401(k) rules allow boss to enroll you in specific plan

ON THE MONEY

Your Money

October 28, 2007|By GAIL MARKSJARVIS | GAIL MARKSJARVIS,YOUR MONEY

If you are afraid of the stock market, you might not like where your money is headed in the company 401(k) plan.

But don't fight it. A good dose of stocks, blended together with some bonds in mutual funds, will be good for you - especially if you are years away from retirement and won't panic in a downturn.

And the federal government, and your employer, are working to make sure you take your medicine.

Last week, the Labor Department set in motion rules that are likely to revolutionize the way millions of Americans save for retirement.

Instead of leaving people on their own to potentially blunder through the investment process with 401(k) plans, the government has laid out a preferred route.

It calls for people to invest in a mixture of stocks and bonds designed to grow their money effectively based on the years remaining until they retire.

According to the Congressional Research Service, half of Americans within 10 years of retirement have saved no more than $88,000.

Congress tried to improve the odds that people would have enough retirement savings by passing a pension law last year that gave employers the go-ahead to become involved.

The government told employers that they no longer had to wait for employees to take the initiative and sign up for the company retirement savings plan. Instead, the employers could enroll employees automatically and reroute a portion of their pay - often 2 percent to 3 percent - into the 401(k), 403(b) or other retirement plan.

About 36 percent of large employers are using this "automatic enrollment," said Pam Hess, a 401(k) analyst with Hewitt Associates. And a survey of employers recently shows that half of those not currently using the system are likely to add it this year.

The trend is rolling so quickly that David Wray, president of the Profit Sharing/401(k) Council of America, estimates that virtually all major employers will be enrolling their workers in 401(k) plans and investing the money in a mixture of stocks and bonds within five years.

Some employers have hesitated until recently because they wanted more clarity from the government about investing employee money. The Labor Department cleared the way last week to a new approach.

In essence, it said that employers won't be liable in a lawsuit if they are investing in a diversified mixture of stocks and bonds.

Employers can put employees in one of three options: Balanced funds, which generally keep about 60 percent of a person's money in stocks and 40 percent in bonds; target-date funds, which alter the mixture of stocks and bonds based on a person's age, and so-called managed accounts. In these, a professional divides up a person's money based on their age.

Under federal rules, employees may choose to opt out of the 401(k) or do their investing themselves.

But Hewitt's Hess said target-date funds are already popular with employers and employees. Administrators simply need to look at an employee's age, and can then select a single mutual fund for each person.

For a person in their 20s or 30s, the mixture will be heavily weighted in stocks - perhaps 80 percent of the portfolio - to help grow savings adequately. As the person ages, more money is shifted out of the stock market and moved into bonds to reduce risks. So at 65, a person might have a portfolio divided about 50/50 in stocks and bonds.

Most employers invest about 3 percent of a person's pay in a 401(k) plan. But financial planners suggest it should be 10 percent a year.

gmarksjarvis@tribune.com

Gail MarksJarvis writes for Your Money.

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