Do you offer a simple 401k risk questionnaire to all employees entering your plan?
Failing to make a risk questionnaire an integral part of enrollment and investment selection hurts the participant in multiple ways. If your employees don’t identify their risk tolerance and get help investing in a way that reflects that risk, bad investment behavior is encouraged. The biggest mistake participants make in investing is running when the market drops. When they do it, they forfeit their ability to ever recover.
While we are supporters of the idea of target date funds, typical TDFs lump everyone together into an investment that considers only time horizon, and make assumptions about risk that may or may not fit the participant. For example, the investment allocation for a more conservative, younger TDF investor may be too risky for comfort in the early going.
However, when a simple, easily understandable risk questionnaire is used, the participant can select an option that fits him and he will remain committed to that option in a down market. The more you do to help participants understand what investments match their risk tolerance, the better off those participants will be when it’s time to retire!
What happens when participants are invested in a way that makes sense for them? Click below to read our case study.