One of the most important decisions in decades has just been made by the Labor Department.
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The government this week eased the way for employers to place workers in retirement savings programs when employees fail to take this vital step on their own.
But even if you have been diligent in signing up for and contributing to 401(k) tax-advantaged savings, you need to pay attention. This is especially true if you don’t want to invest in the stock market.
The Labor Department’s action provides legal immunity for employers who act on behalf of their employees but without the employees’ direct permission.
The department has anointed three investment strategies eligible for automatic enrollment dollars. The qualified default options all involve stock market investments. Nearly three-quarters of employers who already offer automatic enrollment used a life-cycle or target retirement date fund as the default option.
This is a good news story. The government estimates that one-third of eligible employees do not participate in 401(k) plans and similar programs.
“This will certainly motivate some employers to put automatic enrollment in their plans,” said Jan Jacobson, retirement-policy legal counsel for the American Benefits Council.
But experts note that active participants in 401(k) programs should be aware of two potential problems.
First, if your employer has an automatic enrollment program, there’s a good chance that the money has been placed in a money market fund or stable value fund. These funds, which do not invest in the stock market, no longer will be eligible for automatic enrollment programs.
But other employees probably have chosen to be in these funds.
Ann Combs, a former Labor Department official now a principal with mutual fund giant Vanguard Group, said employers and their 401(k) advisers typically don’t know if employees in money market or stable value accounts are there by default or choice.
As the automatic enrollment employees are shifted into the qualified default plans, such as target retirement funds, the active account holders will switch along with them, possibly against their wishes.
As Combs reads the rules, “if we don’t hear from you, we’re going to put you in the new target retirement fund. So if you want to stay in the stable value fund, tell us.”
A second problem for active 401(k) participants relates to what happens when an employer changes a 401(k) service provider. Under current practice, the employer “maps” the type of funds selected by the employee and matches them to similar funds offered by the new provider.
As long as the employee is informed of the change, the money shifts seamlessly without the employee asking to maintain the type of fund selected.
But Ian Kopelman, a Chicago lawyer who specializes in retirement issues, said his reading of the new regulation suggests the employee must act.
“If we knock out a Fidelity and put in a Vanguard, what this regulation says is that if you don’t make an affirmative investment election, you default” into the qualified default option, such as a life-cycle or target-date fund.
Combs disputed this interpretation.
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