When either starting or evaluating a 401(k) plan, choosing the right partners is paramount to the overall success of the plan. These are typically the Recordkeeper, the Third Party Administration (TPA), and the plan’s investment Advisor. When choosing these providers, there are many considerations around what is the best fit for you and your team. Of course, the cost of these providers is always a consideration but, in some cases, you get what you pay for. We believe that while cost is a consideration, just as important are the features/decisions/philosophies of those providers. An example being: Would your team benefit from having additional “self-service” features on the plan’s website or would they prefer more of a white glove “in-person” experience. One consideration that should not be overlooked is the investment options and philosophy of both the advisory team and the fund companies they recommend you work with.

If we are in a room of 20 employees providing Investment Education and we ask “who really gets into markets and wants to design their own 401(k) portfolio” there are usually 1-2 hands that come up. The remaining 18-19 employees want someone to help educate them so that they understand the available options and select the one that best fits with their goals. That’s where the plan’s Advisor can help, both with participants and even before hand by advising you around what the right investment options are for your team.

When it comes to your plan’s investment options, knowing your team and demographics, your company and how the team interacts with the plan are key to selection. This is especially relevant for the “Do It For Me” menu of options available to your team. Below are two menu options that The Joseph Group recommends for team members and generally how they are engaged.

Target Date Funds

A target date fund is a type of investment that is built for long-term investors who are aiming for a specific goal (typically retirement) at a specific date. The investments are then de-risked the closer the investor gets to that specific date. These can act like a “set it and forget it” investment menu option and have become the most common investment chosen by participants during enrollment. There are several great options in the fund universe that provide the team with a diversified portfolio that has increasingly less equity (stocks) the closer the investor gets to retirement. The Fund Company will have a philosophy that can include their path for de-risking the investments, how they utilize active vs passive management and if there are any types of downside protection built into the investments. Depending on your company and team, a different option may be the best fit.

Asset Allocation Service (Models)

Essentially an asset allocation service or model is a managed portfolio of different investment options that is managed in accordance with either risk tolerance or a specific objective. There are many different options available in this space. Some Recordkeepers will have their own service or an agreement with a third party, such as an investment fund manager to provide this option at an additional cost. For example: An employee may elect to have their recordkeeper manage their investments based on a questionnaire or a conversation with the team member. These services often cost between 0.25% and 0.55%. Another option is a model managed directly by your plan’s investment Advisor (team). Depending on your advisor and their service agreement, these can either be included in the overall or at an additional cost.

The Joseph Group provides both options to you, all included in our base cost (nothing additional). We believe that in offering plan participants both “Do It For Me” options, as well as a full investment menu of active and passive funds, you, as plan sponsor, are giving your team the best opportunity to find the right fit for their situation. When we are doing enrollment meetings with a new employee, we find that roughly 90% are going into either a model or a target date fund. Roughly it’s about a 50/50 split on which option they choose. Some team members prefer the more “set it and forget it” path, while others are less concerned about the hands-free de-risking of the target date fund(s) and prefer to have their funds managed to an objective through a model.

The importance of getting these decisions correct is imperative to the success of your plan. The Joseph Group is here to help! If you are asking questions about whether or not your target date series is correct for your team or if you are interested in learning more about providing an asset allocation service for your team, please give us a call. We are always happy to provide a no cost second opinion of your plan.

Written by Matt Kruckenberg, Manager of Retirement Plan Services. Matt can be reached at 614-907-8639 or matt.kruckenberg@josephgroup.com