January 27, 2009
So far, employer efforts to get us to diversify our 401(k) investments aren't a resounding success.
We still tend to hold too much stock or not enough. Or, we invest too heavily in our employer's stock, putting our jobs and retirement at risk if the company falls on tough times.
But employers aren't giving up. The newest twist is called "re-enrollment." With re-enrollment, your employer can shift your money out of current 401(k) investments and reinvest the money in a diversified portfolio for you. You have the right to opt out, of course, if you don't want to change.
It's another sign of how 401(k)s are adopting features of traditional pensions, where workers are automatically signed up and investment decisions are made for them.
Why do employers care whether you are diversified?
"They realize the responsibility has shifted to workers to save enough for retirement and invest wisely. They are concerned that people are not prepared," says Ann Combs, head of the Vanguard Group's Strategic Retirement Consulting group and former assistant secretary of labor for the Employee Benefits Security Administration.
You can thank the Pension Protection Act of 2006 for this latest strategy. That law eased the path for an employer to automatically enroll workers in a 401(k) and make an investment selection for them as long as the money was properly invested.
Vanguard, which administers about 2,200 plans, says 14 employers have adopted re-enrollment in the past year.
"Employers are taking it in stages," Combs says.
Employers have used re-enrollment when there are changes to the plan, such as a new administrator or a new lineup of funds, Combs says. Instead of reinvesting workers' money in funds that are most like their old choices, employers have been moving the money into the diversified default option, she says.
But there is growing interest in going a step further and re-enrolling employees because they have a poorly diversified account and need a more balanced portfolio, Combs says. Companies, though, are waiting until the stock market stabilizes, she says.
Vanguard notes that there are some issues companies need to weigh before re-enrolling workers. For instance, shifting workers' money out of some investments early could trigger redemption fees. Or, selling off a huge block of employer stock sitting in 401(k) accounts could cause the stock price to fall.
Re-enrollment is still new, and whether it eventually will catch on is unclear. While re-enrollment can benefit workers who take no interest in managing their 401(k) investments, could it also make them even less engaged if the employers make all the choices for them?
Fidelity Investments administers more than about 17,000 company 401(k) plans, but only a handful have undertaken re-enrollment.
"Re-enrollment is a very bold move that people are waiting to see if it's the right kind of thing," says Michael Doshier, Fidelity's vice president of marketing.
Employers want to get workers on the saving path, but they also want to make sure, among other things, that re-enrollment fits with the company's culture, Doshier says.
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