401(k) Investment Solutions - Offering 401(k) Fund Options for Different Purposes
Investment Solutions: Offering 401(k) Fund Options for Different Purposes
For many employers, the most overwhelming aspect of 401(k) plan management is investments. That makes good sense; just because you want to provide your employees with a valuable retirement benefit, doesn’t necessarily mean you want to become an expert in investing. Most employers have enough to worry about when it comes to the day-to-day responsibilities, and the world of investing can be confusing to navigate.
If this describes you, I have good news: This section isn’t about becoming an expert investor at all. Just as you don’t really need to understand how a computer works to use one effectively, you don’t need to know much about investing to efficiently and appropriately manage the investment solutions within your retirement plan. If you do want to become more knowledgeable about investing, that’s great; let us know and we will be happy to provide resources and support to help you do just that. In the meantime, the complexities that come with investing are exactly the reason why so many people choose to hire a retirement-specific adviser, so they don’t need to become experts themselves.
Investment Solutions for Different Employees
Once a plan is established and the fund lineup is determined, the next step is for employees to take action: choosing how they’d like to invest their money in their retirement account. Of course, not every employee will know how to focus their investments, and not every employee’s unique situation will demand the same approach. For that reason, most plans have several investing solutions to help increase engagement numbers and to give employees flexibility in being as involved—or uninvolved—as they’d like. Review these solutions, and make sure your plan includes some of them so you can offer options that make sense to your employees.
1. QDIAs for Inactive Employees
One helpful feature present in many retirement plans is the Qualified Default Investment Alternative (QDIA). A QDIA is a default investment for participants who do not give investment directions. The plan fiduciary can invest assets in the QDIA without being liable for any investment losses. The need for this is significant: In our recent 401(k) Wellness in the Workplace survey, we found that 67% of employees are not confident in selecting their own investments. For those whose lack of confidence might lead to inaction, plans with QDIAs help these employees get started saving for retirement.
2. Age-Based Solutions for Evolving Needs
Age-based solutions are increasingly popular types of investments that gradually shift automatically as an employee ages and gets closer to retirement. One such solution is the target date fund, which changes its investments over time. For example, younger people may need to see more growth in their portfolio. They also have more time before retirement, so they can stomach more ups and downs in the market. People closer to retirement may not need as much growth, but instead may want to maintain capital. As such, their investments will become more conservative as the target retirement date of the fund approaches. Age-based solutions like this are popular especially among Millennial workers who know they need to plan for retirement, but may not be comfortable making a lot of their own decisions when it comes to investing.
3. Participant Education for Employees Seeking Guidance
For those employees who want help selecting a more customized solution, many providers offer participant education programs. This feature involves an adviser teaching employees how to choose an investment solution based on more than a default investment, or their age alone. In this type of solution, the adviser might discuss how long someone is likely to live in retirement, how much the employee has already saved, how much money they expect to need in retirement, or even how the employee is likely to react when there’s a huge drop in the market. Based on that information, the employee can better select the investments that are likely a good fit for their unique needs and situation. Note some providers may charge an additional fee for this type of solution above and beyond the normal expenses associated with the chosen funds.
4. Mutual Funds and Collective Funds
Some employees may wish to look at a curated lineup of funds and choose their investments for themselves. For those employees, your 401(k) plan’s lineup of mutual funds and collective funds will be ideal. Mutual funds and collectives are both types of investment products in which investors pool their money to collectively invest in things like stocks or bonds. Collectives are only available to qualified retirement plans, including 401(k) plans. Your plan could have as few as three or as many as 100 different options, and in either case, those options were likely chosen by your plan’s adviser using a third-party evaluation tool. As an employer, you should have access to the reports your adviser uses to evaluate your plan’s funds at least once per year. This is a good opportunity to double check that your funds are still good options for your employees, and that you are meeting your fiduciary obligations.
5. Model Portfolios for Goals-Based Investing
Some employees prefer to choose their own investments within the confines of pre-established models. Model portfolios are a great option for these employees. Many providers will create a number of model portfolios within the plan to accomplish various investment goals/styles. This is typically done exclusively through funds available on the plan lineup. This allows employees to pick the model that best suits their needs, and know that it will be periodically rebalanced to stay true to the model goal.
6. Self-Directed Brokerage Accounts for Total Control
Finally, at the other end of the spectrum from the QDIA, another common investment solution is called the self-directed brokerage account. Typically reserved for the most active and interested of employees, these accounts offer employees the opportunity to own individual stocks or bonds, or specific mutual funds not otherwise available in a plan’s fund lineup. By opening a self-directed brokerage account within their 401(k), employees can enjoy the flexibility to invest in a far greater number of funds—sometimes up to 10,000 options. Employees who use these accounts have the option of allowing their own personal financial advisers to manage the account on their behalf.
Wherever your employees fall on this spectrum, from a complete lack of investing confidence, to the desire to take full control over each choice, the key is this: Most retirement plans are designed to help people of any investment experience to effectively participate. If you are missing any of these options in your plan, you may be missing opportunities to engage with different types of investors.
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