The End of Do-It-Yourself Retirement Accounts

Employers are stepping in to automatically enroll participants in 401(k)s and actively tweaking investment lineups

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401(k)s have long been thought of as do-it-yourself retirement accounts. Yet, employers have been playing a growing role in how much workers save and where they invest their 401(k) dollars. Many 401(k) plan sponsors now automatically enroll workers in 401(k)s unless they specifically out. A portion of each employee’s paycheck is put into an investment of the company’s choosing, typically a target-date or balanced fund. Plus, even if you have already picked funds you like, your company can shift your existing nest egg into a new default investment through a process called re-enrollment. Employees who don’t want their nest egg moved into new investments must specifically elect not to have the change made. Here’s a look at some of the ways employers are becoming increasingly involved in your retirement accounts.

Automatic enrollment. Provisions of the Pension Protection Act of 2006 make it easier for companies to automatically enroll workers in a 401(k) plan or move retirement contributions into default options including target-date funds, balanced funds, or a managed account. “The Pension Protection Act really wanted to take employees that didn’t have a really well thought out asset allocation or portfolio model in their plan and get them into something that was reasonable,” says Michael Malone, managing director of MJM401k, a 401(k) consulting company in Phoenix. “More and more plan sponsors that were uncomfortable with taking an employee’s investments and putting them in a target-date fund are feeling more comfortable with that.”

The number of Fidelity retirement accounts offering automatic enrollment increased nearly 70 percent between the end of 2007 and March 31, 2009. Large employers were the most likely adopt this feature. Over 50 percent of 401(k) plans with 25,000 or more participants now automatically enroll at least some workers, compared to just 13 percent of plans with 500 participants or less. Young and relatively low income workers were the most likely to be automatically enrolled. Just over half (52 percent) of automatically enrolled Fidelity participants were between the ages of 20 and 34 and 56 percent made less than $40,000 annually. Older workers are generally less affected by automatic enrollment. Only 13 percent of participants between the ages of 50 and 64 were automatically signed up for 401(k) plans and just 10 percent had salaries between $80,000 and $150,000 per year.

[Also, check out The Case Against 401(k) Automatic Enrollment.]

Once enrolled, most people stick with their employer’s plan. Only about 10 percent of workers eligible for automatic enrollment proactively opted out of the plan. Most workers also accepted the deferral rate their employer chose. When the company put 3 percent of a worker’s salary into the 401(k) plan, 57 percent of the employees kept that contribution rate and another 37 percent increased their savings rate. Employees also largely stayed put when a higher default savings rate was used. When employers choose an automatic 6 percent savings rate, 60 percent of workers kept deferring that amount of money and another 24 percent saved even more. Lifecycle funds were the default investment for 61 percent of Fidelity plans that utilize automatic enrollment. “To put someone in the plan unless they say no, unless they take action, seems to keep people in the plan and on the right path,” says Michael Doshier, vice president of marketing for Fidelity's Workplace Investing Group.

Re-enrollment. Existing retirement savers may also be confronted with some form of automatic enrollment. When your employer selects a new company to administer your 401(k) or changes the investment lineup, employees may be re-enrolled in the new default investment unless they specifically opt out. Fidelity, Vanguard, and TIAA-CREF each told U.S. News that a handful of their clients have re-enrolled existing participants in new investments in the past year. “They are basically doing a restart,” says Brian Snarr, a partner at the New York-based law firm Morrison Cohen who specializes in employee compensation and benefits. “They make everyone re-pick investment options and if you don’t pick them you go into the default.” Employees will generally be given a window of at least 30 days to opt out of the new default investment before their nest egg is moved. “When your money is being moved you will receive lots of notice,” says Stephen Utkus, director of the Vanguard Center for Retirement Research. “Read those notices, pay attention, and make sure you are comfortable with what going to happen.”

[See Employers Can Override Your 401(k) Investment Choices.]

While a significant change to the 401(k) plan is usually the cause for the re-enrollment, a 401(k) trustee can legally make changes to your investment lineup at any time. “401(k) accounts are not bank accounts that the participant owns. The actual real owner is the trust and the controlling trustee. It is not actually your money. It is actually your future self’s money,” says Matthew Hutcheson, an independent pension fiduciary. “If a trustee wants to move money out of cash and put it into a balanced fund, they have the right to so that. It’s their prerogative under the law to do what they think is best for the participant.” Some employers have expressed interest in helping employees with overly aggressive or conservative portfolios to diversify. “If you receive notice that you have been defaulted into an investment choice, that doesn’t necessarily mean that it is the wrong choice for you. It could be a very valid choice for you,” says James Nichols, vice president of advice strategy at TIAA-CREF. “But make sure that that investment option fits well with your plan for retirement.”

For more information, see:

  • 5 Ways Your 401(k) Will be Changed in 2009
  • A 401(k) Automatic Enrollment Snapshot
  • After a 401(k) Match is Cut, Do Workers Stop Saving For Retirement?