• There is a distinct possibility of losing money if the stock market performs poorly in the next few decades.

I’ve been staying away from the “lifecycle funds” or “target retirement funds” that seem to be the favored approach to automatic investments for a few reasons. I could pick a retirement date, but I’ll more than likely be incorrect. It’s hard to say whether I’ll be retiring early, on time, or late. My career path isn’t as clear as some other people’s. Also, it’s easier to hide layers of fees in these “funds of funds.” Each layer of fund adds diversification, but also adds more distance between the investor and the underlying companies.

For now, I’m creating my own mix of mostly stock funds in my 401(k). I’ll write more about my personal asset allocation in the future.

In Search of Savers: 401(k) Rules Are Changing