Question about meeting 404(c) requirements where participants must choose ONE of 6 lifestyle allocation funds ...

[Guest jdsmith]

Company has PS plan with 401(k) feature.

Currently no investment choices. Everyone is in same conservative investment.

Company wants to add participant directed investment feature, as follows:

There are 6 options:

5 Lifestyle accounts (funds of funds) (geared toward time horizon)

1 Money Market account

Participant must choose ONE from the 6 choices.

Can this meet the 404© requirement of "broad range of investment alternatives"?

I feel it cannot due to language in 29 CFR 2550.404c-1(b)(3)(B)(4). That is, that the investments must minimize risk "when combined with investments in the other alternatives." So, because they cannot choose more than one alternatives, they are not properly minimizing risk.

Am I way off? I have seen some discussion about the unavailability of 404© protection where there are lifestyle accounts.

Any thoughts? Thanks.

[Locust]

I think it is possible, but you'd have to review the characteristics of each fund. Can a participant pick a mix of funds that will result in a portfolio with aggregate risk and return characteristics at any point within the range normally appropriate for the participant or beneficiary? I believe this is the test for determining whether the investment funds provide an adequate mix of alternatives under 404©. By definition a lifestyle fund already picks a mix of funds appropriate to a certain age or investment need.

[Guest jdsmith]

No, participants cannot pick a mix of funds. The lifestyle allocation funds are pre-determined mixes of 10 mutual funds. Since the participants cannot choose to invest in more than one lifestyle allocation fund, they CANNOT pick risk/return characteristics on EVERY point within the range normally appropriate for the participant or beneficiary. They are effectively limited to 6 points on the range.

The employer and investment manager argue that being able to choose two funds would be pointless. They argue that choosing 50% of Lifestyle Fund 1 and 50% of Lifestyle Fund 3 would result in the same allocation of Lifestyle Fund 2. That MAY be, but what about all the points in between, as well as the points between Lifestyle Fund 1 and Lifestyle Fund 2 that cannot be accessed?

Yes, the Lifestyle Funds are already a mix of funds, but they are limited to the mix that the investment manager deems appropriate.