Just because something's automatic, doesn't mean you can totally sit back and relax; especially when it comes to your retirement. In recent years more companies are shifting away from traditional pensions and placing the responsibility for retirement planning more squarely on individuals. As part of the move, many employers now offer automatic enrollment in their 401(k) and are changing the types of funds they offer. While these enhancements may be to your benefit, you'll still want to ask the important questions.
Following are some answers to questions about how those changes could affect 401(k) programs.
Q: My company has an automatic-enrollment 401(k) program that increases contributions over time and takes care of how the money is invested. Am I safe to just leave decisions to the plan administrators or shall I still be involved?
A: Auto-enrollment programs have grown rapidly since the Pension Protection Act was signed into law two years ago. It has increased the number of workers setting aside money for retirement because it's easy. However, you should monitor your account and may need to make adjustments to suit your individual situation.
“Most of the automatic decisions are good for employees, but employees still need to stay engaged in the retirement planning process, making sure that the decisions being made for them are in line with their retirement goals,” said Christopher Jones, chief investment officer of Financial Engines, a Palo Alto, Calif., investment advisory and management company.
Jones recommends several tips for workers automatically enrolled in a 401(k):
Make sure the default investment of the plan is a good fit for you by checking that it is at the appropriate risk level, and the fees are not too high. Some options, such as managed accounts, provide access to an adviser, allowing you to talk with someone about your financial goals and questions.
If your own company's stock is a default choice, make sure your account is balanced and not too centered on your company's stock. If your 401(k) account is under professional management in managed accounts, your company stock allocation is likely to be reduced to an appropriate level.
Review your progress each quarter to make sure that you are on track to reach your retirement goals, but don't make the mistake of jumping out of the market at the first sign of trouble.
On the Net: Financial Engines
/www.financialengines.com
Q: Are target-date or life cycle funds a good idea? I've read that they can become too conservative too soon, reducing potential earnings.
Target-date funds are an increasingly popular option in many employer retirement plans. The Investment Company Institute says target-date funds have grown from about $2 billion dollars in assets in 1997 to $183 billion in 2007. Roughly 5 percent of the assets held in employer-sponsored retirement plans are invested in target-date funds.
These funds allow an employee to choose a retirement date – 2030, for example – and invests assets accordingly. Typically, the funds invest aggressively early on in an attempt to earn higher returns, then become increasingly conservative, placing more of the money in safer investments – usually bonds – carrying less risk and usually lower returns.
Des Moines area investment adviser Don DeWaay, founder of DeWaay Capital Management, said target-date funds likely perform better than an inexperienced individual who might try to handle their own money.
DeWaay said a few things about the funds concern him:
Target-date funds are a relatively new product so their true track record over time is unknown. The funds base their modeling on historical market performance and future performance may not reflect that level of return.
There are large differences from one company to another about how target-date funds operate and how assets are allocated, so research is advised before you settle on one.
DeWaay believes you'll also want to pay close attention to diversification. Some funds focus mostly on domestic stocks and bonds, excluding other investment categories such as real estate securities or international assets that better balance your risk.
There's a risk that a fund may become too conservative too soon, reducing potential earning capability while others might leave assets in risky holdings until close to retirement.
DeWaay acknowledges that most people don't have the time, resources or desire to actively manage their retirement savings themselves or to hire their own adviser. He said for many people in this position, placing money in a target-date fund is an acceptable option.
DeWaay Capital Management:
www.theprofitzone.net
Q: Should I be worried if my 401(k) administrator is replacing mutual funds with collective investment funds? What are they and how do I know if this change has been made?
Collective funds are similar to mutual funds in that they pool investors' assets and invest in stocks, bonds and other securities. The biggest difference is that they are typically available only in retirement plans and are not regulated by the Securities and Exchange Commission. Instead, they are under the jurisdiction of bank regulators and the Department of Labor.
Because collective investment funds don't have some of the regulatory requirements of mutual funds, collective funds are less expensive than certain types of mutual funds, and so may be offered through a 401(k) plan at a lower cost to participants, said advisers at The Vanguard Group.
While lower fees can mean more money in the pockets of participants over the long term, there are some drawbacks to collective funds. They're not listed, so it's harder for investors to regularly check their returns, meaning their performance is not as easily accessible as mutual funds. Collective funds also aren't required to provide prospectuses, and may not update the value of their holdings and performance as frequently as mutual funds.
Otherwise, participants should approach their selection of collective funds just like they should when they invest in mutual funds:
Have a well-thought-out investment strategy that considers your objectives and risk tolerance.
Diversify your funds to spread your risk.
Choose cost-effective funds that keep expense ratios low. The Investment Company Institute says mutual fund fees and expenses paid by investors have fallen from about 2.3 percent of fund assets on average for stock funds since 1980 to about 1 percent last year.
Rebalance your portfolio periodically to maintain an asset allocation that's in line with your risk tolerance.
Your employer and the administrator of your 401(k) plan should provide information letting you know if collective funds are being added to your plan and how to use them.
On the Net: The Vanguard Group:
www.vanguard.com/
Have 401(k) questions of your own? Send them to:
dpitt@ap.org
