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.

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. Investing

    Investment Suitability 101

    This a fundamental concept from both a legal and practical perspective.
  2. Managing Wealth

    RIAs and Brokers: What's the Difference?

    RIAs and brokers are held to different standards when providing investment advice. Here's how they differ.
  3. Financial Advisor

    The DoL Fiduciary Rule: What It's All About

    The new fiduciary rule is complicated but hopefully beneficial—for most. Here's some background and what is ahead for both advisors and clients.
  4. Financial Advisor

    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.
  5. Financial Advisor

    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.
  6. Retirement

    Enticing Retirement Plan Participants to Save

    Getting participants interested, educated and enrolled in their retirement plan is the first step to long-term saving for a comfortable retirement.
  7. Financial Advisor

    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.
  8. Financial Advisor

    7 Steps To Evaluate A Financial Advisor

    Looking to hire a financial advisor but unsure what you want or need? Follow these seven steps.
  9. Financial Advisor

    Top Retirement Prep Questions to Ask Clients

    Is your client really ready for retirement? Here are some essential questions to ask.
  10. Retirement

    401(k) Investment Policy Statement: An Example

    Here's what a 401(k) investment policy statement should look like.
Frequently Asked Questions
  1. Depreciation Can Shield Taxes, Bolster Cash Flow

    Depreciation can be used as a tax-deductible expense to reduce tax costs, bolstering cash flow
  2. What schools did Warren Buffett attend on his way to getting his science and economics degrees?

    Learn how Warren Buffett became so successful through his attendance at multiple prestigious schools and his real-world experiences.
  3. How many attempts at each CFA exam is a candidate permitted?

    The CFA Institute allows an individual an unlimited amount of attempts at each examination.Although you can attempt the examination ...
  4. What's the average salary of a market research analyst?

    Learn about average stock market analyst salaries in the U.S. and different factors that affect salaries and overall levels ...
Trading Center