Businesses are taking more control of workers' 401k's, retreating from the 30-year experiment with employees running their own accounts.
Barclays Global Investors, a unit of Barclays (BCS, news, msgs), now urges employers to automatically direct 8% of workers' pay into 401k savings and build from there. T. Rowe Price Group (TROW, news, msgs) in the past year has seen a sharp increase in plans moving all participants into target-date retirement funds -- even if those participants previously selected their own investments. Prudential Financial (PRU, news, msgs) recently announced a sweeping 401k package that, among other things, encourages employers to prohibit workers from borrowing against their retirement savings.
The moves are a more-aggressive version of the employer intervention that has taken hold in 401k plans in recent years. Many employers already automatically enroll workers in 401k plans and divert money from employee paychecks into retirement savings. Workers can typically opt out of the employer-directed moves. But they rarely do.
The greater employer control is a philosophical shift in 401k's and other defined-contribution plans, which held $3.5 trillion at the end of last year. The new, more-paternalistic approach, with employers making most of the decisions, resembles a defined-benefit pension plan. But unlike a pension plan, a 401k's investment risk is borne by individuals.
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Nearly one-third of participants who are offered access to company stock, for example, have put more than 20% of their balances into this relatively risky option, according to Vanguard Group.
Automatic plan features will help workers save enough for retirement and improve their diversification, says Stephen Utkus, director of the Vanguard Center for Retirement Research.
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Employers introducing some of the more-aggressive automated features are finding that workers generally go along for the ride. Laboratory-equipment maker Thermo Fisher Scientific (TMO, news, msgs) recently overhauled its 401k plan's investment lineup, giving participants a two-week period to select their own investments. Those that didn't make a choice were moved to target-date funds early last year.
Nearly three out of four participants were automatically shifted to the default funds, says Susan Gagne, vice president of employee benefits. Early this year, the company started automatically enrolling all new hires in the plan, directing 6% of their pay to 401k savings. More than 80% of those automatically enrolled stay in the plan.
Continued: Risks for participants
