Should 401(k) investors choose growth or value? Small-cap, mid-cap or large-cap? Active or passive? Equity, bonds or balance? And what about commodities, real estate and alternative investments?
For many 401(k) investors, these are the types of questions they first ask. Indeed, 401(k) plan sponsors often provide free education seminars offering investment guidance that emphasizes the differences and similarities among all these choices. But for most 401(k) investors, this may not be the first and most important to ask. It might not even make the top three.
This is where 401(k) plan sponsors can help. The plan sponsor is a fiduciary to the plan, and therefore all the employees of the plan. As a result, the plan sponsor is in a position to influence 401(k) investors decision making process (see "A Better Way to Help 401(k) Investors Choose Among Options," November 6, 2012).
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What we're talking about is a three-step process:
1) Have the employee identify the goal;
2) Have the employee determine where he stands in relation to achieving the goal; and
3) Have the employee determine the time frame needed to achieve the goal.
Now, we all know what the goal is: a happy retirement. That takes care of step one. Getting the data to determine where the employee stands right now as it relates to "a happy retirement" should already be at the hands of the employee.
That leaves the most important question. This is where the plan sponsor should focus the employee's attention. This is a vital question that needs to be answered before the employee even begins to consider investment options. That question is: "What's your time frame?"
There are only two possible answers to this question: "short-term" and "long-term."
If the plan sponsor has structured the 401(k) menu option properly, then it should be immediately clear which investment options fall into the "short-term" category and which fall in the "long-term" category.
Since it's most likely the short-term category will be needed only in rare cases, then it makes sense for most of the menu options to fall under the long-term category.
And once you enter the long-term category, then you can start asking questions about investments. But, a good 401(k) Investment Policy Statement will give employees the chance to first decide how much work they actually want to put into the effort, and then provide an array an options for all types of employees.
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Christopher Carosa
Chris Carosa has been writing a weekly article and monthly column for BenefitsPRO online and BenefitsPRO Magazine since 2011 and is a nationally recognized award-winning writer, researcher and speaker. He’s written seven books, including From Cradle to Retire: The Child IRA; Hey! What’s My Number? – How to Increase the Odds You Will Retire in Comfort; A Pizza The Action: Everything I Ever Learned About Business I Learned By Working in a Pizza Stand at the Erie County Fair; and the widely acclaimed 401(k) Fiduciary Solutions. Carosa is also Chief Contributing Editor of the authoritative trade journal FiduciaryNews.com and publisher of the Mendon-Honeoye Falls-Lima Sentinel, a weekly community newspaper he founded in 1989. Currently serving as President of the National Society of Newspaper Columnists and with more than 1,000 articles published in various publications, he appears regularly in the national media. A “parallel” entrepreneur, he actively runs a handful of businesses, including a small boutique investment adviser, providing hands-on experience for his writing. A trained astrophysicist, he also holds an MBA and has been designated a Certified Trust and Financial Advisor. Share your thoughts and story ideas with him through Facebook (https://www.facebook.com/christophercarosa/)and Twitter (https://twitter.com/ChrisCarosa).
