401k Plan Investment Options
If you want to help your employees plan for the future, one of the first areas you need to focus on is the 401k plan investment options, which can be difficult to understand. Sometimes there can be too many options, causing employees to become overwhelmed and not participate, which can drastically impact their ability to retire at a comfortable age. In other cases, the plan investment options may be overly limited, forcing employees into unnecessarily high cost and insufficiently diversified funds.
In this article, we will discuss a few of the best 401k investment options that allow for diversification without becoming too overwhelming. We will also discuss how to invest in a 401k plan since many people do not understand how to take this initial step toward retirement.
How to Invest In a 401K
If you want to know how to invest in a 401k, the first step is to simply find the money to invest. Employees will need to budget and find a number that they think is sustainable long-term so that they can get the most out of their investment.
The next step of investing in a 401k is to get registered on the record keeper’s website and determine your contribution rate, which can be either a dollar amount or percentage. Employees are always encouraged to at least contribute up to the match. This contribution can be contributed to the traditional 401k, Roth, or a combination of both, depending on each employee’s situation.
Once those steps are completed, employees then need to determine the best 401k investments suitable for their situation. This will be very different depending on factors such as age, income, and financial goals, so it is recommended to get a 401k consultation.
When choosing investments, employees need to consider the expense ratio, risk level, and the extent to which their investments are correlated, meaning whether or not they tend to move in the same direction over time. Once they have chosen their investments, it will be helpful to periodically consult with the plan financial advisor to ensure what they have chosen continues to be in line with their goals.
Building a 401k portfolio is not as complicated as it may seem initially, but it can be more challenging for those who are older whose needs may be more complex. The less investing time an employee has, the more crucial it is that they build a suitable portfolio as soon as possible.
The Best 401K Investments and the Best 401K Plans
There are many different types of 401k plan investment options available that can help employees create a diversified investment portfolio. However, it is easy to become muddled in all of the options, which can lead to your employees not choosing suitable 401k investments or not choosing any at all.
The broadest option is to offer a self-directed brokerage account, which allows the full range of investments that a custodian offers. There are thousands of investment options in these accounts, so the number of choices can be overwhelming, which is why it can be helpful to have an experienced financial advisor. The costs of these accounts can range from $50 to $400 per personally annually, or there can be an employer cost in some cases. And there can be limitations on how much participants can save in these accounts which can range from 50 to 75%, but in other cases there are no limits.
The main advantage of using this account is the ability to access alternative investments that aren’t available as part of the core investment offering. Gold and silver are two examples of non-correlated assets that can add meaningful diversification. A simple way to invest in these commodities is through ETFs (exchange-traded funds) that simply track the price of gold and silver. Some record keepers allow for ETFs in their core investment line-up, but most do not. Brokerage accounts also allow for investing in individual stocks, which can be particularly valuable for participants that have a skilled advisor. While investing in a broad array of U.S. stocks has generally been a good strategy, investors are going to need to implement for sophisticated diversification strategies in order to maximize their returns.
More specifically, in an era of unprecedented market distortion where years of artificially low interest rates have overvalued financial assets and undervalued real assets like commodities, self-directed brokerage accounts provide the essential tool for sophisticated diversification beyond traditional stock and bond allocations. While the U.S. stock market trades at historically extreme valuations due to monetary policy distortions, commodities like gold, silver, platinum, and uranium offer compelling value propositions that are simply unavailable through typical 401k core offerings. The ability to access these alternative investments, combined with tactical individual stock selection guided by experienced advisors, transforms retirement accounts from passive wealth preservation vehicles into active wealth optimization platforms. As markets inevitably revert from their current distortions, participants with access to undervalued real assets and strategic diversification will be positioned to capture the rotation of capital from overvalued financial assets to historically cheap commodities and alternative investments.
However, most employees will find a select few to be the most suitable for their financial situation. Here are a few typical 401k investments that employers consider offering their participants as part of the core investment line-up.
Target Date Funds
A common investment option is a target date fund, which provides an investment allocation based on the year an employee believes they will retire. Keep in mind that this investment option will be impacted by how many investing years they have, as a longer timeline allows them to withstand market fluctuations better.
Before you move ahead with a target date fund, you also need to consider the fact that there are several different types. Different target date funds can have different risk levels and costs, and some companies may provide plans with more aggressive allocation than others. Different plans may also become more conservative after they pass their retirement date, while others may maintain the same allocations after the retirement date.
S&P 500 Indexing
Another common option for employees is to invest in the S&P 500 through 401k index funds. The S&P 500 index fund tracks the largest companies in the United States based on market capitalization. When you use this option, your employees can easily follow the market activity of these top companies.
Choosing an S&P 500 indexing fund allows employees to create a portfolio of U.S. stocks and bonds for their 401k investment plan. It can provide versatility without being overly complex. It also has a good track record of consistency.
However, at Paul D. Sippil & Associates, we recommend that individuals do not rely on an S&P 500 index fund entirely, as it isn’t as reliable as it used to be. For full diversification, it is best not to rely entirely on U.S. stocks, especially since the U.S. faces risks, such as economic uncertainty, inflation, and the erosion of the U.S. dollar.
Customized Risk-Based Investment Models
Customized investment models constructed by an experienced financial advisor can provide a properly diversified portfolio that covers various asset classes, including alternative assets like gold that aren’t correlated to U.S. stocks or bonds.
Unlike most target date funds that are solely based on age, these models take other factors into account such as income, debt, and net worth. However, while target date funds are automatically adjusted as participants get older, the investment models have a static allocation, so employees need to periodically monitor their risk tolerance and determine if they should invest in model with a different risk level.
Which Option Is Best For You
There are pros and cons to any type of 401k investment option, which can make it difficult to determine which ones are best. For instance, target date funds are simple and can be effective for employees in larger plans that don’t have a financial advisor or at least not one that has time to meet with all of the participants personally to develop a customized allocation. However, if you don’t have a large number of employees, offering customized models created by an experienced financial advisor who has time to meet with each employee one on one makes more sense.
These personal meetings can significantly help increase participation. Granted, employees have access to a wide variety of financial tools offered by the 401k record keeper such as a retirement calculator. But employees often don’t use these tools unless an advisor personally demonstrates how to use them.
Find the Right 401K For You With Paul D. Sippil & Associates
Most employees do not fully understand the investment options provided by their employers for their 401k plan and most employers don’t know which service provider to select. Employee engagement typically increases when their employer takes the time to develop a sustained education campaign with the help of a knowledgeable and experienced financial advisor who specializes in employer-sponsored retirement plans.
Contact us today at Paul D. Sippil & Associates for 401k consulting to explore the best 401k plans and how they align with your employees' present and future financial goals.
