Many of us have been focused lately on new 401(k) fee disclosures that let us see just how much we’re shelling out to the folks who administer our retirement plans. But what we haven’t heard much about—and this can be about as frightful as it gets—are the financial losses you could shoulder if your employer selects “default” funds on your behalf for your retirement account because you haven’t made a pick yourself.
You’ll still be on the hook if those funds plummet in value, according to a report in Forbes magazine—never mind that you didn’t choose them. That’s because a recent Appeals Court decision affirmed laws that protect employers from liability if they put workers’ savings in Department of Labor-approved “qualified default options” if those workers hadn’t bothered to select their own funds.
The decision was handed down after two workers lost a collective $100,000 in retirement savings and sued their employer. Their savings had been put in target date funds because they hadn’t selected investments.
Target date funds don’t guarantee principal but they’re considered by many financial advisors to be a better long-term investment for workers, particularly younger ones, because they hold a mix of stocks and bonds that grow more conservative as the target retirement date approaches, writes Forbes’ Janet Novack. And that’s why the DOL approved them as default alternatives. But these funds can plummet if the market falters.
It used to be that many employers used so-called stable value funds as the default option for workers who didn’t pick their own investments, generally because these funds guaranteed a return of principal and an interest rate of at least 3 percent. But starting in 2007, DOL allowed target date funds as the default option.
Now a couple of retirement savers wish that switch had never been made.
Photo credit via flickr.com