Improving 401(k)s

AN EMPLOYER’S 401(K) or 403(b) is typically the best place to stash your savings, thanks to the initial tax deduction, tax-deferred growth and any matching employer contribution. Yet many employees fail to take full advantage of these plans, contributing little or no money. And those who do contribute either never make an investment choice or, if they do, never revisit it.

To improve employee decision-making, many employer-sponsored retirement plans have been revamped. New employees are often automatically enrolled in the plan and their annual contribution is automatically increased, unless they opt out.

To help employees make better investment decisions, many plans have reduced the number of investment options, so employees are less overwhelmed by the choice. More important, plans have also changed their default investment option. Before, if you didn’t make a choice, your contributions would often end up in a low-risk, low-return investment, such as the plan’s money-market fund or stable-value fund. The latter is typically invested in short-term bonds, with an insurance wrapper added, which allows the fund to maintain a stable share price.

Now, many plans have designated target-date retirement funds as their default investment option. These funds have broadly diversified portfolios of stocks and bonds that are geared to particular retirement dates. As that date approaches, the funds become more conservative.

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