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You’re Not (necessarily) In Control

So you’ve set up your 401k 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?


Photo credit: jb

Not so, Mona Me. (or maybe that’s mon ami?) Or at least not completely so. You see, way back in 2006, Congress passed the Pension Protection Act, which had a provision in it that allows employers to automatically enroll employees in retirement plans, and 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 401k’s) high expense ratio fund that doesn’t really accurately represent the total domestic equity market very well.

Your employer can make this change any time they want – maybe it’s to get their cousin an additional commission since he sold the plan to your employer. 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 in your 401k account is if it was determined that your account wasn’t diversified enough. Seems pretty big-brotherish, but it’s still a possibility, just not very common.

Default investments can be changed on a whim as well – from a basic money market account to, perhaps, a costly stable-value insurance product. When these choices are changed, your money is automatically moved. You can always change to something else (among the available options), but you have to make the change on your own.

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 thoroughly, right Mona?

Particularly pay close attention when your company sends you a letter explaining changes to the plan. These are supposed to be concise and easy-to read, so watch for them. When funds are going to be automatically moved you’ll get a 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 funds.

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