New pension laws allow companies to automatically enroll employees in 401(k) plans tailored specifically to the year they plan to retire. The plans adjust from being more aggressive to more conservative as a worker ages. But there are drawbacks, says Ray Hennessey, editor of SmartMoney.com.
The plans may be a good idea for people who aren't active investors, Hennessey says, however more involved investors may want to look elsewhere. The funds are fairly rigid, and don't allow investors to take advantage of new market opportunities. "You're giving up control," he says.
The funds typically focus on stocks in their initial stages, but eventually switch to less risky bonds. This can limit their effectiveness, according to Hennessey.
"A lot of them actually under perform the market because these are very conservative sorts of funds," he says.
By retirement, the funds put 90 percent of an investor's money in bonds. Hennessey says because people are now living longer, however, a plan that focuses almost solely on bonds may not provide enough income. "You may want to be more aggressive as you're approaching retirement and wait to be more conservative once you're in retirement."
That doesn't mean investors are without choices. Many get out of the 401(k) plans, Hennessey says, choosing to invest elsewhere. He says that's an especially good idea for young investors. "If you're young, get into technology, get into emerging markets…now is the time to take the risk," he says.
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