Author: Paul A. Carl, CHSA, CPFA™ Vice President, Retirement Plan Consulting, Registered Representative
A qualified retirement plan advisor reviewed a prospective client’s 401(k) investment lineup. In addition to the usual investment categories, the plan advisor found an unusually high number of specialty investment options. Among them were healthcare, utilities, natural resources, financials, precious metals, industrial metals, technology, and several others. The prospective client informed the plan advisor that, “Every time the economic winds shifted, our current broker would recommend adding a new investment option or two.”
For plan fiduciaries, a solid investment lineup starts with identifying an appropriate menu construction. What investment categories should the plan offer to participants? Plan sponsors with a disproportionate number of skilled labor employees may want to offer a different number of investment categories than those with unskilled labor. The same can be true for plan sponsors with a highly educated or technologically oriented workforce. In other words, no one menu construction size fits all. Sometimes plan sponsors can offer too many investment categories and others an insufficient number.
As participant-directed retirement plans gained in popularity, in 1992 the Department of Labor issued the original guidelines under ERISA section 404(c) effectively calling for plan fiduciaries to consider offering at least three distinct categories of investment options: cash equivalent, fixed income, and equity. Those original 404(c) regulations have since been updated and, when combined with other related regulations and industry best practices, menu construction takes on a heightened awareness and scope.
Help can certainly come from the Investment Policy Statement, or IPS. While not actually required by law or regulation, the IPS can provide the roadmap needed by plan fiduciaries to guide many of their investment decision making. Sometimes the IPS will address menu construction directly and other times make no mention of specific construction. Regardless, menu construction is about making appropriate number of investment categories available in participant-directed retirement plans to enable those plan participants to build a diversified investment portfolio.
Whether plan fiduciaries have an existing investment lineup or are initiating participant direction for the first time, best practices include periodic review of the existing asset categories offered, evaluation of the investment sophistication level of the employee base, consideration of the needs and culture of the plan sponsor, and adherence to governing rules and regulations especially those under ERISA.
How many investment categories does your plan offer?
The content of this blog is offered by HORAN Wealth Management, an SEC registered investment advisor. This information is not intended to serve as legal advice or as a substitute for the advice of your own counsel and should not be relied upon as such, as the advice appropriate for you will be dependent upon the particular facts and circumstances of your situation. Linked Websites: We provide links to other sites that we believe may be useful or informative. We do not take responsibility for links to third-party content or the accuracy of the content itself. Any links to third-party sites, or information therein, are not intended as and should not be interpreted by you as constituting or implying our endorsement, sponsorship, or recommendation of the third-party information, products, or services found there. Please note: clicking on external links means you will be leaving this Website; you assume total responsibility and risk for your use of the site(s) you are visiting. Neither the information nor any opinion expressed constitutes a solicitation to use our services or to purchase or sale of any security. Any reference to past performance is not to be implied or construed as a guarantee of future results. Market conditions can vary widely over time and there is always the potential of losing money when investing in securities. HORAN and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only and is not intended to provide and should not be relied on for tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.