On this page Investing plan assets Valuation of plan assets at fair market value Retirement plan fees Retirement plan investment FAQs Investing plan assets In setting up a qualified plan, employers arrange how the plan's funds will be invested to increase and protect its assets. Although there is no list of approved investments for retirement plans, there are special rules contained in ERISA that apply to retirement plan investments. In general, a plan sponsor or plan administrator of a qualified plan who acts as a fiduciary is required to exercise the judgment that a prudent investor would use when investing for his or her own retirement. In addition, certain rules apply to specific plan types. For example, there are different limits on the amount of employer stock and employer real property that a qualified plan can hold, depending on whether the plan is a defined benefit, a 401(k) or another kind of qualified plan. Certain plans, such as 401(k) plans, permit participant-directed investment. With participant-directed investments, a plan must offer at least three diversified options for investment, each with different risk/return factors, and the participant can choose how to invest his or her account assets in those options. There are also certain restrictions on investment choices. For example, both participant-directed accounts and IRAs cannot invest in collectibles, such as art, antiques, gems, certain coins or alcoholic beverages. They can invest in certain precious metals only if they meet specific requirements. The Department of Labor Employee Benefits Security Administration provides guidance and oversight in the proper investment of certain retirement plan assets. Neither the plan, trustees nor fiduciary are held liable for poor performance of the investments if prudence was used to select the investments. Therefore, any losses of account value are born by the affected participants in the plan. Back to top Valuation of plan assets at fair market value Plan assets must be valued at fair market value, not cost. An accurate assessment of fair market value is essential to a plan’s ability to comply with the Internal Revenue Code requirements and Title I of ERISA. For example, the FMV of assets must be accurately determined to preclude: Prohibited transactions, Exclusive benefit violations under IRC section 401(a), Violations of the section 415 limitation on benefits and contributions, Excess deductions under IRC section 404, Violations of the IRC section 412 minimum funding requirements, or Discrimination violations under IRC section 401(a)(4). In a profit-sharing, money purchase, or stock bonus plan, the assets’ valuation will determine a participant’s account value, and ultimately, a participant’s distribution. In a defined contribution plan, Revenue Ruling 80–155, 1980–1 C.B. 84 provides that because amounts allocated or distributed to a participant must be ascertainable, plans must value their trust investments at least once a year, on a specified date, and according to a method consistently followed and uniformly applied. In a defined benefit plan, the valuation of trust assets will determine if the plan is adequately funded and if the plan’s funding assumptions are reasonable. This, in turn, will affect the employer’s deduction and funding status. In a defined benefit plan, IRC section 412 requires yearly plan assets valuations for funding purposes. These valuations must be based on reasonable actuarial assumptions. See Treas. Reg. section 1.401–2(b). Back to top Retirement plan fees A plan may deduct fees from a participant’s defined contribution plan account. Plan administration fees and investment fees can be deducted from the account either as a direct charge or indirectly as a reduction of the account’s investment returns. Fees for individual services, such as for processing a loan from the plan or a Qualified Domestic Relations Order, also may be charged to the account. Plan fiduciaries have a specific obligation to evaluate the fees and expenses paid by a plan for its operations. Fiduciaries must establish a prudent process for: selecting plan investment alternatives and plan service providers, ensuring that fees paid to service providers and other plan expenses are reasonable considering the level and quality of services provided, selecting investment alternatives that are prudent and adequately diversified, and monitoring investment alternatives and service providers once selected to see that they continue to be appropriate choices. Back to top Retirement plan investment FAQs There are certain limitations on the types of investments a retirement plan can have. Some investment restrictions apply to different plan types. Prohibited transactions are certain transactions between a retirement plan and a disqualified person. If you are a disqualified person who takes part in a prohibited transaction, you must pay a tax. These frequently asked questions and answers provide general information and should not be cited as legal authority. Are there special limits on the type of investments available to retirement plans? Although there is no list of approved investments for retirement plans, there are special rules contained in the Employee Retirement Income Security Act of 1974 (ERISA) that apply to retirement plan investments. In general, a plan sponsor or plan administrator of a qualified plan who acts in a fiduciary capacity is required, in investing plan assets, to exercise the judgment that a prudent investor would use in investing for his or her own retirement. (ERISA Section 404) In addition, certain rules apply to specific plan types. For example, there are different limits on the amount of employer stock and employer real property that a qualified plan can hold, depending on whether the plan is a defined benefit plan, a 401(k) plan, or another kind of qualified plan. (ERISA Section 407) Certain plans, such as 401(k) plans, that permit participant-directed investment can avoid some fiduciary responsibilities if participants are offered at least three diversified options for investment, each with different risk/return factors. (Labor Reg. Section 2550.404c-1) In addition, under the Code, both participant-directed accounts and IRAs can’t invest in collectibles, such as art, antiques, gems, coins, or alcoholic beverages, and they can invest in certain precious metals only if they meet specific requirements. (IRC Section 408(m)) Individual retirement accounts aren’t permitted to invest in life insurance. (IRC Section 408(a)(3)) Finally, certain transactions between a plan and a “disqualified person” are specifically prohibited by law (see below). Similar rules apply to transactions between an IRA and its owner or beneficiary or between an IRA and a disqualified person. What is a prohibited transaction? A prohibited transaction is a transaction between a plan and a disqualified person that is prohibited by law. Prohibited transactions generally include the following transactions: a transfer of plan income or assets to, or use of them by or for the benefit of, a disqualified person, any act of a fiduciary by which plan income or assets are used for his or her own interest, the receipt of consideration by a fiduciary for his or her own account from any party dealing with the plan in a transaction that involves plan income or assets, the sale, exchange, or lease of property between a plan and a disqualified person, lending money or extending credit between a plan and a disqualified person, and furnishing goods, services, or facilities between a plan and a disqualified person. Certain transactions are exempt from being treated as prohibited transactions. For example, a prohibited transaction does not take place if a disqualified person receives a benefit to which he or she is entitled as a plan participant or beneficiary. However, the benefit must be figured and paid under the same terms as for all other participants and beneficiaries. The Department of Labor (DOL) has granted class exemptions for certain types of investments under conditions that protect the safety and security of the plan assets. In addition, a plan sponsor may request that the DOL give them an administrative exemption for a proposed transaction that would otherwise be a prohibited transaction. For additional information, see Publication 560, Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans), and Retirement topics – Prohibited transactions. Back to top Additional resources Retirement plans FAQs regarding IRAs Ten Warning Signs That 401(k) Contributions Are Being Misused PDF Fiduciary Education Campaign – Know Your Fiduciary Responsibilities (DOL) Beginners' Guide to Asset Allocation, Diversification and Rebalancing Savings Fitness: A Guide to Your Money and Your Financial Future PDF What You Should Know About Your Retirement Plan PDF A Look At 401(k) Plan Fees PDF Understanding Retirement Fees and Expenses PDF
