When you sponsor a 401(k) plan, several investment-related decisions must be made. Because dramatically different fees and expenses can result from this decision-making, you should know your options to make “prudent” decisions on behalf of plan participants – an obligation under ERISA. Otherwise, personal liability can result.
Investment decision-making for a 401(k) plan does not need to be difficult or time-consuming. All plans require just two basic investment decisions:
Making these important decisions can be simple when you know your options.
There are literally thousands of 401(k) investment funds available. All of these options can make investment selection overwhelming for many plan fiduciaries. It doesn’t need to be. ERISA has very basic diversification requirements and fund selection is easy when you use index fund performance as a baseline.
Participant investment advice is important. An Aon Hewitt study found that median investment returns for 401(k) participants using Target Date Funds (TDFs), managed accounts and personal investment advice were 3.32% greater than returns earned by participants that picked an investment portfolio themselves. In short, professional advice is proven to help participant investing success.
Generally-speaking, there are two ways 401(k) plans provide investment advice to participants today:
Both approaches have merit. While the fund-based model is generally less expensive, the advisor-based model can help increase 401(k) participation via more personalized advice.
I meet a lot of plan fiduciaries confused about the investment decisions they need to make for their 401(k) plan. I get it. There is a dizzying array of 401(k) investments and services available. However, this process doesn’t need to be overwhelming. The key is breaking the process into its two basic decisions and knowing the options for making these decisions.