In recent years I’ve heard that employers have started to auto-enroll employees into 401(k) plans. It’s great to know that employees still have a say in where their money goes. I guess the assumption is that people who don’t pay attention to their pay stubs won’t notice if some of their money gets put into a retirement plan without their permission. It would be interesting to know how and if people who do notice these auto-enrollments ever do contact their employers to ask that they be unenrolled. People who do not enroll in 401(k) plans may have reasons for not doing so such as paying down debt or choosing other retirement investments such as a Roth IRA. Or they simply may not want to participate.

On the other hand I suppose some see auto-enrollment as an employer taking care of their employees and potentially reducing the burden on government to pay for people’s expenses as they get older.

So when auto-enrollment does occur, what kinds of investments do companies put the money into?

One common choice is target-date mutual funds. In most cases, target-date mutual funds are tied to a specific retirement year, such as 2040. In a target date mutual fund, the asset allocation changes as people age. The closer that the investor gets to retirement the more conservative the fund becomes – likely shifting money into bonds and money market accounts. One of the purported benefits is that the investor doesn’t have to manually change investments to obtain increased stability and security.

In 2007, about 37 percent of 401(k) plan participants had some of their money invested in target date mutual funds, according to the Employee Benefit Research Institute (EBRI).

Target date mutual funds held 7 percent of all 401(k) assets in 2007.

Younger workers tend to invest in target-date mutual funds more than older workers. Forty-four percent of workers under age 30 with 401(k) plans had some of their money in target-date mutual funds. For workers age 60 or older only 27 percent had some of their 401(k) money in a target-date mutual fund. In addition, target-date fund investors tend to earn less and have been on the job for a shorter amount of time than other investors.

It’s important to understand, however, that how target-date funds invest money varies widely – even for those with the same target retirement date. Investment professionals may disagree on what the investment mix should be for a given retirement date. And according to the study, this concerns some members of Congress.

Finally, the study found that equity asset allocation was better for those invested in target-date mutual funds, as opposed to those who did not invest in those funds.

What’s the takeaway from all this? Even though promoters of target-date funds say that much of the planning is taken care of for the investor, it’s still important to know what the funds invest in, when they change the investments and how much you as an investor will pay in fees annually.

March 9, 2009.