Forget something?
Or has your 401(k) given you the finger?
Perhaps you’ve heard your retirement plan provider say “Set it and forget it.” You’re not sure what it means … but kind of like when cousin Sal says “Fugged about it” you’re pretty sure you shouldn’t.
Here’s what it means: the service providers and brokers refer to your 401(k) savings as “sticky money” because they know that if they can get you moving in a particular direction then behavioral science tells us you’ll likely keep moving in that direction. And if they can encourage you to “Fugged about it” then it’s a sure thing.
Generally “set it and forget it” refers to investing in a portfolio that moves along a particular glide path towards retirement to “de-risk” as you grow older. That portfolio is often the “default investment” and could even qualify as the Qualified Default Investment Alternative (QDIA). If the trustees of the plan (READ: the BOSS) selected that “default investment” it must be the right investment choice, right? Set yourself on this path and forget about it? ONLY if the following (deoimnwefoin) things are true.
- Set it and forget it ONLY works on the investment portion of the retirement plan … not on the savings or contribution portion. An employee should continue to increase their savings over time as their pay increases and/or as they free up debt and are able to save more. Unfortunately, while most retirement plans are moving towards adopting some type of auto-enrollment into the plan many are still reluctant in adopting an auto-increase feature that will automatically raise contribution levels. In the absence of that feature you’d better not “set it and forget it” or you can forget retiring. After all, the savings portion has a dramatically larger impact on Retirement Readiness than the investment portion. The contribution rate has to be reexamined over time.
- Set it and forget it ONLY works if the Retirement Plan Committee is working to properly evaluate the “default investment” and scrutinize the QDIA. Unfortunately, many Retirement Plan Committees are not doing this. Following a path of “Poor Plan Design” or “Typical Plan Design” rather than “Plan Health Design” they adopt some auto features (like auto-enrollment) but not all of the auto features, and they completely miss the importance of scrutinizing the QDIA as part of that plan design. There are a number of reasons why the QDIA is under-scrutinized (none of the reasons are valid, by the way). In part two of this blog post we’ll examine those reasons.
- Set it and forget it ONLY works if you’re setting yourself along a path in a Managed Accounts Program that manages the investments AND the savings rate, and does so FREE (or at no additional cost beyond the cost of those investments). Yes, it is possible to have a FREE Managed Accounts Program. It’s also possible to pay 1% or more if you’re interested in throwing away your money, but most reputable MA programs have now reduced their costs to zero or near zero.
Or you could listen to Sal. Just go into the under-scrutinized default fund, or the expensive Managed Accounts fund, and never increase your savings rate beyond the default enrollment amount. Set it and forget it. The industry (and those managing expensive MA accounts) know it’s “sticky money” and if they can get you to make a decision (even if it’s a bad decision) you’ll likely just stay there.
And retirement? Fugged about it.
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