|To ensure a 401(k) plan is up to date, CPAs
should advise clients or employers that sponsor such
plans to |
Maintain an investment policy statement.
This document establishes the plan’s
criteria for monitoring investments, the
performance expectations, the process of reviewing
investments and the benchmarks to guide investment
Provide a diversified menu of investment
options. Plan sponsors should
offer a minimum of 12 choices to allow
participants to diversify across all investment
categories—value, blend, growth and fixed income.
Offer investments from a variety of
mutual fund families. Companies
usually allow employees to select investments from
among several families, not just one: This
provides additional diversification. Also, as fund
families have different investment philosophies
and areas of expertise, they can include the top
performers in each investment category. For
participants who have no interest in actively
monitoring their investments, providing
asset-allocation funds based on age and risk
tolerance also is a good option.
Review investment selections at least
annually to ensure they continue to beat
Questions plan sponsors should ask
What are the criteria for adding and
When was the last time the plan added
or deleted an option?
A plan that hasn’t
recently added or deleted an investment choice may
signal that it doesn’t replace underperforming
funds on a timely basis.
Create a retirement plan committee.
Having a group of participants
collect and act on employee feedback will help
staff feel more involved in the process.
Generally, an individual responsible for the
retirement plan, such as the business owner, CFO
or human resources director, will coordinate the
committee. Size will vary, depending on the number
of workers in the company; one scenario might
consist of an employee from each department.
Provide online advisory services to
enrollees to help them with their investment
allocation decisions. Plans can
offer online enrollment and provide educational
tools, retirement calculators and transaction
capabilities, such as changing investment
Issue timely participant statements.
Information an employee receives two
months after a quarter ends has little value in
helping him or her react to changing market
conditions. Many plans today offer Internet
access, providing up-to-date participant balances
and investment details. This is especially
helpful, for example, if a participant needs a
current statement for lenders when refinancing a
Offer participants automatic
rebalancing. Employees with
conservative or moderate risk tolerance who didn’t
rebalance after the strong equity gains of the
1990s were probably caught with a more aggressive
portfolio than they had wanted. For example, an
employee with a 50/50 allocation in stocks and
bonds may have seen his or her portfolio shift to
70/30 when stocks were rising much faster than
bonds. Automatic rebalancing—returning the
employee’s fund allocations to their initial
percentages after a period when investments
performed at different rates— ensures participants
maintain their original allocations. By
rebalancing, a participant sells a portion of his
or her winners and reinvests in the losers,
essentially selling high and buying low.