The Benefits of Offering a Customizable 401(k) Plan
So you’ve decided to start a 401(k) for your small business – now what? We know it can seem daunting to implement this new savings vehicle, and one of the biggest challenges small business owners face is deciding the right investments to offer your employees.
While traditional 401(k) plans typically offer plenty of investment options, there is a growing trend of small businesses offering customized investment options as part of their 401(k) plans.
The Traditional 401(k) Plan
Traditional 401(k) plans are designed to meet the needs of a typical employee, and while they do offer some customization, they aren’t fully customizable. This approach keeps savers within certain guardrails and their investments at less risk than a plan with fewer restrictions.
This also means all employees are offered the same investment options, regardless of their needs and goals. Some employees and employers may prefer to have all options open to them so they can customize and control their investments with greater detail and specificity.
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The Benefits of Offering a Customized Investment Strategy
Offering a customized investment strategy allows your employees to personalize their investments to match their financial needs and goals.
Improved Investment Outcomes
Customized investment strategies can lead to improved investment outcomes for your employees. By tailoring investments to match their goals, you could be helping your employees be more likely to achieve their desired investment outcomes.
Increased Employee Engagement
Offering a customized investment strategy can also increase employee engagement in your small business’s 401(k) plan. Employees who have the opportunity to tailor their investments to their specific goals, interests, and needs are more likely to take an active interest in their plan and monitor their investments regularly.
Offering a customized investment strategy can also give your small business a competitive advantage when it comes to attracting and retaining top talent. Employees are increasingly looking for comprehensive benefits packages. Offering customized investment strategies can be a powerful way to make your business stand out from competitors.
How to Implement a Customized Investment Strategy
Work with a Professional
Implementing a customized investment strategy requires the expertise of a financial advisor or knowledgable provider. Small business owners should work with someone who has experience in small business 401(k) plan implementation and administration.
Look for a professional who can help you develop an investment strategy that meets the needs of your employees. (This will also help you stay in compliance with federal regulations.)
Use Target-Date Funds
These handy funds automatically adjust their asset allocation as an employee approaches retirement, based on their expected retirement date. This allows your employees to invest in a diversified portfolio that matches their risk tolerance and time horizon.
Offer Managed Accounts
Another option is to offer managed accounts and professionally managed portfolios tailored to an employee’s individual needs and goals. This option can be more expensive than other investment options, but it can also lead to better investment outcomes for employees.
You may also want to consider offering a Roth 401(k) for your employees. This retirement option allows employees to save for retirement with after-tax dollars and all future distributions are tax-free. This allows employees to save more money for retirement and can be beneficial for those who anticipate their tax rate to be higher in the future.
Additionally, you can offer employees the option to invest in mutual funds or exchange-traded funds (ETFs). These investment vehicles allow employees to diversify their portfolio, potentially leading to better long-term investment outcomes.
Ubiquity is not a registered investment advisor and no portion of the material herein should be construed as legal or tax advice. Please consult with your financial planner, attorney and/or tax advisor for advice.