One of the ideas behind 401(k) retirement accounts is that employees decide how much to save and how to invest and then reap the rewards or losses of their choices. But workers aren't in full control of their retirement money. Sometimes an employer can override a worker's investment choices. Through a process called re-enrollment, your current nest egg could be transferred to investments your employer deems more appropriate for you. Here's a look at when employers can change your 401(k) allocations and what to do if you don't want changes made.
A new 401(k) provider. When your employer selects a new company to administer your 401(k), the retirement money you have already saved can be diverted into new investments. Employers may choose to enroll existing 401(k) participants in investments similar to the funds they already selected or re-enroll everyone in a new default investment, typically a target-date or balanced fund.
"Most re-enrollments are event based: You're switching providers, or your employer is changing your defaults, perhaps from money market to target-date funds," says Stephen Utkus, director of the Vanguard Center for Retirement Research. Half a dozen Vanguard clients have re-enrolled employees in new default investments in the past year.
The Pension Protection Act of 2006 made it easier for employers to automatically enroll employees in a 401(k) plan and put or move retirement contributions into default options including target-date funds, balanced funds, or a managed account. 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. "Basically, you have to reup on your investment decisions, and you have to make a new decision," says Brian Snarr, a partner at the New York-based law firm Morrison Cohen who specializes in employee compensation and benefits. "If you don't do anything, instead of staying where you have been, they are going to put you in the defaults."
An updated fund lineup. Sometimes employers also make substantial changes to their investment lineup and eliminate some funds. "A lot of our clients choose to change only the future contribution and they leave the past contributions alone, but a handful have elected to map the prior balance to the new default investment options," says James Nichols, vice president of advice strategy at TIAA-CREF. A few TIAA-CREF clients moved employees from conservative money market funds into more diversified life-cycle funds but also gave employees an opportunity to opt out.
"Everyone gets notified at least twice, either via E-mail or a mail letter or postcard," says Michael Doshier, vice president of marketing for Fidelity's Workplace Investing Group. A handful of Fidelity's approximately 17,000 401(k) plans have re-enrolled participants. "You will get a letter saying something to the effect of 'We'd love for you to stop by the benefit office or NetBenefits [online] and re-enroll. ... If you choose to do nothing, then on this date you will be automatically enrolled at this savings rate and in this investment option,' " Doshier says. Workers who were automatically enrolled in the default investment option when they began a new job may also be automatically shifted to a new investment if the employer decides to go with a new default fund. For example, an employer could have automatically enrolled workers in a money market fund last year but decide to go with a target-date fund this year.
Failing to diversify investments. Although significant changes to the 401(k) plan are usually the catalyst for an employer to change your retirement investments, a 401(k) trustee can legally make changes to your retirement investments at any time. For example, if your portfolio is not properly diversified, your employer could take steps to diversify your 401(k) for you. For a 20-something employee with no equity exposure in his retirement account, an employer has the ability to move his retirement stash into an age-appropriate default investment. If a baby boomer approaching retirement age has 100 percent of her portfolio in the stock market, an employer could move her money into a qualifing fund with a smaller allocation to equities.
"An employer, acting as a fiduciary or trustee, can change participant investment choices and should, if the participant's choices are not prudent or appropriate," says Matthew Hutcheson, an independent pension fiduciary. "A trustee can override a participant decision at any time. A trustee should override participant decisions if those decisions are clearly imprudent."
Although some employers have expressed interest in correcting their workers' poor investment choices, few have yet taken direct action to correct inappropriate diversification. "There is a degree of paternalism associated with it. If we look at the allocations that employees have, there have been more cases than not that those allocations and selections of funds aren't necessarily the best things for them," says Michael Malone, managing director of MJM401k, a 401(k) consulting company in Phoenix. "But if you want to maintain your existing elections, you can move back into any elections you want."
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