Today's fiduciary Q&A comes from an advisor concerned about the perception and advisability of capping the amount that can be invested in a particularly volatile investment option.
Q: We have been introducing more specialty type funds to our plan sponsors. In a few cases the plan sponsors have asked if we would limit a participant’s exposure to certain funds. For example, by only allowing participants to direct a maximum of 6% of their current allocation into a commodities fund. Yesterday at a client meeting the plan sponsor asked what if any liability the fiduciaries would have if a participant complained at some point in the future that by restricting their purchase of this fund they were held back from meeting their retirement goals? What is fi360's opinion about limiting access to certain funds within a plan?
A: There is always the potential that a participant may complain about how the plan has been managed. A participant could complain about limitations placed on an investment option to which they wanted to allocate a greater percentage of their portfolio. Conversely, if the commodities fund performs poorly, they could complain that you should not have made it available to begin with because of its inherent volatility. It’s a judgment call that must be made with the overriding objective of doing what is in the best interest of the participants. If volatility is the issue, the safest approach is not to offer the commodities fund in the plan. But if the decision is made to include it, capping the amount participants can invest is probably prudent.
If the decision is made to cap the investment, the plan sponsor should clearly communicate the risk/return profile and other characteristics of each investment option to the participants. This is one of the requirements of 404(c). In conjunction with that disclosure, information about the cap should be provided as well. If the participants have issues with the cap, they can always opt not to invest.
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If you have a fiduciary question you would like to have answered, submit it to blog@fi360.com.
The opinions expressed in this post are those of fi360 and should not be regarded as advice. Fiduciaries should always make decisions within the context of achieving the goals of the investors they serve. When in doubt, it always best to consult legal counsel regarding the liability associated with investment decisions.
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