Types of Retirement Plans - Suitability

Suitability
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.

Time Horizon
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.

Diversification
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


Related Articles
  1. Personal Finance

    RIAs and Brokers: What's the Difference?

    RIAs and brokers are held to different standards when providing investment advice. Here's how they differ.
  2. Retirement

    Should You Change Your Retirement Portfolio?

    The 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.
  3. Financial Advisors

    Impact of Proposed DoL Rules on Financial Advisors

    The DoL had proposed rules that would have a major impact on financial advisors. If they are approved here's what it would mean.
  4. Investing Basics

    7 Steps To Evaluate A Financial Advisor

    Looking to hire a financial advisor but unsure what you want or need? Follow these seven steps.
  5. Your Clients

    5 Tips for Those 5 Years Away from Retirement

    Whether helping a new client or working with long-time clients, here are five financial planning tips for those within five years of retirement.
  6. Career Education & Resources

    Retirement Tips for Financial Advisors

    Learn some valuable tips that financial advisors are using to successfully transition from practice to financially secure retirement.
  7. Personal Finance

    Get Your House In Order By Choosing a Financial Advisor

    As the old saying goes, people don't plan to fail, they just fail to plan.
  8. Retirement

    401(k) Investment Policy Statement: An Example

    Here's what a 401(k) investment policy statement should look like.
  9. Financial Advisors

    Essential Questions for a Financial Advisor

    If you're a prospective financial advisor client (or an adviser), here are some questions you should ask ... and be prepared to answer.
  10. Financial Advisors

    How to Help Clients Overcome Retirement Shortfalls

    Telling a client they don't have enough for retirement is tough. Here's how advisors can help clients overcome retirement shortfalls.
RELATED TERMS
  1. Suitable (Suitability)

    A situation (and sometimes a legal requirement) that an investment ...
  2. Registered Investment Advisor - ...

    An advisor or firm engaged in the investment advisory business ...
  3. Investment Advisor

    As defined by the Investment Advisors Act of 1940, any person ...
  4. Unsuitable (Unsuitability)

    A situation where an investment strategy does not meet the objectives ...
  5. Fiduciary Rule

    Fiduciary rule is regulation that requires retirement advisors ...
  6. Target-Benefit Plan

    A benefit plan that is similar to a defined benefit plan since ...
RELATED FAQS
  1. I have 40K to invest. What would be the best? Mutual funds, treasury bills, or shares ...

  2. Is a 401(k) a qualified retirement plan?

    Examine the different types of qualified retirement plans, and discover if a 401(k) meets the definition of a qualified retirement ... Read Answer >>
  3. How should I invest the money I keep on my IRA?

    For individuals who are just starting to save, certificates of deposit can be a good place to start, but the interest rates ... Read Answer >>
  4. How do you plan for retirement if you have multiple employers? Can you combine retirement ...

    Retirement planning for those who work for more than one employer is essentially the same as for those who work for only ... Read Answer >>
  5. What are qualified retirement plan types?

    Understand the different types of qualified retirement plans and what they mean in terms of employee and employer contribution ... Read Answer >>
  6. Is an IRA a qualified plan?

    Learn about the definition of a qualified retirement plan and some of the features and benefits of individual retirement ... Read Answer >>
Hot Definitions
  1. White Squire

    Very similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in ...
  2. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
  3. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  4. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
  5. Weighted Average Cost Of Capital - WACC

    Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is ...
  6. Basis Point (BPS)

    A unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly ...
Trading Center