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 cannot 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 also are not 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.
- Retirement Topics – Investing Plan Assets
- IRA FAQs - Investments
- Retirement Plans FAQs regarding IRAs
- Pub 4222, 401(k) Plans for Small Businesses (PDF)
- Investing 401(k) Monies
- Ten Warning Signs That 401(k) Contributions Are Being Misused (PDF)
- Duties of Fiduciaries in Light of Recent Events Regarding Bernard L. Madoff Investment Securities, LLC
- Beginners' Guide to Asset Allocation, Diversification and Rebalancing
- MyMoney.gov (Saving & Investing)
- Savings Fitness: A Guide to Your Money and Your Financial Future (PDF)
- Taking the Mystery Out of Retirement Planning (PDF)