As a plan sponsor, choosing the right investment options for your 401(k) plan is one of the most critical decisions you’ll make. Each option—from variable accounts (i.e. equity, bond or real estate mutual funds, CIT’s, pooled separate accounts) to fixed accounts—comes with its own risks and rewards. Ensuring these choices align with participants’ needs while protecting your fiduciary responsibilities requires careful thought.

Types of Investments in Participant Directed Defined Contribution Plans:  (401(k), 403(b) Profit Sharing, Money Purchase Plans.

Most participant directed 401(k) and 403b plans offer a mix of options, including:

• Mutual Funds: Balanced portfolios of stocks, bonds, or a combination, suitable for a range of risk tolerances.
• Collective Investment Trust (CIT) Funds: Balanced portfolios of stocks, bonds, or a combination, suitable for a range of risk tolerances. Also, stable value option that cannot be done in a mutual fund structure.
• Public or Private Company Stock: Allows employees to invest in their employer’s shares, though it carries concentration, diversification and other regulatory risks. Additional cost will apply.
• Insurance/Annuity Fixed Investment Accounts: Stable, low-risk options designed to offer predictable returns.

While each option has its place, fixed accounts deserve particular attention—for both their benefits and their risks.

The Appeal of Fixed Accounts

Fixed accounts, also known as stable value funds, are popular among participants who prefer security over volatility. These options provide predictable returns, making them attractive to risk-averse investors or those nearing retirement.

For sponsors, offering fixed accounts can help diversify your plan’s investment lineup, appealing to participants who prioritize stability.

Potential Risks and other Contractual Considerations of Fixed Accounts

Despite their appeal, fixed accounts aren’t without challenges. Plan sponsors should be aware of the potential downsides:

• Liquidity Constraints: Fixed accounts may limit plan sponsors ability to move funds in and out, creating potential participant dissatisfaction.
• Concentration and Diversification Risk: A significant tenant of ERISA is diversification to reduce risk. Most all insurance fixed accounts have single creditor risk.
• Interest Rate Risk: As interest rates decrease, fixed accounts may deliver lower returns compared to other options.
• Inflation Risk: Over time, fixed may not keep pace with inflation, eroding purchasing power for participants.
• Fee Transparency: Since these products are a spread product it is very difficult if not impossible to know what fees are to benchmark for reasonableness.
• Fee Levelization Challenges: Plan fiduciaries are responsible to allocate fees in fair, reasonable and transparent way. Fixed accounts can make this very difficult to do.

For plan sponsors, failing to evaluate these risks and properly communicate them to participants could lead to fiduciary concerns.

Why Plan Sponsors Must Be Proactive

As a plan sponsor, your fiduciary responsibility requires you to not only offer diverse investment options but also ensure they are suitable and well-communicated to participants. This includes regularly reviewing the lineup, monitoring performance, and assessing the potential risks to both the plan and its participants.

Selecting and managing these investments isn’t just about providing options—it’s about protecting your employees’ retirement savings and ensuring compliance with your legal obligations.

Let’s Work Together to Optimize Your 401(k) Plan

Choosing the right investments for your 401(k) plan can feel overwhelming, but you don’t have to navigate this alone. Our team specializes in helping plan sponsors like you evaluate investment options, assess risks, and fulfill your fiduciary responsibilities.

If you’re ready to take your plan to the next level, let’s start the conversation. Reach out today to learn how we can help create a 401(k) plan that protects your employees and your business.