Employee Aligned 401(k) Investment Menu

We have yet to talk to an employer investment committee that had considered the makeup of their employee base when determining their 401(k) investment menu. The Employee Retirement Income Security Act (ERISA) regulations for a Qualified Default Investment Alternative (QDIA) state that there are three types of investments that qualify for that status: target date funds, balanced funds, and asset allocation funds. Among these, target date funds have become the most popular choice.

Are your target date funds on target?

However, not all target date funds are equal in terms of their assumptions and performance. The investment committee must understand that there are choices for QDIA and select the best option based on their findings. What is the age distribution of your employee base? Are many employees returning to work after several years, as is often the case with working mothers? If so, a target date mutual fund with its highest target return behind it might not be the best choice for them. They may be better served with a menu of lifecycle or asset allocation funds, allowing them to determine the risk level they need to pursue along with their savings and any matching contributions you provide. Savings is the key factor in ensuring a comfortable retirement over returns. Even for a younger employee base, an asset allocation fund matching the risk-return target of a target date fund might be a better long-term choice, as it would not decline in risk-return as a target date fund does.

Employee values conflicts lurking in the 401(k) investment menu

Have you surveyed your employees about their environmental and social concerns? For example, have you asked them about their faith? Some may be Catholic, and some may be Muslim. One of my former investment advisor representatives mentioned that his father, a devout Muslim, and his friends were not investing their money in the company retirement plan because it conflicted with their faith. They were too afraid of losing their jobs to bring this up to their employer. Many people are devout Catholics. Are there abortifacients inside the mutual fund in your target date retirement holdings or other holdings? Would they benefit from having a mutual fund that aligns with their values?

Unfortunately, many investors simply take the default investment choice of their employer without knowing much about investing. Even the issue of QDIA is a challenge, as you must show that they evaluated alternatives and selected the best one for your employees. When selecting target date retirement mutual funds, you should consider whether your employees would benefit from a "to retirement" glide path versus a "through retirement" glide path.

Possible diversity, equity and inclusion conflicts in your 401(k) menu

Do you have many female employees or African American employees who may have lower investment literacy? They might benefit from education on the choices in their investment menu. Would they appreciate having options that speak to them, such as women's empowerment or private prison-free investments?

Even if you decide to stick with target date retirement funds or other QDIA choices, consider offering additional 401(k) investments that speak directly to your employees. This could be a low-cost way to show your employees that you care. By working with the right investment advisor, not a stockbroker, who specializes in understanding the available options, you will find more than competitive returns.

Ready to start exploring your options?