Helping 401(k) Participants Invest Better

A high 401(k) plan participation rate is a great thing. But it’s just the beginning. The next step — deciding how those funds will be invested — is critically important in realizing a plan participant’s ability to achieve the goal of a financially secure retirement.

In “Key Ways to Help Your 401(k) Participants Become Better Investors,” Robert C. Lawton of Lawton Retirement Plan Consultants identifies common mistakes in investing 401(k) funds and offers some solutions regarding how to rectify them.

Lawton argues that many 401(k) plan participants “have developed bad habits and make many 401(k) investing mistakes,” and observes that Dalbar has calculated that the average equity investor in 2016 earned a little more than 7%, five percentage points less than did the S&P, and that “many of those investors are 401(k) participants.”

What mistakes are participants making? Lawton says they include:

• poor initial elections;

• failing to rebalance investment allocations;

• listening to guidance from experts who aren’t;

• falling prey to groupthink;

• making an investment in order not to miss something;

• holding to an allocation out of loyalty;

• buying and selling at the wrong times; and

• believing they are better investors than they are.

Lawton offers some ideas on how to prevent and correct these mistakes:

• make risk assessment quizzes a part of employee education;

• offer free, basic investment advice to every participant;

• offer target date funds as an option;

• re-enroll all participants in the plan’s qualified deferred investment alternative; and

• adopt auto-enrollment.