The Right Way to Give Investment Options to Your Employees
How can you provide a diversified investment lineup to your employees that meets your fiduciary obligations as a plan sponsor fiduciary? There are a couple things to keep in mind.
The first is choice. Giving your employees too many choices has a negative impact. We often evaluate retirement plans and find people that have as many as 100 investment choices. Studies have shown that the more choices you give someone, the less apt they are to take action. More choice does not incentivize people to take action.
A reasonable number of investment options in a 401(k) plan lineup should be about 16 to 18 choices. In the video above, I’ve listed all the major investment asset classes in a retirement plan.
You should have a diversified investment choice for employees who do not want to make an investment choice. In my book “Paychecks for Life,” we found that 85% of your employees would prefer you to make an investment choice for them. This can either be a balance fund, a target life fund, or a lifestyle fund, and it would cover that group of employees. For the other 15% who want to make an investment choice for themselves, it’s critical that you offer them at least one choice in each asset class.
As far as active funds versus passive funds, you have a duty of prudence and a duty of loyalty to your employees. This means you should offer them choice, but you shouldn’t make the choice for them so you’re not liable for their investment decisions. In order to do that, you should offer both passive (index) funds and actively managed funds.
You should have an index fund in each of the blend categories of the asset classes, including “Growth,” “Mid-cap,” and “Small-cap.” This will be low-cost investing—anywhere from six to eight basis points. On the outside, meaning large-cap growth, large-cap value, mid-cap growth, mid-cap value, small-cap growth, and small-cap value, you should have an active fund option. In the “International” category, offer an index fund and an active fund. In the “Bond” category, offer the same thing.
If you do this, you’ll end up with about 16 to 18 choices, which is all your employees need to build a robust, diversified investment choice.
If you have any questions about offering investment options to your employees, don’t hesitate to reach out to us. We’d be happy to help.