I have done a lot of 401(k) plan participant education sessions over the years. As a result, I may know your 401(k) plan participants better than you do (without ever having met them!). That's because I've found that most 401(k) retirement plans have four participant investor groups. These groups are: core-funds investors, index-funds investors, specialty-funds investors and target-date funds investors.


1. Core-funds investors

Approach to investing: These investors are willing to spend time understanding the economy and the markets. They are comfortable with researching investment options on their own and keeping current with the markets.

Preferred investment funds: Core-funds investors will consider investing in all of the funds that are offered.

Demographic: Found in all demographic groups, although not in great numbers. Many providers target their employee education to this group, mistakenly assuming that everyone in the plan is a core-funds investor.

Percentage of your plan: I've found that approximately 10% of all your participants belong to this group.

What they need from you: This is probably the only group that really appreciates the sort of employee education that you are probably doing now, which features discussions on diversification, rebalancing, reviews of the economy and markets, etc.


2. Index-fund investors

Approach to investing: This group has come to the conclusion that it's impossible for most managers to consistently beat the market. They're willing to settle for index or average performance in their investment portfolio, believing that the allocation of any additional time on their part to analyze investment opportunities is unwarranted. They're also uncomfortable paying the higher expense ratios associated with actively managed funds and very much appreciate the lower fees offered by index funds.

Preferred investment funds: Index funds only. You'll want to consider whether your plan is currently offering enough of them in your investment menu for this group.

Demographic: Found in all demographic groups, although not in great numbers.

Percentage of your plan: Based upon my experience, I estimate that approximately 10% of your participants belong to this group.

What they need from you: A nice selection of index fund options. This group will be very happy once exchange-traded funds become more prevalent in retirement plans.


3. Specialty-funds investors

Approach to investing: These folks tend to be very sophisticated investors who are likely part of the executive group at your company. They may have access to, and can afford paying for, professional investment advice. This group is willing to spend a lot of time with their investments and their 401(k) accounts, and often consider themselves to be more knowledgeable about investments than the investment professional leading your employee education sessions.

Preferred investment funds: These are the employees who advocate for the addition of more investment funds. For example, they're happy that you offer a good intermediate-term bond fund, but would really appreciate a convertible bond fund as well. Often they have many investment portfolios and may use your plan to invest in options that are not available to them elsewhere.

Demographic: Generally older, highly educated, with many years of investment experience. They tend to be highly vocal about your plan (and often not in a complimentary way).

Percentage of your plan: I believe that approximately 5% of your participants are part of this group.

What they need from you: They want unique investment options including, but not limited to, commodities funds, ETFs, long-short funds, hedge funds, specialty funds, etc.


4. Target-date funds investors

Approach to investing: This group is too busy to spend any time following or understanding the markets or the economy. They want to invest as quickly, easily and successfully as possible. They have lives and are busy with work, kids, hobbies, sports, families, anything but managing their 401(k) plan account.

Preferred investment funds: Target-date funds. But most of the time, they don't know that.

Demographic: All ages, shapes and sizes, but especially your younger and lower-paid employees.

Percentage of your plan: In most plans, I believe that 75% or more of plan participants are part of this group.

What they need from you: Someone, anyone to help them understand what a target-date fund is. Once they get the concept, you will never see or hear from them again.


What to do now

Many plan sponsors continue to offer employee education sessions that are targeted to the core-funds investor when it appears that they should be spending the bulk of the session talking to their target-date funds investor group. This is the main reason many plan sponsors struggle with getting employees to attend education sessions. Many participants have attended a prior session and saw that it wasn't really geared to their lifestyle or investment approach. Adjusting your curriculum to target those participants who just want to "set it and forget it" will increase the satisfaction your employees have with your employee education sessions.

Also, keep in mind that the larger your 401(k) plan, the more important it is for you to offer a fund lineup that satisfies each of these types of investors. Plans that have 100 or fewer participants may only have between five and 10 index-fund investors. However, plans that have thousands of participants may have hundreds of these types of investors. If your retirement plan is attempting to serve a large number of employees, your investment menu probably should be broad enough for all of these investors to find a home.

Contributing Editor Robert C. Lawton is a financial adviser in Madison, Wis., with Graystone Consulting, a business of Morgan Stanley Smith Barney. He can be reached at robert.lawton@morganstanleygraystone.com or 608-283-2304.

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