Investment Control

Once funds have been contributed to a retirement plan, they must be invested. For defined-benefit and money purchase plans, the right or duty to direct those investments falls by statute to plan administrators. Other types of plans may choose to give employees some degree of control over such investments.

Plans That Require Administrators to Control Investments

Money purchase plans and defined-benefit plans do not allow participants to control their investments. Under ERISA, administrators of such plans have a fiduciary responsibility toward beneficiaries. They must make all investment decisions in accordance with a "prudent expert" standard--a somewhat ambiguous concept that is nonetheless more stringent than the pre-ERISA standard. Furthermore, administrators must diversify investments to minimize risk. ERISA also prohibits certain transactions that could undermine the fiduciary relationship and, in order to introduce more accountability than had been the case before its passage, requires more reporting and disclosure from pension funds.

Plans That Allow Employees Some Control Over Investments

Employers that sponsor 401(k) plans may decide how much control employees should have over the way their contributions are invested. In 2000, 64 percent of full-time employees participating in 401(k) plans had some say in investing their employer's contributions. In 2002, 81 percent of participants had some say in investing their own contributions. Employees who are granted choices generally face a large menu of investment options (10 options is the median). In most cases, employees may change their investments at will, but employers may limit the frequency with which they do so.(1)

Typically, participants in profit-sharing plans that are not 401(k)s exercise some control over their investments, as may employees with 457 plans, to varying degrees. Participants in 403(b) plans, however, are restricted in how much control they can exercise. In most cases, they can invest only in annuity contracts or in mutual funds. Employers can offer considerable choice within those constraints, but they cannot offer other investment options within the plan. Employers offering SEPs retain no control over investments.

1.  Employers may also briefly "lock down" a plan when they change plan administrators. During that period, participants may not alter their investment choices but employers retain a fiduciary responsibility to the participants.

 
Sources:  Bureau of Labor Statistics, National Compensation Survey: Employee Benefits in Private Industry in the United States, 2002-2003, p. 116.

Bureau of Labor Statistics, National Compensation Survey: Employee Benefits in Private Industry in the United States, 2000, p. 76.