Taking advantage of automatic 401(k) enrollment can yield significant returns
More than three-fourths of employers now offer a premixed portfolio option, up from 63 percent in 2005. For most workers, this investment strategy is more suitable than the more-conservative default investments used in the past.
Still, even a weak stock market can be good news for investors in the long run, says Mary Schapiro, chief executive officer of the Financial Industry Regulatory Authority, or Finra. Buying shares of mutual funds when prices are low positions you for big gains when the market rebounds. And most employees benefit from matching contributions from their employer.
A guaranteed 50 percent return on your investment is better than any fund can promise. With regular contributions, most newly enrolled workers will see their account balances grow, even in a down market.
A recent study by John Hancock compared the account balances of 401(k) participants who invested in target funds with those of employees who selected their own investments from 2002 through 2006. Researchers found that after five years, 81 percent of workers who picked their own investments would have accumulated higher balances if they had invested in a single life-cycle fund instead.
Broad-based enrollment in a company's retirement plan also benefits high-income employees (those who earn $105,000 or more), who are sometimes prevented from contributing the maximum amount to their 401(k) plan because too few lower-income workers participate. When auto enrollment is extended to existing workers who are not already in the company plan, participation rates can jump to as high as 95 percent of those eligible, compared with an average 78 percent of eligible workers who currently participate in 401(k) plans, according to a study by the Retirement Made Simpler coalition.
Mary Beth Franklin is a senior editor at Kiplinger's Personal Finance magazine. Send your questions and comments to moneypower@kiplinger.com
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