Investment selection for a retirement plan should be guided by suitability rules meant to ensure an investment strategy or choices meet the objectives and means of plan participants. Investment advisors to retirement plans are subject to suitability rules under the Uniform Securities Act and the Investment Advisors Act of 1940.
The following practices are examples of violations of the suitability rules:
- Recommending securities without having a reasonable basis for the recommendation.
- Recommending securities without taking the client's financial situation, needs and objectives into account.
- Recommending the same security to all clients.
The Investment Advisors Act of 1940 also defines "failure to meet suitability standards" as an unethical practice.
An investment advisor who does not make reasonable inquiries or suitable recommendations, given the information from such an inquiry, is guilty of violating the suitability requirements.
The time horizon of employees – how long until they reach their retirement age – should also be a consideration for selection choices within an employer-sponsored retirement plan. A defined contribution plan should include choices appropriate both for those near retirement age and for younger employees who can handle an appropriate level of investment risk.
A defined contribution plan should include sufficient investment choices to allow a participant to construct an appropriately diversified portfolio that depends on age, risk tolerance, income level and other factors.
Unrelated Business Taxable Income and Life Insurance
Financial AdvisorDiscover the differences between the Suitability and Fiduciary Standards when hiring a financial advisor.
RetirementThis a fundamental concept from both a legal and practical perspective.
Financial AdvisorRIAs and brokers are held to different standards when providing investment advice. Here's how they differ.
Financial AdvisorThe new fiduciary rule is complicated but hopefully beneficial—for most. Here's some background and what is ahead for both advisors and clients.
RetirementThe government's new fiduciary rule is a reason to look hard at your retirement savings and consider replacing those that wouldn't pass muster now.
Financial AdvisorThe DoL had proposed rules that would have a major impact on financial advisors. If they are approved here's what it would mean.
Financial AdvisorWhether helping a new client or working with long-time clients, here are five financial planning tips for those within five years of retirement.
Financial AdvisorLooking to hire a financial advisor but unsure what you want or need? Follow these seven steps.
Financial AdvisorIs your client really ready for retirement? Here are some essential questions to ask.
RetirementHere's what a 401(k) investment policy statement should look like.