Want to make your 401(k) plan clients happier?
Consider offering to help them set up plans that offer employees less choice.
If you are new to the retirement savings market you might think that, all other things being equal, a longer menu of investment options is better than a shorter menu, but advisors who survived the recent downturn may tell you a different story.
During the late 1990s, it seemed as if every plan sponsor was under pressure to add more investment options to the 401(k) plan. A vocal minority of plan participants asked why they couldn’t have this or that growth fund with an annual return of more than 100%, or why couldn’t they buy any of the tech stocks with equally astronomical returns.
Many of these employees were the highest earners (and the highest-placed executives), so sponsors responded by adding new funds and self-directed brokerage options that gave participants access to many mutual funds as well as to individual stocks and bonds.
When choosing appropriate investments for a plan, sponsors have an obligation as fiduciaries to provide a suitable array of investments while limiting the liability of the plan sponsor for possible investment losses within the accounts. For the most part, plan sponsors attempt to meet these obligations by complying with Section 404(c) of the Employee Retirement Income Security Act of 1974, which generally provides sponsors with relief from potential liability as long as the plan fulfills a number of requirements. The requirements include:
- Offering a broad range of diversified investment options.
- Allowing regular transfers between the offerings.
- Disclosing these options.
- Providing plan participants and beneficiaries with extensive plan information.
Although plans are not required to comply with the regulations under Section 404(c), sponsors should have thorough discussions about ERISA investment guideline compliance with their tax and legal advisors.
Although compliance with Section 404(c) could be accomplished with as few as 3 well-diversified investment options, most providers offered at least 8 to 12 options as part of their standard offerings throughout most of the 1990s, with increased menus available as dictated by demand.