How to Choose 401(k) Investments

Published June. 14, 2022

When it comes to 401(k) investments, we think there’s a better way. It starts with us giving you a high level of protection for your investments.

You know how important it is in today’s market to have a 401(k) plan. Having a competitive retirement plan can help your company find and keep good employees. It can also be a key part of a larger programme for financial wellness. Even if your employees are still a long way from retirement, a 401(k) plan and the educational materials that often come with it can help them feel better about their futures. This is especially true if your company offers a 401(k) match and/or profit-sharing contributions, which can really help balances grow quickly.

Whether you’re starting a 401(k) plan for the first time or your company already has one, it’s important to know what’s happening in the market. This is especially important if a lot of your company’s jobs are in competitive fields, where a good 401(k) plan can be a deciding factor for people (potential hires or current workers) (who may be evaluating competing job offers).

Your Choices for Your 401(k)

Some of these trends may have to do with how the plan is made, like whether or not to offer a matching contribution, automatic enrollment, or whether or not to change your plan to a safe harbor design that gets rid of compliance testing. Each of these choices is likely to have a big effect on your organization’s finances, so you need to think about them all carefully.

Investments are one of the most obvious choices you have to make. You might choose funds that your employees don’t like, but that’s not the only reason you might hear about it. Choosing and keeping an eye on funds is one of the most important fiduciary duties you can have as a plan sponsor. And if you don’t do what you’re supposed to, it can be dangerous and expensive.

In fact, there have been a lot of lawsuits against plan sponsors in the past few years claiming that 401(k) funds were too expensive. Fund expenses are taken out of the fund’s assets, which means they have a direct negative effect on fund returns and make it harder for participants to save money for their retirement. To put it another way, fund fees are built into fund expense ratios. This means that the amount employees pay depends on how their money is invested.

The traditional way to choose 401(k) investments

Most 401(k) plans today offer a list of mutual funds from different companies. These funds are chosen based on a number of factors, such as how well they perform and how much they cost. Plan sponsors often hire a financial advisor to help them find the right funds, but the employer usually has full fiduciary responsibility for choosing and keeping an eye on the funds.

Employees can make a diversified portfolio of investments if they have a wide range of asset classes (stock funds and bond funds; domestic and international) and investment styles (large cap, mid cap, and small cap) to choose from. Of course, they should feel comfortable choosing their investments. And research shows that many employees don’t feel comfortable choosing and keeping track of their investments. Because of this, many plans have target date funds that employees are automatically put into.

Target date funds are shown in a series, with each one aiming for a specific retirement date (year) that matches an investor’s investment time horizon. Target date funds are not only well-diversified, but they also change their asset allocation over time to become more conservative as the retirement date gets closer. This lowers the risk of an investor with a shorter time horizon.

401(k) plans with mutual funds

Mutual funds are a popular choice for 401(k) plans because many employees are already familiar with them, know the brand names, and may even have money in the same funds outside of their 401(k). From an employer’s point of view, mutual funds are a good choice because of how they are priced. Often, the 401(k) plan’s different service providers can be paid directly from the funds’ expense ratio, which means that the participants pay for them.

Using mutual funds to pay for necessary and legal fees may be a convenient way for plans to do so, but putting all these costs into the expense ratio makes it hard for both employers and employees to understand what the real cost of the fund is. Even though required fee disclosures are meant to make the complicated fee structure easier to understand, there isn’t much evidence that this has made employers or employees more aware of hidden 401(k) fees.

Learn about your responsibilities as a fiduciary investor

Like most plan sponsors, the day-to-day tasks of your business leave you with little time to do a lot of research and analysis on investments. Many plan sponsors hire service providers to handle the duties of a fiduciary investor on their behalf. But 401(k) providers can be very different in how much fiduciary protection they offer.

Some providers say they don’t have any fiduciary responsibilities and just offer a list of investments. This leaves the plan sponsor with the fiduciary responsibility and liability for choosing 401(k) plan options.

Some providers will agree to help you with your duties as a fiduciary investor. ERISA 3(21) investment advice is the name for this level. Under this model, investment advisors or service providers agree to follow the fiduciary standards when recommending investments and are subject to enforcement by the DOL. But the plan sponsor has the final say over which investments will be part of the plan and shares legal responsibility for each investment decision.

How to Invest Better with Tenjin AI

At Tenjin AI, we think there is a better way to invest in a 401(k). First of all, as the 3(38) investment manager for your plan, we offer a level of investment fiduciary protection. This means that we take full responsibility for choosing and keeping an eye on the plan’s investment options. This takes away your fiduciary responsibility for choosing plan investments.


Section 3(38) of ERISA talks about the duty of a fiduciary.

As a 3(38) investment manager, Tenjin AI will take over the following tasks, taking them off your list of things to do for your 401(k) plan:

Make a statement about how you will invest. As a best practice for plan governance, 401(k) plan sponsors should adopt an investment policy statement that spells out the plan’s long-term goals for its investments and the criteria that will be used to judge them.

As the investment manager, we are in charge of making the due diligence process for choosing investments and keeping an eye on them. We will also choose the investments for your 401(k) plan.

We will keep an eye on how well investments do and replace them if they don’t do well or if similar investments with lower fees become available.

If you choose Tenjin AI as your ERISA 3(38) investment manager, you don’t have to keep track of what we do with your money. You have given us the full responsibility for that duty of care.

As required by the DOL Fee Disclosures rules (ERISA 408(b)(2)), investment fiduciaries have to look at 401(k) plan fees and make sure that only reasonable expenses are paid from plan assets. This is one of the more difficult duties of an investment fiduciary. This is not an easy job for a busy boss who is also running a business.

Exchange-Traded Funds (ETFs)

As was already said, the fee structures for traditional 401(k) investments can be complicated, which makes it hard for both sponsors and participants to figure out how much they are paying. As a 3(38) investment manager, Tenjin AI is in charge of keeping an eye on investment fees. Because it only uses Exchange Traded Funds, it gets rid of a lot of the worries that come with traditional 401(k) investment models.

ETFs have a more open fee structure than mutual funds. This means that the 401(k) service providers don’t get paid behind the scenes. With no hidden fees, all plan vendors must charge clear and explicit fees for their services. This makes it easier for plan sponsors to compare, evaluate, and understand the real costs of plan administration. And it makes it easier for workers to see where their money is going.

Advice for Employees on Investing

Some 401(k) products that offer ERISA 3(38) services limit the investment management services to help from the plan sponsor. This means that employees have to decide on their own how to split their savings among the available investments. Tenjin AI helps both plan sponsors and plan participants with 3(38) investment management. We know that professional investment advice is important if you want your employees to be better off financially in the short and long term.

In particular, Tenjin AI helps your workers figure out:

How much it will cost for them to retire, based on how they want to live and where they want to live, and how much of their current paycheck they should put into a 401(k) plan to reach their long-term savings goatermenls.

By giving more personal information, like household income and the amount of money already saved for retirement, employees get more personalized advice, such as how much they should save and which accounts to use.

Tenjin AI will make a customized investment portfolio for each employee to help them reach their savings goals. Each portfolio will be spread across different asset classes, giving employees access to over 36,000 stocks and bonds from companies and governments in the United States. Also, the risk is managed automatically over time, and the portfolio is rebalanced often to help stay on track with the goal.

How to invest your 401(k) money better

Tenjin AI’s investment strategy combines smart technology with low-cost index-based ETFs to free employers from one of their most important fiduciary duties: choosing and monitoring 401(k) funds. We also make it easier for employees to save for the future by creating efficient and diversified long-term portfolios on a goals-based platform.

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