Default fund for 401k

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
Topic Author
Jimsad
Posts: 903
Joined: Mon Mar 20, 2017 5:54 pm

Default fund for 401k

Post by Jimsad »

Does the default fund for a company 401k have to be a target date fund ?
Is there anything wrong in having a stable value or money market fund as the default for those participants who do not specify ?
I feel there is a risk for the plan administrator being sued if the target fund loses value (which it might in short term ) and the risk averse employee is not happy .
Is there any rule that says only a target date fund has to be the default fund ?
User avatar
FiveK
Posts: 15693
Joined: Sun Mar 16, 2014 2:43 pm

Re: Default fund for 401k

Post by FiveK »

It doesn't have to be, but a target date fund is one Qualified Default Investment Alternative.
Topic Author
Jimsad
Posts: 903
Joined: Mon Mar 20, 2017 5:54 pm

Re: Default fund for 401k

Post by Jimsad »

FiveK wrote: Sat Jul 24, 2021 8:21 pm It doesn't have to be, but a target date fund is one Qualified Default Investment Alternative.
Thank you . That was helpful
MrJedi
Posts: 3538
Joined: Wed May 06, 2020 11:42 am

Re: Default fund for 401k

Post by MrJedi »

I've heard of too many stories of people who contribute into an IRA and don't realize they have to actually invest and choose funds within the IRA. 10+ years later they become more educated on the topic and they realize they've missed out on 10+ years of appreciation as their contributions were just sitting in the cash/settlement fund.

If 401ks allowed a cash-like instrument as the default investment, I think we'd hear a lot more of that type of situation.
Topic Author
Jimsad
Posts: 903
Joined: Mon Mar 20, 2017 5:54 pm

Re: Default fund for 401k

Post by Jimsad »

MrJedi wrote: Sat Jul 24, 2021 9:02 pm I've heard of too many stories of people who contribute into an IRA and don't realize they have to actually invest and choose funds within the IRA. 10+ years later they become more educated on the topic and they realize they've missed out on 10+ years of appreciation as their contributions were just sitting in the cash/settlement fund.

If 401ks allowed a cash-like instrument as the default investment, I think we'd hear a lot more of that type of situation.
What if they actually lose money if there is a long bear market and are heavily in stocks in a target fund as they are young ? Usually losses sting more than missed gains
MrJedi
Posts: 3538
Joined: Wed May 06, 2020 11:42 am

Re: Default fund for 401k

Post by MrJedi »

Jimsad wrote: Sat Jul 24, 2021 9:07 pm
MrJedi wrote: Sat Jul 24, 2021 9:02 pm I've heard of too many stories of people who contribute into an IRA and don't realize they have to actually invest and choose funds within the IRA. 10+ years later they become more educated on the topic and they realize they've missed out on 10+ years of appreciation as their contributions were just sitting in the cash/settlement fund.

If 401ks allowed a cash-like instrument as the default investment, I think we'd hear a lot more of that type of situation.
What if they actually lose money if there is a long bear market and are heavily in stocks in a target fund as they are young ? Usually losses sting more than missed gains
I think most people understand IRAs and 401ks as longer term investment vehicles due to the restrictions on withdrawals (in fact many people call them retirement accounts). For the ones who don't, there are typically lots of verbiage about how investments can lose value.
User avatar
OuterBanks
Posts: 166
Joined: Fri Dec 11, 2020 4:19 pm

Re: Default fund for 401k

Post by OuterBanks »

My work had people that were not invested in anything in their 401K. To avoid that several years ago it was changed to default to Vanguard Balanced Index Fund Admiral Shares,VBIAX, if money was not invested in any fund.
User avatar
riverant
Posts: 1068
Joined: Tue May 04, 2021 6:51 am

Re: Default fund for 401k

Post by riverant »

Jimsad wrote: Sat Jul 24, 2021 9:07 pm
MrJedi wrote: Sat Jul 24, 2021 9:02 pm I've heard of too many stories of people who contribute into an IRA and don't realize they have to actually invest and choose funds within the IRA. 10+ years later they become more educated on the topic and they realize they've missed out on 10+ years of appreciation as their contributions were just sitting in the cash/settlement fund.

If 401ks allowed a cash-like instrument as the default investment, I think we'd hear a lot more of that type of situation.
What if they actually lose money if there is a long bear market and are heavily in stocks in a target fund as they are young ? Usually losses sting more than missed gains
A money market is not an appropriate default investment. Something like 97% of vanguard 401k plans have a target fund as the default choice.
Topic Author
Jimsad
Posts: 903
Joined: Mon Mar 20, 2017 5:54 pm

Re: Default fund for 401k

Post by Jimsad »

TJat wrote: Sun Jul 25, 2021 8:34 am
Jimsad wrote: Sat Jul 24, 2021 9:07 pm
MrJedi wrote: Sat Jul 24, 2021 9:02 pm I've heard of too many stories of people who contribute into an IRA and don't realize they have to actually invest and choose funds within the IRA. 10+ years later they become more educated on the topic and they realize they've missed out on 10+ years of appreciation as their contributions were just sitting in the cash/settlement fund.

If 401ks allowed a cash-like instrument as the default investment, I think we'd hear a lot more of that type of situation.
What if they actually lose money if there is a long bear market and are heavily in stocks in a target fund as they are young ? Usually losses sting more than missed gains
A money market is not an appropriate default investment. Something like 97% of vanguard 401k plans have a target fund as the default choice.
Not ‘appropriate ‘? Is it allowed though ?
I know of plans which have it and participants actually wanted it to be the default fund in those cases
dkturner
Posts: 1936
Joined: Sun Feb 25, 2007 6:58 pm

Re: Default fund for 401k

Post by dkturner »

Jimsad wrote: Sun Jul 25, 2021 3:58 pm
A money market is not an appropriate default investment. Something like 97% of vanguard 401k plans have a target fund as the default choice.
[/quote]
Not ‘appropriate ‘? Is it allowed though ?
I know of plans which have it and participants actually wanted it to be the default fund in those cases
[/quote]

I believe only for 120 days. After 120 days it must be moved on one of the other USDL approved default options. A plan participant can move his/her account balance entirely to a money market fund at any time. The mm fund just can’t be a default option for more than 120 days.
runyanorama
Posts: 23
Joined: Tue May 29, 2018 7:36 pm

Re: Default fund for 401k

Post by runyanorama »

MrJedi wrote: Sat Jul 24, 2021 9:02 pm I've heard of too many stories of people who contribute into an IRA and don't realize they have to actually invest and choose funds within the IRA. 10+ years later they become more educated on the topic and they realize they've missed out on 10+ years of appreciation as their contributions were just sitting in the cash/settlement fund.

If 401ks allowed a cash-like instrument as the default investment, I think we'd hear a lot more of that type of situation.
I can't speak for how it is now, but for the five years I was in the military my TSP (Thrift Savings Plan-- basically, the Federal government 401k plan)-- was set up exactly like that. I contributed dutifully every month for five years without realizing that my default fund was a just a money market account. The process to gain access to my account and adjust my asset allocation was complicated and involved a letter with an access code being mailed to my parents' house on the other side of the country from where I was stationed. I'm still not sure what transpired, but that letter never materialized and I went through my entire time in the military missing out on any kind of stock market appreciation. Thankfully, I was relatively young back then and got out of the military after only five years. I rolled the money that I had managed to accumulate into an IRA and then made a real effort to educate myself along Bogleheads lines-- but I still sometimes think about how much more I would have now if the TSP had just started me off in a Target Date fund....
User avatar
btq96r
Posts: 548
Joined: Thu Dec 26, 2019 2:46 pm
Location: Nashville, TN

Re: Default fund for 401k

Post by btq96r »

MrJedi wrote: Sat Jul 24, 2021 9:02 pm I've heard of too many stories of people who contribute into an IRA and don't realize they have to actually invest and choose funds within the IRA. 10+ years later they become more educated on the topic and they realize they've missed out on 10+ years of appreciation as their contributions were just sitting in the cash/settlement fund.
My friend had a similiar thing happen to her TSP. She signed up for 5% when she started her job as an ER nurse with the VA maybe 8-9 years ago, and just last year finally gave into peer pressure to find out just what it was invested in from myself and her boyfriend. She learned it was all in the G Fund buying Treasury Securities. Better than simple cash accumulation, or not even saving it, but she clearly missed out due to lack of knowledge. She had managed to save up $80k. If she had just gone C Fund and kept paying down her mortgage, she would be halfway to the double comma club before she turned 40.
Post Reply