Self-Directed Participant Accounts
Almost all 401k plans utilize self-directed participant investment accounts. This is where participants select their own investments from a list of investments approved by the employer. Self-directed accounts are not required but they are used because employers don’t want the responsibility of investing money that their employees consider their personal savings. What most employers are not aware of is that they can still be held liable for participant investment losses, even if participants are making their own investment choices. To avoid this liability, the employer must qualify for the exemption under ERISA Sec. 404(c). ERISA Sec. 404(c) requires that the plan’s investment options be explained and that charges, expenses and investment risk are disclosed. The disclosure material is usually supplied by the plan’s investment provider and is distributed to potential participants prior to joining the plan.
401k Investment Providers
401k plans are offered by insurance companies, mutual fund companies and brokerage firms.
Insurance Company Plans
A typical insurance company 401k plan consists of a number of variable subaccounts with different investment objectives and one more fixed account guaranteed by the insurance company. As part of their basic services, most insurance companies offer participant level record keeping, participant statements, enrollment material and customer service. Participant level record keeping allows participants Internet access to their account. Some companies also offer plan level administrative services such as a plan document, testing and 5500 preparation for an additional charge.
Insurance companies provide many services and, as a result, often have the highest internal expenses. However, because insurance company plans are underwritten, these charges can be reduced. Pricing is based on plan characteristics such as anticipated contribution flow, assets to be transferred and the average participant account balance. As a general rule, the more money involved the more favorable the pricing.
Mutual Fund 401k Plans
Most of the larger mutual fund companies now offer 401k plans. While their services are not as extensive as insurance companies, some offer participant level record keeping, which allows participants Internet access to their accounts. Internet access is a nice feature, but it is not essential. Many plans have operated successfully without it for years.
The major no-load fund companies’ offer record keeping and administrative packages but their focus is on larger plans with at least several million dollars in assets. Companies whose funds normally have a sales charge, often have a special share class just for retirement plans. With these shares, there are no front end sales charges or surrender charge but internal expenses may be somewhat higher than their other share classes.
Individual Brokerage Accounts
An increasing number of brokerage firms are allowing participants to establish individual brokerage accounts under a master account sponsored by the plan. Participants can make online investment changes but cannot withdraw money from their accounts unless authorized by the plan trustee. Participants have essentially the same freedom that they would have with any other brokerage account and can invest in individual stocks, bond and ETFs as well as mutual funds.
You are not limited to one type of 401k investment provider. Some employers offer an insurance company or mutual fund option for the less sophisticated employees and a brokerage account option for those with an interest in investments.