Default rule for a 401(k) plan fund?

We have long advocated automatic enrollments in 401(k) plans as a way to help people save more for retirement. We (along with others) have produced research showing how poorly most people make investment decisions, either by naively diversifying, by chasing past performance, or by loading up on company stock.

As more companies adopt automatic 401(k) enrollment thanks to new congressional law, individual investment decisions (and biases) will become even more important. In today’s New York Times, benefits consultant Ted Benna says teaching people personal finance has been a tougher challenge than many financial advisers originally thought. “When 401(k)’s started, he said, ‘we thought we could educate most people to manage their retirement accounts.’ But as it has turned out, most people prefer a ‘set it and forget it approach,’ for which target-date funds are ideal.”

Target-date funds are ideal for younger investors and those without large retirement nest eggs. Rather than use a single form that requires individuals to choose individual mutual funds for their portfolio, should companies use two forms – a basic default form and an advanced form. After filling out basic demographic information, the basic form would ask one question: At what age, approximately, do you plan to retire? Individuals would be enrolled in the appropriate target-date fund based on their answers. More advanced investors could choose the form that allows the flexibility in picking funds.

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