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Selecting the right ETFs for 401(k) plans

07/28/2010:

The low-expenses of Exchange Traded Funds (ETFs) make them very attractive for 401(k) plans. And there are a lot to choose from with well over 800 ETFs on the market today. They cover narrowly defined marketplaces all over the world to very broad indexes like the total US stock and bond markets.

What Regulations Help Guide a 401(k) Plans Fund Make-up?
When it comes to 401(k) plans, there are several critical items to consider in determining which funds are a good fit for 401(k) plan with respect to both the regulations and the Department of Labor guidance.

A company has some important duties that it is responsible for (liable) in offering a 401(k) plan:

  1. The company is required to run the plan in the best interest of all employees at all times
  2. Every company’s plan is required to offer diversified investments to help minimize risk of large losses

Point number two above is very important and is good common sense for retirement investing to begin with. Given this, narrowly defined or highly volatile ETFs are going to be a poor fit in a retirement account. Covering the major asset classes and providing a select few specialty funds is the smart way to go.

How Many Funds Should Be in My 401(k) Plan?
The law indicates three funds / asset classes are the minimum required (stock, bond, cash). That is very minimal in today’s world of hundreds if not thousands of investment offerings. However, too many options will hurt participation in the plan. Somewhere between 12 and 18 fund choices should put the plan on strong footing.

You can see in the ShareBuilder 401k fund line-up that it’s been built to make most any participant happy in any size office. And as we’re a registered investment advisor, we help limit your fiduciary business risks as our Investment Committee continually monitors the fund line-up and model portfolios in line with our low-cost Investment Philosophy for your company.

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