Investments

Asset allocation should provide a mix of investments that have at least the potential to produce the desired returns with the least amount of overall fluctuation in value.  Defined benefit plan asset allocation has to be mindful of the obligations of the plan (pension payments), and the assets of the plan available to make those payments.  And, of course, the better the plan assets perform, the less the employer will have to contribute in additional funds to help the plan meet those objectives. 

Defined contribution plans present plan sponsors with a somewhat different challenge.  If you determine the investment allocations for a defined contribution plan, such as a profit-sharing plan, it may be important to focus on preserving gains and reducing the risk of losing money.  Participants will better appreciate the program and the benefits provided to them as a consequence of their employment. 

On the other hand, if you are responsible for selecting investments for a participant-directed defined contribution plan (such as a 401(k)), you will want to make sure that participants can choose from a sufficiently diverse mix of investment choices.  This is important because ERISA 404(c) only provides protection for choices made within the plan's options, not from the fiduciary decision of which funds to include in the plan itself. 

Questionable investment selection is one of the most common issues litigated in fiduciary cases, although the Department of Labor has offered no set limits or guidelines. 

ERISA requires a fiduciary to ensure that plan investments are diversified—invested in a variety of assets and asset types to minimize the risk of "large losses." Setting aside the fine print, that means that a plan sponsor is on the hook to see that plan assets are invested properly—and stay that way. 

A formal investment policy—founded on sound principles of asset allocation, and regularly monitored and applied—can minimize risk for the plan on many fronts.