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Use of managed 401(k) funds on the rise

(MoneyWatch) A growing number of retirement plan participants are using what is known as managed asset-allocation investment funds, according to recent report by Vanguard. Of those in retirement plans managed by the mutual giant in 2011, 24 percent were invested in a single target-date fund, 6 percent were in a single traditional balanced fund and 3 percent were in a managed account advisory program. In all, one-third of participants were in a managed allocation plan last year, up from 9 percent at the end of 2005.

Managed asset-allocation funds are a type of 401(k) plan that includes target-date, balanced, and asset-allocation funds, along with managed account services. In short, they're funds or services that provide professional asset allocation and/or management. But using managed funds is not enough to grow your retirement savings. Workers in 401(k) plans must make four critical decisions:

  • When to enroll in the plan
  • How much to contribute
  • How to invest contributions
  • How to manage the account

The problem: Many folks don't join their 401(k) at the earliest opportunity, they don't save enough, and they fail to diversify and manage their accounts. That can cost workers tens of thousands of dollars, or more, in reduced savings for retirement.

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The good news is that more employers have made changes to their 401(k) plans to help employees. A big change for many 401(k) plans is the "opt-out 401(k)," where enrollment in the plan is automatic as soon as an employee becomes eligible to join. This simple change takes advantage of the power of inertia. New employees are automatically enrolled in a company's 401(k) plan, and they must officially ask to discontinue contributions if they do not want to enroll. The "automatic enrollment 401(k) plan" has proven to increase the number of employees who participate in plans with this feature.

Typically, as soon as an employee is eligible to enroll in a retirement plan, the employer will start funneling contributions at an initial rate of 1-3 percent of pay. The amount will vary by employer. Some plans will automatically escalate the initial contribution rate by increasing it by one percentage point each year until it reaches a specified percentage, such as six percent. The contributions are invested in a default investment fund, usually a target-date fund, which is allocated and managed for a specific set of participants who are in a common age group.

These default settings are a good starting point for many people, but there is so much more that you need to do to help your 401(k) plan grow to become a meaningful retirement benefit. Check back in a few days when I'll write about what people can do to better manage and grow their 401(k) account.

Image courtesy of Flickr user 401(K) 2012

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