How would your typical client answer if you asked him how his 401(k) is invested?  Even professionals in the personal finance field sometimes put off selecting funds in their employer’s retirement plans.

Whether your client has a 401(k), Thrift Savings Plan (TSP), or 403(b), he or she likely needs to choose from available investments within the account. Many employees are overwhelmed with hundreds of investment choices and take no action, remaining in the default funds.

While an AFC practitioner cannot give specific investment advice, explaining various concepts like risk, time horizon, asset class, balancing, and fees can go a long way toward educating clients about investments so that they can make more informed investment choices for themselves.

Walking a client through his investment selections doesn’t have to be difficult.  The entire process can be broken down into a few steps:

Step 1

Start with the Plan Document. This outlines the basics of the plan, including whether the employer matches employee contributions and any vesting requirements. Urge your client to take advantage of any contribution matches an employer offers, and discuss the tax savings. If the client doesn’t have a copy of the plan document or access to an online account, the human resources representative is usually the person to ask.

If there is a Roth option, discuss the merits with your client to see if this fits his situation.  If so, it can be a great way to contribute even more post-tax dollars than the $5,500 annual limit for a Roth IRA or $6,500 for those 50 and older.

While reviewing the Plan Document, confirm the desired beneficiary(ies)  and contingent beneficiary (ies), especially if the client has a blended family. As with all important documents, this should be reviewed and updated as needed when major life events occur, like marriage, divorce, death, birth, or minor children reaching the age of majority. Beneficiaries can likely be updated either online or with the client’s human resources department.

Step 2

Discuss the client’s target retirement date, goals, risk tolerance and portfolio as a whole. If your client also has an IRA or other retirement investments, consider the investments in the employer’s plan in relation to existing investments. Each individual plan does not need to be perfectly balanced, as long as the whole portfolio reflects an appropriate blend for age and goals.

As you take a look at the client’s complete portfolio, you may discover that outside investments need rebalancing as well.  If a client owns funds in an IRA, it may make sense to invest in funds with the lowest fees in the employer’s plan to the extent possible, then suggest balancing the portfolio with international or other higher-fee index mutual funds within the client’s IRA at an online discount broker. The client might also consider investing in exchange traded funds (ETFs), to take advantage of even lower fees.

If this is the only retirement account, I typically recommend contributing up to the match, if the employer offers one, then investing in an IRA through a discount broker. An exception to this is the TSP for uniformed service members – although there is no match, the annual expense ratio is phenomenally low, making it an attractive choice.

Step 3

With the client’s goals established, suggest the client build a rough “ideal” portfolio mix. Generally, a client will not need more than one fund with a low fee and good performance history within each of the following categories: large-cap stock, small-cap stock, international securities, and fixed-income securities. Explain to the client what these categories are and give examples of the types and sizes of companies in each class of fund.

Not every client may need a fund in each of these categories and the percentages will vary depending on age, risk tolerance, and outside investments, but these basic categories will serve most clients well. Depending on the funds available and the allocation of other investments, the optimal allocation within an employer’s plan might be 100% in just one fund. Keep in mind that the goal is to get the client as close as possible to an ideal asset allocation, not only to select the best funds in the employer’s plan.

After identifying the client’s target asset allocation, look at the asset class of each fund, concentrating on the classes you both have identified as appropriate. Read the overview for the funds in these asset classes, and plug the symbol into the ticker at a site like Yahoo Finance or Google Finance. These tools allow you to compare the funds against one another, other mutual funds, and indexes. Explain the concept of using index funds.

Educate the client on how fees work, and the different ways they are charged. Many clients have simply never done the math to determine exactly how much in fees they are paying to the investment industry. Often the historically better performing funds have lower fees anyway, possibly due to less turnover of funds.

A note on target date retirement funds: A client who is unlikely to review asset allocations or use a professional in the future may benefit by allocating 100% of contributions to a target date fund if available. The target date funds are always worth a glance to see if one is a good fit for the client, though they can be a bit conservative for younger employees and may have higher fees than the other alternatives.

Step 4  

Once the funds are selected, review with the client the previously discussed target asset allocation.  The client will need to assign a percentage of contribution to each selected fund (ensure the percentages add up to 100%). Remind the client to rebalance quarterly or annually depending on preferences (unless he has opted for a target date fund), and prompt the client to set a calendar reminder in his or her phone. Some plan providers provide automatic portfolio rebalancing services upon request.

Selecting appropriate funds within an employer’s plan can be done in a single session. Encourage your client to take a bit of time to review his options and take advantage of the investment opportunities.  You should also review your own employer’s plan, if you haven’t already. Consider it as doing research for your clients with a tangible reward for your retirement at the same time. For more complex situations, a referral to a fee-only Certified Financial Planner® is sometimes the best advice, but providing an investment education can enable clients to make wise investing choices for themselves.


Michelle Pimentel is a recipient of the FINRA Military Spouse Fellowship and has been an AFC®since 2010. She has worked in the personal finance field since 2007 and is a candidate for CFP® certification. She is currently a Personal Financial Counselor with Zeiders Enterprises, Inc and lives in Okinawa, Japan.

Comments are closed.