How automatic 401(k) contributions
are invested

When you’re automatically enrolled in a 401(k) plan, the amount deducted from your paycheck isn’t the only thing that your employer sets by default. Unless you choose otherwise, your employer also selects where your money is invested. It’s known as a default investment option. To change this default, you must let your employer know that you want to change your investment selection. Or, in many cases, you can simply get in touch with your company’s 401(k) provider directly to reallocate your portfolio or direct your future contributions to different investments within the plan.

Conservative funds

One default investment may be a fairly conservative mutual fund or similar investment — typically, a money market mutual fund or stable-value fund. About half of all companies using automatic 401(k) enrollment choose funds such as these as a default. Because these choices may be too conservative for most people, particularly those years away from retirement, experts urge you to consider building a more diversified portfolio with greater potential for investment growth.

You may want to ask your 401(k) provider about the other investment options available with your 401(k) plan. Make sure to review the prospectuses for any funds you are considering to help you make appropriate selections based on your age, financial situation, and tolerance for risk. You can download these online or request them from your 401(k) representative.

Lifecycle funds

Many other companies that use automatic 401(k) enrollment choose target-date, or lifecycle, funds as a default. These mutual funds allocate and reallocate their portfolios based on a target retirement age. For example, if you’re 35 years old in 2008, your employer might direct your contributions to a fund with a target retirement date of 2040.

As the target date approaches, the fund gradually shifts its assets to a more conservative, income-oriented allocation. Target date fund managers regularly review investment performance in light of investment objectives and modify the strategy as necessary. While a target-date fund will almost certainly provide better returns over the long-term than a stable value fund, it’s a good idea to fully investigate all the investment options in your company’s 401(k) before deciding what’s best for you.

Other employers may designate a balanced fund, one or more managed accounts, or a unified account that includes a number of different investment categories as their default investments. You should be sure you understand the default investment option in your company’s plan.