Bucks Blog: Retirement Plans Don’t Have to Give You a Cash Option

Kacper Pempel/Reuters

The recent wild swings of the stock market had a lot of investors seeking the safety of cash, at least temporarily. One Bucks reader wrote to lament that the retirement plan offered by his former employer, a large not-for-profit institution, lacked what he deemed suitable options for putting investments in cash.

That made us wonder: is there any requirement for plans to offer at least one cash-equivalent option?

Regardless of whether you think parking any of your nest egg in cash is a good idea, it might be comforting to have that choice. So we put the question to the federal Department of Labor, which helps oversee private retirement plans under the Employee Retirement Income Security Act of 1974, known as Erisa.

The answer: No.

Erisa requires retirement plan “sponsors,” as employers are known in benefits lingo, to act with “prudence and solely in the best interest of plan participants” in the selection and monitoring of investment options, a Labor Department spokesman said in an e-mail. But, the law doesn’t mandate that any specific types of investment options be used.

In the case of 403(b) plans, which are similar to 401(k)’s but are offered by nonprofits and public school systems,  the Internal Revenue Code allows the plans to offer either annuity contracts or mutual funds; plans can offer both, according to the Labor Department, but they’re not required to do so. Regardless, “there’s no specific requirement” that the plans include any certain type of fund, says  Lisa Germano, a member of the American Institute of Certified Public Accountants Financial Literacy Commission.

That said, many retirement plans do offer diverse investment options, including lower-risk funds, in order to be attractive to a range of employees, notes Rebecca Davis, legislative counsel for the nonprofit Pension Rights Center. Lower-risk choices often include money market mutual funds that invest in cash equivalents short-term certificates of deposit, government bonds and other highly liquid securities. But again, that’s at the sponsor’s discretion. (Even money-market funds carry some risk, as investors learned during the market turmoil of 2008.)

“For the most part, plan sponsors have a huge amount of freedom,” Ms. Davis said. “The employer gets to choose what is offered.”

If you want different options added to your retirement plan, she advises, you should approach your plan’s sponsor. For a look at the challenge of effecting change in employer-based plans, read Ron Lieber’s recent coverage in his Your Money column.

Are you satisfied with your retirement plan’s cash options?

Article source: http://feeds.nytimes.com/click.phdo?i=f97f3b45915ed987c0ec5a2e3dc02678