How Important Are Risk Tolerance Questionnaires?

In the investment world, before an advisor suggests to his client any form of investment, he must first assess the client’s risk tolerance. This is done though the completion of a risk tolerance questionnaire. Without this awareness, one cannot possibly build – in good faith – a client’s investment portfolio as should be.

401k plan contributions are being routed towards various investments; meaning that the above mentioned concept should also apply. A fiduciary should realize that his investment decisions should reflect his clients and their particular risk tolerance levels.

This would translate as follows. If your employees are older, more risk conscious and conservative, then the options that you provide them should reflect this. If on the other hand they are younger and more aggressive, then you should be providing them with higher risk investment options.

So how can you know the risk tolerance of your employees? You should provide each and every participant with a risk tolerance questionnaire; help them understand what it is for and assist them in completing it.

Help your employees in filling out the information and make them realize what their personal risk tolerance is. It is not the case of explaining how stocks, shares and investment work, but at least they should realize what their risk profile is. Once you are able to estimate the risk tolerance, only then, you can select investment options.

Even though risk tolerance questionnaires are not currently mandatory on 401k plans, they should. This questionnaire will make your employees feel more in control and you will be providing them with a good service. After all, there’s their future at stake here.

Reference: http://www.401khelpcenter.com/401k/mcalmond_risk_tolerance.html