Help your employees make the right 401(k) investment choices

As a retirement plan sponsor, you commit to annual (at a minimum) employee education sessions. One topic that should be covered during your sessions is how participants can become good 401(k) plan investors. In order to invest successfully in their 401(k) plans, participants should:

• Commit to a regular savings program. Participants should not vary their contributions based on market or economic activity and should plan on contributing to their 401(k) plan for their entire careers.

• Increase their contributions. Participants need to average 15% in annual additions into their 401(k) plan accounts. Most won't be able to start contributing at this level and will need to increase their contributions gradually. Increasing contributions can often be done painlessly any time participants receive salary increases.

• Invest risk appropriately. Every participant needs to understand his/her risk tolerance and select investments in the plan that are appropriate. The litmus test on whether a participant is invested in risk appropriate investments occurs when markets fall. Participants should not be stunned by the change in value of their investments during a market decline. If they are, they have elected an allocation that is too aggressive.

• Re-balance annually. Participants who are not invested in managed accounts (such as target date funds) need to re-balance their accounts back to their investment elections once per year.

Participants should never:

• Day trade their accounts. Retirement accounts are long term investments, not speculative capital.

• Stop contributing. Ever. Some participants stop making contributions when the markets fall. This is the best time to be buying mutual fund shares and is a key component of the dollar cost averaging strategy.

• Market time. Participants should never respond to market events by reallocating their accounts in a way that appears, at the time, to take advantage of these events.  

• Take a plan loan. Arguably the worst possible investment a participant can make. Taking a home equity loan is a much better alternative.

Consider including a section on how to be a good 401(k) plan investor in your next employee education session. 

Robert C. Lawton is President of Lawton Retirement Plan Consultants, LLC (lawtonrpc.com), an RIA firm helping retirement plan sponsors with their investment, fiduciary, employee education and compliance responsibilities. He may be contacted at bob@lawtonrpc.com or 414.828.4015.