Employees automatically enrolled in investment plans
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Investing: More retirement plans go on autopilot
Mon Aug 1, 2005 11:36 AM ET
(Linda Stern is a freelance writer. Any opinions in the column are solely those of Ms. Stern. You can e-mail her at lindastern(at)aol.com).
By Linda Stern
WASHINGTON, Aug 1 (Reuters) - More and more companies are putting their workers' retirement plans on autopilot, but employees can decide for themselves whether that is a ride they want to take.
People starting a new job are finding themselves automatically enrolled in the company's 401k unless they opt out, and there are more "automated" features every year.
A growing number of companies are automatically increasing the percentage of salary that employees contribute annually, or as they get raises. Some are also choosing investments for their workers' plans and automatically rolling the 401k assets of departing employees into IRA accounts that they open for them.
"In the last couple of years, this is really beginning to take off," says David Wray, president of the Profit Sharing/401k Council of America, a nonprofit whose members are mainly companies offering these plans.
In 2004, more than 10 percent of all companies, and almost a third of large corporations, automatically enrolled their employees in their 401k plan. In addition, more than a third of the employers running automatic enrollment plans also chose the investments that those automatic enrollments went into.
This is as paternalistic as it sounds, and aimed at employees who won't -- or can't -- manage their investments well enough to secure their own retirements. Companies that automate their workers' 401k plans may be motivated in part by a desire to limit their own liability in situations where workers mismanage their accounts and end up with insufficient savings.
"By putting these programs in place, good things happen for those employees, because otherwise nothing would happen," Wray says.
But he concedes that many of the companies' choices for their workers are generic. "If people really want to maximize the advantages, ideally they would be in charge," he said.
What should you do if you work for a company that wants to take charge of your retirement savings? Here are some tips.
-- Decide whether you trust your company and like what it is doing. You own the assets you've contributed to your 401k plan, so the company can't just fold the plan and take your money, at least not legally.
The largest companies doing the most of the automating are quite sophisticated about these retirement programs and know it's in their best interest to make sure your plan is safe and well invested.
But some smaller, less sophisticated or less honest companies could be making bad choices with your money by putting too much of it into their own stock or into very expensive or poorly performing investments. They also could be deducting unreasonably high fees out of your account to pay for management expenses.
If you suspect you have a bad plan, crunch the numbers to see whether you'd be better off investing on your own, outside of a retirement plan. Or press your boss to increase investment choices, company matches and other benefits.
-- See them and raise them. For the most part, these automatic enrollment programs are aimed at helping employers save, but there's no rule that says you can't go higher. If your employer is automatically enrolling you in a 401k plan for less than you're allowed to invest, raise your contribution. Most of these plans hold the automatic contribution to 3 percent of your salary. You can do better.
-- Spend some time reviewing the investment options. Companies that choose investments for their employees may be enrolling them in funds that are so staid and conservative that they could hurt younger workers who should take greater risks and aim for higher returns. And the default settings on your company plan might conflict with investments you have elsewhere. Take the time to review your choices and make sure the money is ending up where you want it to.
-- Weigh your rollover options. Companies can only create IRAs and automatically roll over 401k assets into them if the employee has $5,000 or less in their account. If you have more than that and intend to leave soon, you can leave the money in your company's 401k plan, or roll it over into an Individual Retirement Account or the plan run by your new employer. Figure out which one you like best, and make sure the money stays put or moves seamlessly from one retirement account to another.
Almost half of all workers who leave their jobs cash out their retirement accounts. That may seem like a good idea at the time, but it's a big mistake.
Taking the money too early leads to a tax penalty. And you would also lose forever the compound magic that works when you invest money and leave it in the same place, year after year after year, to earn income in its income.
That magic is real, even if your boss is finding it for you.
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