9/20/2021

Investment Options - Class 401

Welcome to the first day of our senior year at 401K University. Since we have already covered 401(k) basics, plan design, and fiduciary best practices, we now get to learn about the investment options available to you as a plan sponsor. Although this may sound like a somewhat basic task, you’ll see how quickly we can fall down the rabbit hole when designing and updating the investment menu. So let’s roll up our sleeves and dive into the world of 401(k) investment options.

One of the first things we need to know is that a 401(k) investment menu is meant to be put in place with all of the eligible employees in mind, not just a select few. I can’t tell you how many times I’ve sat down with a plan sponsor who is trying to design the 401(k) based solely on their own investment philosophies. In many cases, the plan sponsor is more knowledgeable than most of the employees so he thinks he’s acting in the participants’ best interests by having them invest as he would. However, each investor has a unique set of circumstances that extends well beyond just their risk tolerance and time horizon until retirement. Therefore, we have to open up our minds and design the investment line-up with every participant and eligible employee in mind.

So how do we do this? As an Accredited Investment Fiduciary, I’ve instructed hundreds of plan sponsors on their investment options within the 401(k) Plan. Although there are some basic guidelines that are common to most defined contribution plans, we still have plenty of flexibility to customize your line-up. Let’s start with diversification and asset categories. Just like an individual investor may wish to spread out her risk over several different investment options, we need to do the same when designing the investment menu. A typical line-up might include the following:

Preservation-of-Capital option (i.e., Money Market/Stable Value/Fixed Account)
Fixed Income investments
Domestic Equities
Foreign Equities
Risk-Based or Target Date options

Although this may seem simple enough, there are several subcategories within each bullet-point listed above and an extensive number of investment managers to select from when you decide on the asset categories to offer. On top of that, some people consider socially responsible and ESG options as well as the appropriate investment vehicle (i.e., mutual funds, exchange-traded funds, collective investment trusts, etc.). Likewise, you will want to understand the differences between actively-managed and passively-managed investments to see which of these should represent specific categories within the 401(k)’s line-up. These decisions may seem rather daunting so we’re dedicating our entire senior year to the investment options available to you and which ones may be suitable for your particular group of employees.

As this may be a lot to wrap your head around in one day, we’re going to take it slow and break each topic down into bite-sized piecs. Like most challenging topics, learning about investments can be quite rewarding and can empower you to become a stronger plan sponsor on behalf of the participants. Join us next week when we discuss the different types of investment vehicles you may want to consider for your particular 401(k) Plan…