(b)lines Ask the Experts – Is There a Restriction on Number of Investments?

“Is there anything in ERISA or related DOL guidance that restricts the number of plan investments?” 

Michael A. Webb, vice president, Cammack Retirement Group, answers:

The Employee Retirement Income Security Act (ERISA) and related Department of Labor (DOL) guidance is not specific to the number of investments a plan should/must have, except for the requirement that at least three investment alternatives be made available for a plan to enjoy the investment protections of ERISA Section 404(c). However, in the DOL publication “Meeting Your Fiduciary Responsibilities” (a must-read for any plan fiduciary), there is some general guidance that, when practically applied, can place some constraints as to the scope of investments offered.

First of all, the publication states that fiduciaries “should consider each plan investment as part of the plan’s entire portfolio” as well as “document their evaluation and investment decisions.” If a plan utilizes hundreds of investments, such consideration/documentation would be extremely difficult, if not impossible. A single due diligence report for the plan’s investment would number in the hundreds of pages, serving as a significant barrier to making considerations and decisions regarding each individual investment in the plan.

In addition, fiduciaries have a responsibility to pay only reasonable plan expenses. An unnecessarily large number of investments increases the chances that plan expenses would be unreasonable in two ways; a) by increasing recordkeeping costs (a problem that is exacerbated if multiple recordkeepers are utilized), and b) diluting the plan’s investment purchasing power by spreading out plan assets over a large number of investment providers, which may disqualify the plan from utilizing certain share classes of investments, due to investment minimums.

In addition to the potential compliance issues, there is a practical issue with offering hundreds of investments. Participants have difficulty understanding a SINGLE investment, never mind hundreds of investments! Thus, if a goal is to engage participants in the retirement plan, it may not be the best idea to overwhelm them with investment options. In fact, studies have shown that the more investment options offered, the less likely it is for a participant to voluntarily participate in a retirement plan.

Finally, more investments does not necessarily mean increasing opportunities for investment diversification. The Experts have reviewed many retirement plan investment arrays that, despite having hundreds of funds, did not offer funds in all of the basic asset classes. The reason for this is that some asset classes (e.g. large cap equity) are far more popular that others, so a plan ends up with several investments that are virtual clones of one another. A prudent investment due diligence process should address the issue of asset class coverage and duplicative investments.

Thank you for your question!