The short answer… you as the investor, don’t have to do anything!
However, to understand why you have the option of doing nothing, it’s important to understand how a 401(k) works.
How an employer builds a 401(k), behind the scenes.
When your company created their 401(k) plan, they made a decision to offer a certain amount of investment options to their employees (typically between 10-20 mutual funds). Legally, employers are required to put forward a variety of investment options, enough to allow employees to “build” a diversified portfolio. Each fund in the 401(k) is selected to fit a specific need.
To better explain using a sports analogy (my favorite kind), a baseball team has 9 positions that it must fill to field a team. Simply stated, a baseball team needs 3 outfielders, 5 infielders, and a pitcher.
When picking mutual funds to offer in a 401(k), your employer needs to fill specific positions. In investment terms the “positions” that need to be filled are stocks, bonds, and cash.
Why would your funds (positions) change automatically?
When an employer selects the funds to offer inside the company 401(k), it’s a decision based on the current moment. It’s not a “set it and forget it” model. Your employer does not simply pick the investments on day one and never review them. They are legally required to monitor the investments in the 401(k) to ensure they are still appropriate. Back to baseball, if one of your players continues to strike out or make errors, it may be time to find a replacement. (hmm….Ryan Howard…)
If a fund underperforms, has high fees, changes a manager (just a few examples of what employers look for), the employer may trade it for a more appropriate investment option. In a sense, your company is responsible for making sure you have the all-star team of investment options in your 401(k).
When you receive notice of an investment change, your company is trading one investment for another. When they do make this change, it’s important to know they are not trading an outfielder for a pitcher. They are trading an outfielder for an outfielder.
So what is your responsibility as the employee?
Remember what I said earlier? It’s likely you don’t need to do anything.
Investing is about picking a risk tolerance, setting an asset allocation, and diversifying your portfolio. If you took all these factors into consideration when originally picking your 401(k) investments, there is no need to do anything when a fund changes.
As you have learned above, your company is doing the hard work for you. They have worked with the appropriate people and made a strategic decision they believe is in your best interest (and everyone else’s best interest in the company). They have determined the new fund is “more appropriate” than the old fund that will hopefully better suit their employee’s needs.
If you’ve done a good job setting your asset allocation, you can reasonably assume you picked up an all-star, and traded away a bum!
Past performance is no guarantee of future results. Diversification does not assure a profit or protect against loss.
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