The Super 401(k): Worth A Look For Passive Investors
Tired of the same old 401(k)? How about a Super 401(k)?
Some companies have started offering a new defined contribution retirement plan to employees. Here’s how it works. In return to ceding control over how your contributions get invested, you gain a turbocharged contribution from your employer. As an article from Business Week pointed out, these plans are hybrid of a traditional 401(k) and a pension.
And the increased employer contributions can be substantial — think 15% to 20% of your yearly salary. That’s in addition to the more standard 6% match on your contributions.
So what’s not to love? Well, like the man says, there’s no such thing as a free lunch. In return for the increased match, you turn over control of how the plan (and your money) is invested. Typically, the employer will select a so-called lifestyle or target date fund. Such a fund matches your projected retirement date to an appropriate asset allocation. I personally like target date funds and recommend them to people without much interest in investing. In this case, you’d be turning over control of the investment, but it would like be invested how you would have done it anyway.
That isn’t so bad until you consider the down side of the equation. If how the employer invests the money isn’t so smart and you don’t have enough to retire at your projected retirement age, tough luck. You keep working.
I’m not so sure you’ll see a lot of this in the future. I don’t think turning over control of their money would appeal to a great many people. Besides that, there’s the legal risk. You can sign all the papers you want, but if your company takes your retirement money and invests it inappropriately, I tend to think you’d have legal recourse.