Q: We offer a wide variety of funds in our 401(k) plan. Employees sometimes get so stressed trying to understand the funds that they give up and “just pick one.” We are working on simplifying the offerings and helping them understand those we have available. Any suggestions?
A: You are wise to put thought into the plan’s investment offerings. The first suggestion is to work with your plan’s advisor to develop an IPS, or Investment Policy Statement. It will help guide decisions and to document the reasons each was chosen, which could serve to protect the plan’s fiduciaries should any litigation arise. It’s also a good idea to make sure participants understand how fees are charged. The Pew Charitable Trusts has come up with a calculator that clarifies the impact of paying too much for investments. In an article on their site, they illustrate the difference for someone saving $200 per month at 6% with fund expenses of 1.5% (sum of fund expense ratio and advisory fee) compared to someone in the same situation paying just 0.5%. At the end of 40 years, the person paying the higher amount would have saved $268,700, while the investor paying the lower fees would have $349,600 — a difference of $80,900, even though the difference in expense is just 1%. Click here to read the article, which was originally published in Forbes on November 16, 2018, here.