Categories
News

Investment Menus & Fiduciary Considerations

Plan Sponsors have a fiduciary duty to select and monitor investments in a retirement plan. Ensuring that an investment menu is cost efficient and appropriate for the given employee population is a large component of this responsibility. The wide array of available investment options and complex fiduciary requirements can make this challenging. In particular, it may be difficult to determine whether adding a new trending asset class makes sense for a retirement plan and its participants, or whether it is more prudent to steer clear.

Start by Understanding ERISA’S Fiduciary Standards

The Employee Retirement Income Security Act (ERISA) requires that the following retirement plan stakeholders are subject to fiduciary responsibilities:

  • Anyone who exercises discretionary control or authority over the plan management or assets.
  • Anyone responsible for the administration of the plan.
  • Anyone who provides investment advice for compensation.

According to ERISA, the primary responsibility of these fiduciaries is to run the plan solely in the interest of participants and beneficiaries and for the exclusive purpose of providing benefits and paying plan expenses.

Diversifying Investment Options

Ensuring that the investment menu offered to retirement plan participants is diversified is also a fiduciary duty, with requirements covered in ERISA Section 404(c), including the following:

  • At least three diversified investment alternatives with materially different risk/return characteristics should be offered in the retirement plan.
  • Significant information should be provided regarding all funds on the investment menu to enable participants to make informed investment decisions.
  • Participants should be able to transfer among investment options with a frequency appropriate for each investment’s market volatility, and at least once in any three-month period.
  • Overall, Plan Sponsors should pick “prudent” funds that meet stated investment objectives and have reasonable fees.

Avoiding Highly Speculative Asset Classes

Highly speculative asset classes often come with higher risk and increased volatility. Crypto, in particular, has emerged in the investment landscape over the past decade to great fanfare and interest. However, this digital asset class is not highly regulated yet and is prone to extreme price volatility. In fact, the Department of Labor (DOL) recently released a Compliance Assistance Release, 401(k) Plan Investments in “Cryptocurrencies,” in which the department expressed concerns about plan fiduciaries’ decisions to allow plan participants to invest in cryptocurrencies.

These concerns include:

  • No reliable or consistent valuations and reporting capabilities.
  • Custodial and recordkeeping challenges since these assets are not held like traditional plan assets.
  • Can be difficult for investors to evaluate and understand.
  • The regulatory environment is evolving but is not yet sufficiently robust.

In their recent release the DOL “cautions plan fiduciaries to exercise extreme care before they consider adding a cryptocurrency option to a 401(k) plan’s investment menu for plan participants.”

Key Considerations

Plan fiduciaries need to ensure the prudence of the investment options available in a retirement plan on an ongoing basis. The investment menu should include a formally vetted and diversified mix of funds. Including speculative assets may have a negative impact on a participant’s outcome in retirement. Before adding an investment strategy or asset class to an investment menu it is important to carefully consider the rationale for doing so. Is the potential addition appropriate based on the retirement plan’s Investment Policy Statement and the plan participant population served? Please contact your local ABG representative with any questions you may have about the selection and monitoring of the investment options in your plan.