Question: Do I have to allow my employees the option to choose their own 401(k) investments? I worry they won’t know how to make good investment choices.
Answer: You do not have to allow your employees the option to choose their own 401(k) plan investments. The decision of whether or not 401(k) plan participants should be allowed to invest their own money is one of the responsibilities of the plan trustee. With the internet and daily information on stock choices so widely available to so many people, most companies allow their employees to choose their own investments in the 401(k) plan.
However, many employees are not well versed in how to choose investments and may be easily overwhelmed by the different mutual fund or stock choices available within the plan. When faced with too many options, many 401(k) participants select nothing and leave their investments in the plan’s default investment. This default investment is likely one of the Department of Labor’s qualified default investment options:
a. a life-cycle fund or target date fund based on a participant’s normal retirement age
b. a balanced fund
c. a professionally managed account
If you would rather not allow your employees to invest their own money and instead prefer to pay an investment advisor to invest all of the plan’s money for everyone at the same time, this is an allowable option. If participants are not choosing their own investments, an individual statement must be given out once per year to notify them of their existing account balance. If participants are allowed to choose their own investments, a statement of account must be sent to them at least once per quarter.
Sometimes there is a mix of both participant-directed investments and pooled/shared investments within a 401(k) plan. This usually happens when one brokerage account is set up to hold all the employer profit sharing and/or safe harbor non-elective money but individual brokerage accounts are set up to hold individual participant 401(k) and maybe employer match money. In this case the brokerage company should be sending out a statement at least once per quarter to the individual participant showing the portion of the plan the participant is investing by themselves. Once a year, a statement should be sent to each participant to indicate what portion of the shared brokerage account belongs to them.
While it is not mandatory to provide investment options, most employers set up their plans so employees can choose from a set number of choices. This helps employees worry less while making retirement plans easier for the company.