Ameriprise recently conducted a survey of investors aged 25 to 70 with regard to their views on risk management. The survey sample can be considered a good representation of almost any group of investors, including those in your 401k plan.
Using the survey results, Ameriprise classified investors into four categories based upon how they viewed risk management. Outlined below are the categories along with my thoughts on what you can do as a plan sponsor to help these 401k plan participants become better investors in your 401k plan. First, it might help to better understand risk and risk management.
What is Risk and Risk Management?
In my opinion, the most important element in personal investing is an investor’s understanding of his/her risk tolerance. Virtually all negative investor outcomes spring from a lack of understanding an investor has about his/her ability to bear risk. Risk may simply be defined as the likelihood of loss. An individual’s approach to investing is often described by his/her willingness to absorb loss. For example, there are conservative, moderate and aggressive investors. Aggressive investors can expect to endure significant, extended periods of loss. They take on this level of risk with the hope of enjoying above average investment gains.
Risk Avoider (31% of investors surveyed)
Ameriprise characterized Risk Avoiders as those respondents who would do almost anything to avoid risk. In their personal lives these individuals appeared to be very conservative, fearing things like changing jobs or moving far away. Ironically, Ameriprise found that Risk Avoiders were taking on more risk than they thought. Most were underinsured, kept significant sums invested in cash and typically only invested in the safest investment options, like money market funds. These investment choices make it unlikely they will accumulate enough in their 401k accounts to retire without having to reduce their standard of living. Ameriprise found that 61% of Risk Avoiders were baby boomers and female.
What they need from 401k plan sponsors: Your 401k plan should be offering a set of conservative investment options that include a stable value or guaranteed fund, a short-duration bond fund and an intermediate-term bond fund. Risk Avoiders would benefit most from your employee education sessions focused on diversification.
Risk Mitigator (42% of investors surveyed)
Rather than seeking to avoid risk entirely, Ameriprise found that Risk Mitigators were busy trying to manage risk. This group demonstrated a better understanding of risk as shown by their willingness to make riskier investments after performing significant research. They also did a good job diversifying to reduce overall portfolio risk. Risk Mitigators preferred low-risk investment options and were often quick to move out of investment choices during down markets. This risk-on, risk-off behavior often resulted in a buy-high, sell-low approach to investing – the most damaging investor behavior. Ameriprise found that this group was evenly comprised of millennials, Gen Xers, baby boomers, women and men.
What they need from 401k plan sponsors: A broad spectrum of core fund choices so they may properly diversify along with a set of target date funds. This group would benefit significantly from your employee education sessions focused on sticking with an investment plan.
Risk Manager (25% of investors surveyed)
This group views financial risk as an opportunity and is confident about the financial and investment decisions they make. Risk Managers invest heavily in the stock market, develop well-researched risk management strategies and are focused on growing their account balances. Ameriprise found that 61% of this group were male.
What they need from 401k plan sponsors: An investment menu that includes U.S. equity value, blend and growth options in the capitalization areas of large, mid and small. Also, developed and emerging market international equity options. Risk Managers will probably never attend your investment education sessions.
Risk Embracer (2% of investors surveyed)
Risk Embracers describe themselves as risk seekers who are strongly drawn to risk. They equate risk to excitement and find it stimulating. Members of this group are not afraid of taking a lot of risk in all elements of their lives. They may borrow too much when buying a house or make career moves based less on research and more on a job’s potential. This group is focused almost exclusively on growing their investment accounts. They are young, with 56% coming from the millennial group, and predominately male (67%).
What they need from 401k plan sponsors: Counseling. Send members of this group directly to the investment advisor that works with your 401k plan for one-on-one meetings.
Not sure if your 401k plan offers a home for each of these investors? Contact your 401k plan investment advisor to find out.
Robert C. Lawton, AIF, CRPS is the founder and President of Lawton Retirement Plan Consultants, LLC. Mr. Lawton has over 30 years of retirement plan consulting and administration experience and has provided consulting services to many Fortune 500 companies including: Aon Hewitt, Apple Inc., AT&T, First Interstate Bank, Florida Power & Light, General Dynamics, Houghton Mifflin Harcourt, IBM, John Deere, Mazda Motor Car Company, Northwestern Mutual, Northern Trust Company, Trek Bikes, Tribune Company, Underwriters Labs and many others. Mr. Lawton may be contacted at (414) 828-4015 or email@example.com.
Lawton Retirement Plan Consultants, LLC is a Milwaukee, Wisconsin-based independent, objective Registered Investment Advisory (RIA) firm providing investment advisory, fiduciary compliance, employee education, vendor management and plan design services to 401(k) plan sponsors. The firm currently has contracts in place to provide consulting services on more than $400 million in plan assets. For more information, please contact Robert C. Lawton at (414) 828-4015 or firstname.lastname@example.org or visit the firm’s website at: https://www.lawtonrpc.com. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser.
This information was developed as a general guide to educate plan sponsors and is not intended as authoritative guidance, tax, legal or investment advice. Each plan has unique requirements and you should consult your attorney or tax adviser for guidance on your specific situation. In no way does Lawton Retirement Plan Consultants, LLC assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations. Investors should carefully consider investment objectives, risks, charges and expenses. The statements in this publication are the opinions and beliefs of the commentator expressed when the commentary was made and are not intended to represent that person’s opinions and beliefs at any other time. The commentary does not necessarily reflect the opinion of Lawton Retirement Plan Consultants, LLC and should not be construed as recommendations or investment advice. Lawton Retirement Plan Consultants, LLC offers no tax, legal or accounting advice and any advice contained herein is not specific to any individual, entity or retirement plan, but rather general in nature and, therefore, should not be relied upon for specific investment situations. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser and accepts clients outside of Wisconsin based upon applicable state registration regulations and the “de minimus” exception.