401k mutual funds and 401k participant-directed accounts

Here are just a few things to consider in selecting your 401k plan investments:

-- Your employees' current and projected investment goals.

-- Your employees' familiarity and comfort with investing.

-- Your employees' access to and comfort with the Internet (you wouldn't want to select only self-directed brokerage accounts for your 401k plan if any of your employees have very limited access to the Internet, since such is an integral part of self-directed brokerage account investment trading)

-- The types of investments you choose affects the fees your plan participants will be assessed, if any (by the mutual fund company and/or brokerage account company).

-- Self-directed brokerage accounts will give your employees access to most of the no-load mutual fund families available for use with 401k Easy Online, but there may be additional fees when going through the brokerage account (a fee by the brokerage company in addition to any fees assessed by the mutual fund company).

-- Investments with higher fees will need to perform better for your employees to yield the same return as would lower-cost investments. All sales loads and transaction fees as well as ongoing expenses (management fees, etc.) are listed near the front of each investment's prospectus. It is very important that you read the prospectus for any investment you are considering for your 401k plan (unless you're considering self-directed brokerage accounts, in which case it would be impractical to read every potential prospectus).

-- There are pros and cons to both self-directed brokerage accounts and no-load mutual funds. The below table highlights some of the most pressing concerns:

Using Self-Directed Brokerage Accounts

Using No-Load Mutual Funds

Extensive selection of potential investments, including hundreds of no-load mutual fund families

Ample risk-return variety is available within each family of no-load mutual funds to meet most investors' current and future needs

Extensive selection of potential investments includes publicly traded stocks and bonds; transaction costs, if any, are deducted from the investor's account balance

No access to stocks and bonds

Burden of investment choice is on the employee

Some employees prefer their employer having narrowed the potential investment field down to a single quality family of no load mutual funds

Modest account fee — generally $20 to $30 — per year, charged to the employee's account

No such fees

Mutual fund management fees assessed, as described in each fund's prospectus

Mutual fund management fees assessed, as described in each fund's prospectus

Potential for over-trading, which is when investors diminish overall returns by moving money around too frequently (see below)

Over-trading, while possible, tends to be less prevalent — perhaps in part due to the preconception that this investment approach, unlike self-directed brokerage accounts, is not designed to encourage the same heightened level of investor participation.

In selecting a mutual fund group for your 401k plan, it's important to include a spectrum of investments:

-- Include a money market fund for conservative investors seeking capital preservation.

-- Include some lower-risk equity and bond portfolios.

-- Include some medium-risk equity and bond portfolios.

-- Include some high-risk/potentially-higher-return equity and bond portfolios.

In this way your 401k plan will appeal to employees interested in amassing any of a variety of portfolio mixes. Employees can select portfolios that match their investment experience, temperament and objectives.

-- The above is not meant as a cookie-cutter formula for arriving at your 401k investment mix. It is a good idea to consult a professional tax and/or investment advisor in making your final decisions (see Topic 3, above). We can help, too.