Why Simplifying Investment Options Matters for 401(k) Success
Managing a 401(k) plan involves balancing the needs of the company with the best interests of employees. One critical aspect of this is choosing the right investment options. When employees are presented with too many choices—or complex, hard-to-understand ones—they may feel overwhelmed, leading to poor decision-making or, worse, no decision at all. Simplifying investment options can increase participation, improve employee engagement, and lead to better retirement outcomes. This guide will provide strategies for simplifying 401(k) investment options in ways that align with both company goals and employee needs.
- Offer a Curated Selection of Core Investment Options
While it may be tempting to provide employees with a wide array of investment choices, too many options can lead to confusion. According to research, offering fewer, well-chosen options encourages employees to make decisions more confidently.
- Focus on Core Categories: Offer a handful of funds that represent core asset classes, such as domestic and international equities, bonds, and cash equivalents.
- Limit Redundant Options: Avoid offering multiple funds within the same category (e.g., several large-cap growth funds). Instead, select one or two that are consistently high-performing.
How This Helps: By streamlining fund choices, you reduce “choice paralysis” and help employees make decisions more quickly, leading to higher participation and satisfaction.
- Include Target-Date Funds for Simplified Long-Term Investing
Target-date funds (TDFs) are designed to simplify retirement investing by automatically adjusting the asset mix based on the participant’s expected retirement date. These funds are particularly useful for employees who may not have the time or expertise to manage their own portfolios.
- Automatic Rebalancing: TDFs gradually shift from riskier assets (like stocks) to more conservative assets (like bonds) as the target date approaches, providing a built-in investment strategy.
- Easy Decision-Making: Employees only need to select the fund closest to their retirement date, removing the need to research multiple investment options.
How This Helps: Target-date funds allow employees to “set and forget” their retirement investments, encouraging more consistent contributions and fostering better retirement outcomes.
- Provide Managed Accounts for Personalized Investment Support
Some employees may want a personalized approach to their investments. Managed accounts allow employees to receive tailored advice based on their unique financial goals, risk tolerance, and retirement timeline.
- Professional Management: A managed account option allows employees to have their investments overseen by financial professionals who make adjustments based on market conditions and life events.
- Customized to Individual Needs: Managed accounts consider factors beyond retirement age, including outside assets and specific financial goals.
How This Helps: Offering managed accounts gives employees who need more guidance a way to achieve their goals, which can increase overall satisfaction with the 401(k) plan.
- Highlight Low-Cost Index Funds for Cost-Effective Investing
Index funds are known for their lower fees compared to actively managed funds, making them an attractive option for employees who are cost-conscious. By including a mix of index funds in the 401(k) plan, you provide employees with options that deliver market-based returns at a fraction of the cost.
- Diversified and Low-Cost: Index funds cover broad market segments, such as S&P 500 or total bond market indexes, offering diversification within each investment.
- Simple Choice for Consistent Growth: Index funds appeal to employees who want a straightforward investment option with minimal fees.
How This Helps: Lower-cost funds result in more of the returns going back to employees, helping their savings grow faster over time.
- Include an Employee-Friendly Education Program on Investment Basics
One of the most effective ways to improve engagement with the 401(k) plan is by educating employees on investment basics. Many employees are unfamiliar with investing terminology and may find 401(k) options intimidating.
- Offer Regular Webinars and Workshops: Cover essential topics like asset allocation, risk tolerance, and the benefits of different fund types.
- Provide Online Resources: Offer tools like risk tolerance questionnaires, calculators, and short videos to make investment concepts easy to understand.
How This Helps: Education demystifies the investment process and empowers employees to make informed choices, leading to a better experience and higher engagement with the 401(k) plan.
- Consider Adding a Self-Directed Brokerage Option for Advanced Investors
While simplifying choices is generally the goal, some employees may want access to a wider range of investments beyond the core offerings. A self-directed brokerage account can satisfy those who want more control without complicating options for the majority.
- Separate Option for Experienced Investors: This feature allows employees to invest in individual stocks, bonds, and other funds beyond the standard 401(k) selection.
- Minimal Disruption for Core Participants: Since it’s a separate option, it doesn’t interfere with the simplicity of the main lineup.
How This Helps: By catering to a range of experience levels, you make the 401(k) plan attractive to both novice investors and more advanced participants, all while keeping the primary options straightforward.
- Prioritize Transparency and Communication on Fees and Performance
Transparency about fees and performance can foster trust and increase employee confidence in the 401(k) plan. It’s essential to communicate these details clearly and regularly.
- Provide Clear Fee Information: Show each investment’s expense ratio and any other associated fees. For example, create a simple fee comparison chart to highlight low-cost options.
- Offer Regular Performance Reports: Share performance metrics for each fund, along with a comparison to industry benchmarks. Explain why certain funds may perform differently than others.
How This Helps: Transparent communication about fees and performance builds trust and helps employees make more informed choices. When employees understand what they’re paying for, they’re more likely to engage with the plan positively.
- Set Up Automatic Enrollment and Contribution Escalation
Automatic enrollment and contribution escalation features simplify retirement savings by removing common barriers to participation and encouraging consistent contributions.
- Automatic Enrollment: Enroll new employees in the 401(k) plan at a default contribution rate. Most employees won’t opt out once they’re enrolled, increasing participation rates.
- Automatic Escalation: Gradually increase employee contributions annually, helping them save more without significant impact on take-home pay.
How This Helps: Automatic features simplify the decision to join and contribute to the plan, boosting participation and contribution rates across the workforce.
Final Thoughts: Simplifying for Success in 401(k) Administration
By simplifying investment options and providing educational support, 401(k) administrators can create a more effective retirement plan that aligns with employee needs. A well-structured, easy-to-navigate plan encourages higher participation rates, increases employee satisfaction, and ultimately leads to better retirement outcomes. Simplified 401(k) plans are not only easier for employees to understand but also provide a clear path to a secure financial future.
Whether you’re a seasoned 401(k) administrator or just starting out, implementing these simplification strategies can make a significant difference in the success of your retirement plan. By focusing on transparency, core investment options, and automated features, you create a plan that fosters confidence and meets the diverse needs of your workforce.
Global View Capital Management (GVCM) is an affiliate of Global View Capital Advisors (GVCA). GVCM is a SEC Registered Investment Advisory firm headquartered at N14W23833 Stone Ridge Drive, Suite 350, Waukesha, WI 53188-1126. 262.650.1030. Ryan Peca is an Investment Adviser Representative (“Adviser”) with GVCM. Additional information can be found at www.adviserinfo.sec.gov Global View Capital Insurance Services (GVCI) is an affiliate of Global View Capital Advisors (GVCA). GVCI services offered through Experior Financial Group, ASH Brokerage, and/or PKS Financial. GVCI is headquartered at N14W23833 Stone Ridge Drive, Suite 350, Waukesha, WI 53188-1126. 262-650-1030. Ryan Peca is an Insurance Agent of GVCI.
These views do not necessarily represent the views of GVCM or any of its affiliates. Investment involves risk.