NEW YORK (MainStreet)—In an ideal world, you are participating in an employer-sponsored retirement plan, ideally one with matching contributions.
If you are in fact participating, or are considering it, you should continue reading, for not all 401ks are created equal. And this goes for all other retirement plan variations, like 403b's and 457's.
You see, somewhere in the hallowed halls of employer's corporate headquarters, a committee convenes yearly to discuss what investment options will be available to you in your 401(k).
You get to choose which of those options you invest in, but if you don't, the plan will choose for you. Your money will go into the default investment option.
And default investment option's can vary greatly.
For many years I worked for one of the largest retirement plan providers, and I've been a part of the annual committee meetings. I've also dug into the minutiae of numerous retirement plans for clients, so take my word for it: the differences can be dramatic.
Your plan may offer ten different mutual funds while your best friend's plan offers 200. Some participants will think ten are too many while others might think 200 are too few.
And unfortunately, your default investment option might be a stinker.
And the Winner is…
A few years ago, the default option was frequently a money market or cash equivalent account. That wasn't so bad back when you could have earned interest of 5% or more.
But it is a terrible option today with interest rates near 0%.
As such over the past few years many companies have switched the default investment option from money market funds to target date mutual funds.