401(k) Automatic Enrollment Investments Approved
In an earlier post, I mentioned some of the changes to 401(k)s in 2008. One of them was automatic enrollment. In that post I also mentioned that the IRS still had to rule on what those automatic contributions should be invested in. To that end, a couple of weeks ago the IRS promulgated its guidelines on how employers can invest the contributions of people automatically enrolled in their 401(k) plans.
Here are the investments the man says are copasetic:
- A product with a mix of investments that takes into account the individual’s age or retirement date (e.g. a ‘lifestyle’ or ‘target date’ fund)
- An investment service that allocates contributions among existing plan options to provide an asset mix that takes into account the individual’s age or retirement date (e.g. the invest advisor or plan administrator’s version of a lifestyle fund)
- A product with a mix of investments that takes into account the characteristics of the group of employees as a whole, rather than each individual (e.g. a generic ‘balanced’ fund)
- A temporary capital preservation product for only the first 120 days of participation (e.g. a money market fund). The idea on this is that if somebody subsequently opts out, the 401(k) hasn’t lost their money due to a market decline.
There you have it. If you get automatically enrolled in your company’s 401(k) or equivalent, your money has to get dumped into one of these products.
My take is that this pretty smart. I recommend most lifestyle funds to investing novices. Since the first two options are exactly that, and the third is pretty much that, I like how the IRS did this.
I hope employers offer some education on investing to go along with automatic enrollment. Since companies have transferred all of the responsibility for funding and managing your retirement, it’s only fair they smooth the transition with that kind of information.
