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401(k) Fact |
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A 401(k) plan sponsor is the plan fiduciary, legally responsible for selecting the plan’s investment options and monitoring their suitability. Generally, your employer is your 401(k) plan sponsor. |
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You’ll have at least three investment choices in your 401(k) plan, and you may have 100 or more. The average plan offers between 8 and 12 alternatives, sometimes only mutual funds and sometimes a combination of mutual funds, guaranteed investment contracts (GICs) or stable value funds, company stock and variable annuities. Some plans offer brokerage accounts, which means you can select investments from the full range of stocks, bonds, mutual funds and other types of assets rather than having to choose among the plan’s alternatives.
Every 401(k) plan lets you decide how to invest the contributions you make. Some plans also let you decide how to invest your employer’s matching contributions, but others let the employer make that choice. That includes the right to provide the match in company stock.
If you have a limited number of choices—say two stock mutual funds, a bond fund, a stable value fund and a money market fund—each is likely to put your money to work quite differently from the others. But while your investment decision may be easier, you may feel the menu is too restricted.
The more choices you have, the more difficult it may be to choose the ones best suited to your investment goals and risk tolerance. It’s your responsibility to find out how the choices differ from each other and what each of them could contribute to your portfolio. But the more choices you have, the more control you have over the level of investment return you can potentially realize.
When you’re automatically enrolled in a 401(k), your employer chooses a default investment for your contributions. The default investment will be one of the Qualified Default Investment Alternatives (QDIAs)—a lifecycle fund, a balanced fund or a managed account—that the federal government has approved as acceptable choices. You have the option of sticking with the default investment, or moving your money into different investments offered by the plan.
| Greener Pastures If your plan’s investment choice is too limited or you aren’t impressed with the alternatives, you might try mobilizing a campaign to request more choices or a new plan provider. It makes sense that others participating in the plan should agree, since everyone stands to benefit. |
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