Automating the 401(k)

Specifically, the Department of Labor rules acknowledge three appropriate automatic-investment plans for 401(k) accounts:

• Life cycle funds
• Balanced funds
• Professionally managed accounts

If a company automatically funnels employee contributions into one of these formats, it will enjoy a "safe harbor" and be immune from legal action claiming negligent investment advice.

Planning for Life

Life cycle funds have been growing in popularity since they were first introduced about a decade ago, and are already found in many 401(k) plans. These funds instruct individuals to choose a retirement year, and then the managers diversify investments based on that goal, becoming more conservative -- while still investing in equities -- as the fund shareholders approach retirement.

Morningstar estimates that life cycle funds currently have $127 billion in assets. Considering the new DOL ruling, it is likely that demand for these investment vehicles will continue to grow.

Balanced funds have been around for years. They typically use a combination of conservative stocks, preferred and dividend-paying stocks and high-quality debt instruments to create a portfolio that is designed to produce returns over the long run. Portfolio managers make adjustments to the investments based on their outlook for the various markets.

Managed accounts are the relative newcomer to 401(k) investing. As the name implies, these are professionally managed accounts within a 401(k) plan, based on the participant's risk preferences and retirement horizon.

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