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(b)lines Ask the Experts – What Is a Tiered Investment Lineup?

The recordkeeper for our Employee Retirement Income Security Act (ERISA) 403(b) plan recommended that we switch to a tiered approach for our investment lineup."

By PS | August 30, 2016

“However, I could not understand the recordkeeper’s explanation of what precisely a “tiered” investment lineup is. I tried to research the answer myself, but found that it appears to be defined differently in different retirement plans. Can the Experts shed some light on what constitutes a “tiered” investment lineup?” 

Michael A. Webb, vice president, Cammack Retirement Group, answers:  

Excellent question, and you’ve come to the right place! First of all, the Experts are not surprised that you were unable to find a standardized definition of “tiered investment lineup” online, as it is a fairly new term, and consultants, advisers and plan sponsors, as a practical matter, use it to refer to different types of “tiers.”

In general, the tiered approach is a method of communicating your retirement plan’s investment array to participants in a fashion that is intended to be simple for participants to understand. The tiered investment lineup organizes plan investments into multiple “tiers” which each “tier” representing a subset of investments from which a participant can choose. Though the number of tiers and what they represent varies, a common example is as follows:

  • Tier 1: Target-date funds for participants who do not have the desire or aptitude to self-direct investments.
  • Tier 2: Core investments for participants who wish to self-direct investments but do not require any specialized fund choices.
  • Tier 3: Brokerage window (or mutual fund window for 403(b) plans) for participants who prefer specialized fund choices beyond the core investment menu; typically due to the fact that they have an uncommon retirement plan situation for which they are working with a financial professional. (Of course, whether having a brokerage window is appropriate in a particular plan design is a separate analysis.) 

The goal of such a tiered system would be to maximize participant engagement by communicating desired information to targeted classifications of participants. For example, for participants who do not wish to self-direct, Tier 1 (target-date funds) is emphasized. Plan communication materials would reflect the tier classifications in hopes of making them more understandable.

Should you wish to consider a tiered approach, you will wish to discuss the matter with plan fiduciaries, as well as counsel well-versed in such issues as appropriate. Any tiered investment approach will likely require investment policy statement revisions, as well as changes in the overall process for reviewing investments and relevant employee communications.

 

NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.  

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