The Dept. of Labor's proposed rules would remove a legal risk that has made many employers reluctant to automatically enroll workers in retirement plans.
NEW YORK (CNNMoney.com) -- Employers that provide 401(k)s and other defined-contribution plans can be held liable for a host of factors, including poor investment management and excessive fees.
But thanks to proposed regulations put forth by the Department of Labor on Tuesday, they soon will be able to cross a big legal fear off their list: being held liable for the investment performance of investments they choose as defaults for employees who are automatically enrolled.
That fear has kept the majority of companies from offering automatic enrollment, which retirement experts say can significantly boost plan participation rates and worker savings.(See how auto enrollment works.)
As required by the new pension law passed this summer -- which clarified the legality and made it easier for employers to automatically enroll employees -- the DOL has identified what it considers to be three prudent "Qualified Default Investment Alternatives" for 401(k), 403(b) and 457 plans:
- A target retirement date or other lifecycle fund, which offers a well-diversified portfolio of investments suitable to a worker's age and retirement date. The investments in a target fund grow more conservative as you move closer to retirement, whereas some lifecycle funds offer a fixed allocation (e.g. 70 percent stocks, 30 percent bonds) that is appropriate for workers in a given age group. These funds can work for employee who don't feel comfortable investing on their own or don't want to worry about it. Many 401(k) eligible workers either invest too conservatively, too aggressively or not at all when faced with a list of plan investments to choose from. (See more about how target and lifecycle funds work.)
- A balanced fund, which offers a diversified portfolio of investments suitable to the demographic of the plan participants.
- A professionally managed account, in which an investment service hired by the employer chooses appropriate investments for a worker among the investments offered under the plan.
The DOL also proposed that any employer offering automatic enrollment with default investments must:
- Give participants an opportunity to choose the investments they wish their money to be invested in and only if they fail to do so may they be enrolled in the default investments
- Give at least 30 days' advanced notice to workers that their money will be invested in the default fund, as well as information about that fund, including investment objectives.
- Inform workers that they may move their money out of the default investments without financial penalty and as frequently as they can with any other investment in the plan.
The DOL is soliciting comments on the proposed regulations through mid-November and will issue the regulations in their final form on Feb. 14, 2007.
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