So you’ve set up your 401(k) with your employer’s administrator, made your allocation choices, and everything is set to go. You’ve got this retirement saving thing by the tail, right?
Not so, Mona Me. (or is that mon ami?) Or at least not completely so. You see, way back in the bad old 2006′s (before all the hope and change), Congress passed the Pension Protection Act, which had a provision in it that allows employers to automatically enroll employees in retirement plans, and even make default investment choices for them.
Doesn’t apply to me, right? Since I enrolled on my own and made my own choices for allocation of my investments… right? Once again, Mona, you’re not completely correct.
The Most Common Change
The plan sponsor (your employer) can make changes to the funds available for investment choices at any time. So, instead of that no-load broad market fund that you originally chose, now you have a loaded (yes I know they’re usually waived loads in 401(k)’s) high expense ratio fund that doesn’t really accurately represent the total domestic equity market very well.
And your employer can make this change any time they want – maybe it’s to get their son-in-law an additional commission since he sold the plan. But then again, maybe it’s just because the bossman read an article that said A shares were superior to all other investments, or something equally idiotic.
The Other Kind
Another possible way that your employer could change your allocation plan in your 401(k) account is if it was determined that your account wasn’t diversified enough. Seems pretty big-brotherish, but it’s still a possibility – although according to this article in the WSJ, “So far, plan sponsors aren’t re-enrolling just because they think a participant isn’t properly diversified…”.
Default investments can be changed on a whim as well – from a basic money market account to, perhaps, a costly stable-value insurance product. And when these choices are changed, your money is automatically moved.
The Bottom Line
So – the watchword you should take away from this is that you need to pay close attention to communications that you company sends you regarding your retirement plan. None of these changes can be made without communicating the change to you in advance – but if you are like most folks when you get that pack of paper and the book written on recycled cigarette paper, the last thing you want to do is sit down and study it over, right Mona?
Particularly pay close attention when your company sends you a letter explaining any changes to the plan. These are supposed to be concise and easy-to read, so watch for them. Usually when funds are going to be automatically moved you’ll get some notice in advance so that you can choose something different from the default. This may be helpful, or it may not – but you’ll be in a position to have better control over your fund.
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I can learn from you, you can learn from me - please leave your comments and links!Jim Blankenship, CFP®, EA, is an expert in personal retirement, IRAs, and tax issues, with more than 25 years of experience in the industry. Read more from this author
And if you've come here to learn about queuing waterfowl, I apologize for the confusion. You may want to discuss your question with Lester, my loyal watchduck and self-proclaimed "advisor's advisor".