When you meet with an investment advisor or planner for the first time, the most important information he/she can gather is an understanding of your attitude and tolerance about risk. Filling out a risk tolerance questionnaire for an investment client is the first step in building an investment portfolio. Ethically, how can he recommend any investment to a client without this information? What happens in the 401(k) world with plan participants and their investments?

 

What should happen?
The answer should be the same. Sponsors and fiduciaries of 401(k) plans have an obligation to provide participants with the right type of investments needed to meet their retirement goals. Sponsors must take into account the good of all participants, not just what they feel is necessary for a few. The investment choices or options in a 401(k) plan should reflect the risk tolerance of your participants.

Tailor the options
If your plan demographic is mature and more conservative employees, you should provide more conservative options. If they are demographically younger and more aggressive, you should provide a more aggressive investment lineup. You should have a handle on what their risk tolerance is before building an investment lineup. Most companies' workforce is a blend of both types, but usually will favor an older or younger workforce. If your company has an older workforce you should offer more fixed income options, but don't forget about the younger workers that should be invested more aggressively. An investment lineup can be tilted either way, but all must be considered when designing a fund lineup.

Get the information
The question is - how do you learn the risk tolerance of your employees? You can get this information by giving each participant in your 401(k) plan a risk tolerance questionnaire. Help them understand it and complete it. Your broker can assist the plan sponsor and participants with this process.

One of the most important things you can do for your employees is to help them to understand the most basic of investment questions; are they conservative, moderate or aggressive investors? We all would like to be able to teach our participants all about stocks, bonds and mutual funds , but history has shown that participants won't spend the time to educate themselves. Whether they don't have the time or inclination, it usually doesn't happen.

 

When the risk tolerance questionnaire is completed by the participants, it should be compiled and analyzed in the aggregate to help the plan sponsor understand the demographics of their participants and their overall sensitivity to risk. When you have an understanding of their risk tolerance, then you can move on to the selection of investment options for your 401(k) plan. For plans that are not changing providers, this information can be valuable for the annual review to determine if your investment lineup is consistent with your participants' risk tolerance.
 
Risk Tolerance Questionnaires
The same ethical standard should apply to 401(k) plans and their participants; this same standard applies in the investment world where advisors are required to have understanding of an investor's risk tolerance before recommending any investments. Plan sponsors could make it mandatory that 401(k) plan participants have in their file a completed and signed risk tolerance questionnaire. This information will protect the plan sponsor as well as the participants. With these documents, plan sponsors can prove that they have taken the most basic step in educating your employees about their retirement plan investments.

 

Plan sponsor fiduciary protection aside, you would be providing an excellent service for the employees to help them understand their risk tolerance and how to make better decisions. The 401(k) plan needs to be treated as one of the employees' main savings and investment vehicles during their working career, because that is exactly what these plans are becoming.

We invite additional questions about these features and how they relate to your 401(k) plan. Please contact Andrew Sweeny Jr. or Scott Thole at 513.745.0707.