How to Handle a 401(k) Fund Change

It's open enrollment season so be prepared for changes in your benefits, especially your 401(k).

By + More
Scott Holsopple

 It's that time of the year again – benefits enrollment season. Cue the theme from "Jaws"!

Whether you're an old pro or new to the world of employee benefits, the enrollment process can be confusing and intimidating. But it is really important to review everything your employer is offering this year, especially since your health care plan is likely to see some changes as a result of the Patient Protection and Affordable Care Act.

Health care isn't the only place where you may see significant changes to your benefits. You could also see some new investment options in your 401(k) plan. Thanks to recent legislation mandating more transparency in the retirement planning industry, now you and your employer have access to a lot more information about the fees you're paying. This may have led your employer to join the many plan sponsors that are reassessing what they're paying for in the company 401(k) plan.


What would cause your employer to change the funds in your 401(k) and what should you do? First, here are a few factors that may have led to the change:

They weren't happy with the fees. As I stated earlier, new regulations makes it easier to review plan fees. Many plan sponsors are now better able to consider what they are getting for their fees as part of the investment review process.

They see unfavorable changes in a fund. This can be the case if a fund has a change in management or philosophy that causes the fund to no longer fulfill its role in your plan's lineup.

They don't like the fund's performance. A review may also entail a look at performance, and if the fund has underperformed to its peers over the long term, a plan sponsor may decide it is time for a change.

Remember, your plan trustee is legally obligated to make decisions in your best interests, so a change in your fund lineup should be considered a positive move. Plan sponsors are required to provide participants with advance notice of such changes, but do you know what to do when a fund change notification comes to your inbox?

  1. Review what is changing. This seems rather obvious, but this important step is often ignored. Fund changes come in different shapes and sizes, from swapping one fund for a similar type to the elimination of a single fund or even introducing a whole new fund lineup. Take the time to fully understand the changes.
  2. Review how the changes affect the funds you in which you are invested. The fund change notice will outline what will happen to any money you have invested in a fund that is changing. If your investments will be impacted, take a look at how your holdings will be adjusted. Make sure that any automatic adjustments won't alter your investment strategy and that your investments will remain properly diversified given your risk tolerance, time horizon and other factors. Simply put, if you are holding Fund A and it's being replaced with Fund B, be sure Fund B matches your investing goals and strategy rather than assuming that it does.
  3. Don't delay! If you don't want to be invested in the plan's new fund options but see that you will be automatically moved into them, you need to act in a timely manner. Pay attention to the date the changes will be effective. You risk being stuck in a fund you don't like or being charged a short-term redemption fee if you wait to make a change from the new fund after the deadline. Likewise, if you won't be moved into the new fund options automatically, but you believe they would support your investment strategy, put a reminder on your calendar to transfer a portion of your account once the new funds become available.
  4. Fund changes can seem a little complicated, but remember that they represent a potential opportunity for you to be invested more appropriately than you may be currently. So don't ignore them – make the most of them instead.

    Scott Holsopple is the president of Smart401k, offering easy-to-use, cost-effective 401(k) advice and solutions for the everyday investor. His advice has been featured on various news outlets, including FOX Business, USA Today and The Wall Street Journal.