One of the reasons why employers haven’t automatically enrolled employees into retirement plans is because they didn’t want to be liable in the event that the investments the employers chose performed poorly. Well, in proposed regulations by the Department of Labor last month, employers won’t have the worry as long as they offer these three “prudent” “Qualified Default Investment Alternatives” for retirement plans:
- A target retirement date or other lifecycle fund, which offers a well-diversified portfolio of investments suitable to a worker’s age and retirement date. The investments in a target fund grow more conservative as you move closer to retirement, whereas some lifecycle funds offer a fixed allocation (e.g. 70 percent stocks, 30 percent bonds) that is appropriate for workers in a given age group. These funds can work for employee who don’t feel comfortable investing on their own or don’t want to worry about it. Many 401(k) eligible workers either invest too conservatively, too aggressively or not at all when faced with a list of plan investments to choose from. (See more about how target and lifecycle funds work.)
- A balanced fund, which offers a diversified portfolio of investments suitable to the demographic of the plan participants.
- A professionally managed account, in which an investment service hired by the employer chooses appropriate investments for a worker among the investments offered under the plan.
The Department of Labor also said that when employers offer automatic enrollment, they must also:
- Give participants an opportunity to choose the investments they wish their money to be invested in and only if they fail to do so may they be enrolled in the default investments
- Give at least 30 days’ advanced notice to workers that their money will be invested in the default fund, as well as information about that fund, including investment objectives.
- Inform workers that they may move their money out of the default investments without financial penalty and as frequently as they can with any other investment in the plan.
These are only proposed regulations, the final won’t be released until February 14th, 2007.
Source: CNN Money