NEW YORK (MainStreet) -- Employers are increasingly offering to put your 401(k) investments on autopilot, and, for the most part, that’s a good thing. Workers without the time, knowledge or desire to manage their investments often hijack their own best efforts. Automatic enrollment and default investments seem to be the best short-term solution to fix a broken retirement savings system. But there is a hitch: one of those go-to investments offered by your employer may be a poor choice.
Plan sponsors are allowed by the Department of Labor to offer one of three default investments:
- Life-cycle or target date funds, mutual funds with an investment allocation based on the age or risk appetite of the worker
- Balanced funds that hold a fixed mix of investments that never changes
- Managed accounts that provide a “custom” investment strategy
These “do-it-for-me” options are offered to participants who opt out of managing their own investments.
Managed accounts comprised more than $100 billion worth of defined contribution plan assets by the end of 2012, according to the Government Accounting Office. They have become increasingly popular for participants looking for a more personalized investment experience.
Advocates contend that managed accounts help reduce volatility and that the customized allocations and frequent rebalancing outperform target date or balanced funds. In a study conducted by the GAO, several managed account providers even claimed that participants tended to save more for retirement, compared to those who were not enrolled in the service.
But the GAO found managed accounts were prone to charge higher fees than target date and balanced funds.