KEY POINTSWorkers are increasingly getting enrolled into their company 401(k) plans automatically, often into target-date funds that shift the stock-bond mix over time.About 60% of 401(k) plans used auto-enrollment in 2019, up from 42% a decade earlier, according to the Plan Sponsor Council of America.
Americans saving in a 401(k) plan may have money stashed in a robo-advisor — and they might not even know it.Robo-advice is basically professional money management guided by an algorithm (a robot, so to speak), largely allowing investors to be hands-off.Companies offering a retirement benefit are increasingly enrolling employees into 401(k) plans automatically. Most are diverted to some type of robo-advisor.More from Personal Finance:How to use a Roth IRA like the ultra-wealthyThe House passed a bill to protect older Americans in the workplaceA correction may be coming. How to protect your retirement portfolioAbout 60% of 401(k) plans used auto-enrollment in 2019, up from 42% a decade earlier, according to the Plan Sponsor Council of America. Doing so helps overcome inertia that may prevent a person from saving.“You get the momentum going,” Keith Gredys, chairman and CEO of The Kidder Company in Clive, Iowa, who works with 401(k) plans and investors, said of automatic enrollment. ”[Employees] go in and tend not to come out.”
Employers must notify workers that they are being automatically enrolled in a 401(k). But those who don’t pay close attention may not know part of their paycheck is getting invested a robo-advisor.Robo-advisors have come into vogue over the past 15 years or so, leveraging investor demand for ease and lower-cost investing. About 80% of 401(k) plans offer target-date funds, for example, up from 64% a decade ago, according to the Plan Sponsor Council of America.“Most people are terrible investors,” said Philip Chao, a certified financial planner and chief investment officer at Experiential Wealth, based in Cabin John, Maryland.“They’re diversified [and] professionally managed,” Chao said of target-date funds and managed accounts. “So you don’t have to go find an advisor; it’s done for you.“And they’re easy to understand, so they become very popular.”
There’s also a legal rationale for employers to automatically guide funds into such investments — the Pension Protection Act of 2006 offered additional protections to do so.However, Chao doesn’t consider target-date funds to technically be advisors since they only tailor asset allocation (the mix of stocks and bonds) based on the year in which someone plans to retire.Managed accounts, on the other hand, are more tailored to the specific individual since their asset allocations are based on other data points.But managed accounts are also typically more expensive — and that may pose a problem for investors who are automatically enrolled, according to Chao.
Managed accounts often rely on investors to input specific data points (like amount of non-401[k] savings) to guide their investment mix. But those inputs are unlikely to occur without investor engagement, as is more apt to occur after automatic enrollment — potentially negating the additional cost.“You shouldn’t blindly let your money get defaulted,” Chao said. “You should know the cost.“And you should make sure employer has done their job to controlling expenses.”
News source :- CNBC