Letting Your Employer Invest Your 401(k) Money Is a Big Mistake
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What is this episode about and who is the guest explaining 401(k) risks?
Here's your Money Briefing. I'm Anne-Marie Fertoli at The Wall Street Journal in New York. With a 401k, employers typically hire a plan administrator to manage employee retirement savings accounts. The Wall Street Journal's J.R. Whalen talked with financial security expert Pamela Yellen about why employees should take control of their 401k retirement investments and not rely on their employer to invest for them. First, some money and market news you should know. Some analysts say credit risk transfers could be the next big thing for banks. Last month, JPMorgan Chase became the first bank in the U.S. to issue these bond-like instruments tied to a pool of mortgages. Like those issued by Fannie Mae and Freddie Mac, credit risk transfers are a type of insurance on loans.
The recent JPMorgan Chase move to shed mortgage risk is stirring hope that it could help reduce the government's role in the $11 trillion mortgage market. This would also make homeowners less exposed to mortgage defaults.
How are employers and plan administrators typically handling new hires' 401(k) money?
You don't want to be caught in the dark about this next story. A new lawsuit filed by consumer and environmental groups challenged a move by the Trump administration to keep old-fashioned light bulbs on store shelves.
What exactly is a target date fund and why is it the common default?
The Trump administration is trying to roll back a plan to phase out most incandescent bulbs in January 2020. Environmental and consumer groups say going back to those old-style bulbs could cost U.S. consumers billions and hurt the environment. The phase-out was part of the Energy Independence and Security Act, a law signed by President George W. Bush in 2007 to reduce energy consumption. According to the Department of Energy, switching to more energy-efficient bulbs, like LED light, saves consumers $75 a year, even though LEDs cost eight times as much because incandescent bulbs need to be replaced more often. Coming up, how to protect your 401k.
About 90% of all new hires at companies let their 401k administrator invest their money for them with no other direction. Our guest is financial security expert Pamela Yellen, who says that is one of the biggest mistakes a new hire or any employee can make. So Pamela, most employers offering 401k retirement plans automatically put employees' money into a target date fund if there is no other redirection instruction.
Why does Pamela Yellen say relying on employer-chosen target date funds can be dangerous?
What is a target date fund?
Target date funds, or TDFs as we'll abbreviate them, they're mutual funds that invest in a mix of assets, and they're designed to shift from higher risk to lower risk investments as the participants approach their retirement date. And what's interesting is that based on an analysis from Fidelity Investments, as of last year, more than half of all 401k accounts had fully 100% of their assets in TDFs. More than 30% of all assets of all 401ks are in TDFs. Slightly more than 50% of all 401k savers and 62% of savers in 403b plans have fully 100% of their assets in TDFs. There's actually now more than 120. trillion dollars in TDFs and at Vanguard and Fidelity, more than half of all savers put 100% of their money in a single TDF.
So as you mentioned, if you have a 401k, it's very possible that your money is in a target date fund, even if you didn't authorize or request it.
Now, a target date fund, even though it's the default destination for the money, it isn't the most ideal place for 401k money to sit.
I can give you a couple reasons why not. First of all, your employer really isn't accountable. When your employer follows the law that was passed, the Pension Protection Act of 2006, When they automatically put your money into a TDF, you have no recourse if your plan loses a bundle. And because basically your employer has protection from liability. So they can take your money, make poor decisions with it, and then it's, sorry, Charlie, better luck next time. In fact, a study from the Center for Retirement Research at Boston College found that plan administrators routinely make very poor decisions. They choose... mutual funds that lag comparable indexes, because just like the rest of us humans, they routinely chase returns.
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Chapters
8 chapters
1
What is this episode about and who is the guest explaining 401(k) risks?
0:05–1:03
2
How are employers and plan administrators typically handling new hires' 401(k) money?
1:03–1:14
3
What exactly is a target date fund and why is it the common default?
1:14–2:32
4
Why does Pamela Yellen say relying on employer-chosen target date funds can be dangerous?
2:32–5:12
5
What historical losses and GAO findings reveal TDF risks near retirement?
5:12–6:10
6
How do fees in target date funds and funds‑of‑funds erode long‑term retirement savings?
6:10–7:02
7
What practical steps and tools can employees use to evaluate their 401(k) options?
7:02–9:59
8
What alternative retirement strategies does Pamela recommend to reduce market risk?
9:59–13:24
Speakers
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