Participants do not always prefer the investment choices retirement plans offer. Whether participants want additional ways to diversify their portfolios or have other reasons, participants are asking retirement plan sponsors with participant-directed accounts (commonly found in profit-sharing, 401(k), and 403(b) plans) to offer investment options that go beyond traditional investment alternatives. Common examples include investments in real estate, collectibles, cryptocurrency, and a wider array of publicly-traded funds. Using guidance from the Department of Labor concerning the fiduciary responsibilities of plan sponsors, including a June 3, 2020 DOL Information Letter (available here) addressing private equity investment within participant-directed retirement accounts, following is a broad checklist of some items a retirement plan committee might consider when deciding whether to expand investment offerings. Because of the complexity and breadth of issues, many plan sponsors and retirement plan committees will need expert professional assistance to answer all the questions in this checklist.
How might the investment affect general plan operations?
| Will the investment have sufficient liquidity to handle cash outflows (including hardship distributions, loans, and required minimum distributions)? | ☐ Yes ☐ No |
| Will that fund option be able to accommodate investments of relatively small amounts over time via payroll deduction? | ☐ Yes ☐ No |
| Will the investment subject itself to the retirement plan’s qualified domestic relations order (QDRO) and beneficiary procedures (which might require the investment to be split with, respectively, a divorcing spouse or beneficiaries)? | ☐ Yes ☐ No |
Is the investment a proper plan investment option?
| Are the investment’s goals consistent with the interests of the fund option that holds the investment, the plan, and its participants and beneficiaries, considering such aspects as the likelihood of appropriate return with reasonable risk within a reasonable time horizon? | ☐ Yes ☐ No |
| Are the investment fees and expenses reasonable? | ☐ Yes ☐ No |
| Do participants have a level of sophistication that makes it likely they will use the fund option containing the investment appropriately? | ☐ Yes ☐ No |
| Will the investment provide information that will adequately inform participants of how it works, how it differs from other investments, the fees and risks involved, and what restrictions apply? | ☐ Yes ☐ No |
| Will the investment add to the investment diversification already available to plan participants? | ☐ Yes ☐ No |
What is the impact of the investment on DOL Form 5500 reporting obligations?
| Is the investment being valued reasonably, and will the valuation be acceptable for annual audit purposes? | ☐ Yes ☐ No |
| Will the investment provide adequate information for the plan administrator to satisfy its reporting obligations, including regular valuations of investments, annual and quarterly fee disclosures (the latter of which must state the fees and expenses that were actually incurred by each participant), and reports of commissions paid? | ☐ Yes ☐ No |
| Will the investment affect the plan’s annual audit process, the time or cost of conducting an audit, or audit waiver qualifications? | ☐ Yes ☐ No |
How easily can you evaluate the potential increase in the risk of conflicts of interest or self-dealing?
| Do any fiduciaries stand to gain (financially or otherwise) if participants select this investment? | ☐ Yes ☐ No |
| Do any decision-makers or “influencers” have personal funds invested in the investment or stand to earn a commission from the plan option’s investment? | ☐ Yes ☐ No |
While all prohibited transactions must be avoided, certain alternative investments increase the risk of certain types of selfdealing that might violate a plan sponsor’s fiduciary obligations. For example, assume a CEO has personal funds invested in private equity. To the CEO, it makes sense to allow 401(k) participants to invest in that same private equity investment since the CEO already determined it is a prudent investment (for that individual CEO). However, might the additional 401(k) investments reduce the risk of loss to the CEO’s personal investment? Might the CEO be able to aggregate the personal investment with the plan’s investment to exert additional influence on the underlying companies?
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The process of safely adding investment options outside of a traditional retirement plan portfolio is complex, and the answers to some questions may raise others. However, proceeding carefully is more likely to result in a retirement plan committee’s fulfilling its fiduciary obligations, which increases the likelihood that investment options will be appropriate and minimizes potential liabilities. If you have any questions about this or anything else pertaining to employee benefits, please contact the author of this article or the Carlton Fields attorney with whom you normally communicate.
