What's With All of the Fund Changes?

Why your fund options make look different


If you’ve carefully selected the funds for your 401(k) plan account, it could be irritating to learn that your plan sponsor is changing the investment line-up.

[See Preparing for Open Enrollment.]

Employer-sponsored 401(k) plans occasionally make line-up changes. These could involve a few funds or a full-scale revamping.

There are several reasons investors could see these changes, but it’s important to remember that plan sponsors are legally obligated to promote your best interests as a plan participant. The Employee Retirement Income Security Act (ERISA) regulates plan sponsors. According to the Department of Labor, it “protects your plan's assets by requiring that those persons or entities who exercise discretionary control or authority over plan management or plan assets . . . are subject to fiduciary responsibilities.” ERISA originally passed in 1974 and has been updated several times since.

So changes should actually lead to improved investment options for you.

To keep investors safe, plan sponsors are supposed to regularly review 401(k) plans and the investments offered. During the review process, several things could lead to investment line-up changes.

[See 6 Features of a Good 401(k) Plan.]

Asset class diversity. During a review, it may become clear that investors don’t have a broad array of asset classes from which to choose. Under these circumstances, the plan sponsor would make changes so that every investor, from the most conservative to the most aggressive, would have access to an appropriate fund line-up.

Fund performance. Some plan sponsors will monitor the performance of the funds offered in the plan and evaluate the funds based on certain criteria outlined in an Investment Policy Statement. If a fund underperformed relative to its peers for a long enough period of time, a plan sponsor may decide it no longer fits the established standards and a change could be made.

Change in fund philosophy. Occasionally, funds alter their investment philosophy because of economic changes or the addition of a new fund manager. If a fund’s philosophy changes, it may overlap with other funds in the 401(k) plan, the new philosophy may not fit with the 401(k) Investment Policy Statement, or the plan sponsor may simply not like the direction in which the fund is headed.

Plan growth. The plan could have grown large enough to be eligible for funds with improved pricing. Because 401(k) plan providers, like financial institutions and financial advisers, want to encourage plan growth, larger plans can have access to different fund platforms.

If you receive communication indicating a change has been made to your available funds, view these changes as a new, favorable situation. This is a great time to take stock of what’s available and stay engaged in the retirement planning process. Here are some things to think about:

1. Decide whether to seek help from a professional advisory service to assist you in selecting appropriate investments for your personal situation.

2. Next, assess your risk tolerance and determine an appropriate asset class allocation for your risk tolerance. Remember that your ability to tolerate risk shouldn’t change based on market conditions.

3. After you understand what you want to accomplish, look through your 401(k) plan’s new line-up of fund options. Select funds that fit each asset class you decided to use.

4. Lastly, be sure to contact your plan administrator to make your investment changes—for your new contributions and your existing investments.

If your investment options have changed, don’t be frustrated. Make it into an opportunity to update your retirement strategy and improve your retirement portfolio. And remember to remain engaged—review your 401(k) account quarterly to reassess your asset allocation and rebalance your investments.

Scott Holsopple is the president and CEO of Smart401k, offering easy-to-use, cost-effective 401(k) advice and solutions for the everyday investor. His advice has been featured on various news outlets, including FOX Business, USA Today and The Wall Street Journal. Keep tabs on Scott on Twitter and Facebook.