Small business owners have a lot on their plates. Offering a 401(k) plan to employees is just one of many things they must consider doing when attempting to attract and retain talent. But many companies have employees of all ages, investment knowledge and risk tolerance. How to make the best choice for all? I believe offering a self-directed brokerage investment option in your 401(k) plan can keep your savvy employees happy without confusing your less experienced people.
Two Kinds of Investors - The Many and the Few
Most employee-investors are not investment savvy. They run away from choice and seek advice from someone they trust. They want clear, straightforward choices - investing is new and difficult. As I have posted previously, there is a strong preference for preset asset allocations. These employee-investors represent the vast majority of plan participants. In a bow to the new NASCAR season, they are the pack, racing close together and drafting.
My personal investing takes a different tact. As a University of Chicago MBA, I instinctively favor more information and more choice. I love processing information and making my own decisions. I want unlimited freedom to choose my own investments. I am not risk averse, and I want to chase returns. Alas, in the 401(k) universe I am that most disruptive of beings - an outlier.
How does a small business owner accommodate both kinds of employee-investors?
Meet “Acme Endodontics”
At Employee Fiduciary, many of our clients choose the option of self-directed brokerage with their 401k plan. We frequently see this, so I can share with you a high level example of how and why it works so well.
Acme Endodontics is a small, professional services firm employing about 20 people. Acme’s employees, by and large, are fairly young. For many, this is their first or second job. While they’re extremely talented at what they do, they’re not necessarily financially savvy. In fact, even though they know they need to plan for retirement, they’re a bit nervous to invest. The majority of Acme’s employees aren’t likely to use self-directed brokerage services yet, or maybe ever.
But wait, there’s always an outlier. Acme has two employees who minored in finance during their university years. They subscribe to Kiplinger’s and watch CNBC – they want to try their hand at some active investing.
I’ve seen some employers try to make all employees happy by offering a plan with 80 (!) investment options. Confusion reigns!
A Better Solution
I think there is a much better solution. By offering both a core offering of carefully selected investments, together with an optional self-directed brokerage investment, each group can pursue investment strategies within the context of a plan that was built with all employees in mind. The many choose the core and the few outliers choose the self-directed account. Both are more fired up to participate in the plan.
I know I’m going to sound like a broken record, but, while this may not be a paradigm shift, or particularly outside the box, it is something you can wrap your head around to create a true win-win.
While you may not want to use five business cliches in a single sentence, let’s dialogue. Share your opinion in the comment box below!