The New Commonsense Guide to Your 401(k): Rebuilding Your Portfolio From The Bottom up

Chapter 16. What Your Employer Wants

MOST EMPLOYERS WHO USE 401(K) plans want to offer a good plan. They realize that employees have more responsibilities for their own financial needs today, and they want them to succeed. On the other hand, they do not want to be on the hook if the employees fail to save enough.

So employers attempt to achieve a delicate balance. They know that novice investors tend to put too little into the stock market and too much into guaranteed investments like guaranteed investment contracts (GICs). But they are afraid to advise employees to move to stocks to improve their returns for fear the employees will lose money and blame them, or worse yet, sue them. The dismal market returns in 2008 fed these fears.

The government gets involved here, too, and mandates that the employer observe certain "fairness" rules and regulations. There are two basic types of 401(k) plans. The first requires the employer take fiduciary responsibility for acting in the best interest of employees. It can offer any choice of investment options. But the employer who chooses this plan faces liability if employees lose money because of bad investment decisions.

The second type of 401(k) plan relieves the employer of fiduciary responsibility provided it complies with certain rules. These rules, which are referred to as 404(c) regulations, were finalized in 1992 and spell out what an employer must do if it wants limited liability protection when participants direct the investment of their ...