Retirement topics - Participant-directed accounts


When can employees choose their own investments?

In some defined contribution plans, the plan trustee makes all the investment decisions for the plan's assets. However, certain defined contribution plans give participants investment options to choose from and allow them to decide how to invest their account balances. Plan accounts where participants exercise independent control over the investment of their individual accounts are commonly referred to as participant-directed accounts, or self-directed accounts.

The U.S. Department of Labor has established rules about plans that permit participants to direct their own investments. Under these rules, if, and only if, participants truly exercise independent control in making their investment choices, the law will excuse plan officials from the fiduciary responsibility for the consequences of participants’ investment decisions.

A plan that intends to relieve the plan trustee of fiduciary duties for investments must inform the participants of that fact. Such plans must offer at least three diversified investment options, each with different risk/return factors that the participant can choose. Participants are responsible for the consequences of their investment decisions and cannot sue the plan officials for investment losses that result from the participants’ decisions. In addition, a participant directed account plan must give participants sufficient information about investment options under the plan for them to be able to make informed decisions. The information participants are entitled to receive without asking includes the following:

  • A description of each investment option, including the investment goals, risk and return characteristics
  • Information about designated investment managers
  • An explanation of when and how to direct investments and any restrictions on when participants can change investments
  • A statement of the fees that the plan may charge to participants’ accounts when they change investment options or buy and sell investments
  • Information about participants’ shareholder voting rights and the manner in which confidentiality will be provided on how participants vote their shares of stock
  • The name, address and phone number of the plan fiduciary or other person designated to provide certain additional information on request

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