If you are a plan sponsor at a non-profit organization, you are likely responsible for overseeing the investment options offered in your employees’ retirement plan. That responsibility does not require you to become an investment professional. But it does require you to understand enough about how investment lineups work to ask informed questions, make thoughtful decisions, and document your reasoning.
For many non-profit executives and board members, the investment lineup has always been something the prior vendor or advisor simply handled. That approach is understandable, but it carries risk. As a plan fiduciary, your organization bears responsibility for the prudence of the investment options offered to participants. This guide is intended to give you a working vocabulary and a framework for thinking about that responsibility.
Please note this website is not a substitute for legal advice are not a law firm; please reference the department of labor website for the most up-to-date information. https://www.dol.gov/general/topic/retirement/fiduciaryresp
What Is an Investment Lineup?
An investment lineup, sometimes called a fund menu or investment option menu, is the set of investment options available to participants in your retirement plan. When employees decide where to direct their contributions, they are choosing among these options.
The lineup is not just a list of funds. It is a tool that either helps or hinders participants in building a diversified, age-appropriate retirement portfolio. A well-designed lineup covers a range of asset classes and risk profiles, is reasonably priced relative to comparable options, and is manageable enough that participants can navigate it without becoming overwhelmed.
Core Building Blocks
Most retirement plan lineups include a mix of the following types of investments:
Equity funds invest primarily in stocks. They carry more variability in returns than fixed-income options, but they have historically provided the growth that most participants need over long time horizons. Equity funds are typically categorized by geography (domestic or international) and by the size of the companies they invest in (large-cap, mid-cap, or small-cap).
Fixed-income or bond funds invest in debt instruments such as government or corporate bonds. They generally offer more stability than equities but lower growth potential. They play an important role in portfolios for participants who are closer to retirement or who have a lower tolerance for variability.
Stable value or money market funds offer capital preservation and low variability.
Balanced or blended funds combine equities and fixed income in a single fund. They simplify the investment decision for participants who prefer a more straightforward approach.
Target-date funds deserve special attention. These are funds designed to serve as a single, all-in-one investment for participants based on their expected retirement year. A target-date 2040 fund, for example, is designed for someone planning to retire around 2040; it starts with a more growth-oriented mix and gradually shifts toward more conservative investments as the target date approaches. Many retirement experts consider a thoughtfully chosen series of target-date funds to be one of the most effective default options a plan can offer.
How Many Options Is the Right Number?
There is no regulatory requirement dictating how many investment options a 403(b) plan must offer, but the research on participant behavior suggests that there is such a thing as too many choices. When faced with a very large lineup, twenty, thirty, or more options, many participants make poor decisions or no decision at all.
A lineup of several well-chosen options that covers the core building blocks described above, including a good target-date series as the default, gives participants what they need without overwhelming them. If your current lineup is significantly larger than that, it may be worth discussing with your advisor whether a more streamlined approach would better serve participants.
Understanding Fees Within the Lineup
Every investment fund charges a fee, expressed as an expense ratio, which represents the annual cost as a percentage of assets. A fund with an expense ratio of 0.50 percent charges fifty cents for every hundred dollars invested each year. These costs are taken directly from fund returns rather than billed separately, which makes them easy to overlook.
Over a long investment horizon, small differences in expense ratios can compound into meaningful differences in outcomes. Fiduciary standards require plan sponsors to ensure that investment fees are reasonable relative to the services and returns the funds provide. This does not mean always choosing the lowest-cost option, but it does mean being able to articulate why more expensive options are appropriate.
Many funds are available in multiple share classes, which are essentially different fee structures for the same underlying investment. Institutional share classes, available to larger plans or through pooled structures, often carry significantly lower expense ratios than retail share classes. Understanding which share class your plan is using, and whether a lower-cost alternative is accessible, is a meaningful part of responsible plan oversight.
Documenting Your Decisions
Every decision the plan committee makes about the investment lineup, adding a fund, removing one, retaining one after a review, placing one on a watch list, should be documented. This documentation is the primary evidence of a prudent process.
You do not need to document perfection, but you do need to document prudent process for decision making per the Department of Labor https://www.dol.gov/general/topic/retirement/fiduciaryresp. A committee that reviews its lineup regularly, considers performance against benchmarks, examines fees, and records its reasoning is fulfilling its fiduciary obligations. One that has not revisited the lineup in several years, or that cannot explain why certain options are included, is in a more difficult position.
Your plan advisor should be a primary resource in this process. Helping plan sponsors understand their investment lineup, facilitate regular reviews, and document the committee’s decisions is a core part of what a qualified retirement plan advisor does. If you are uncertain about any aspect of your current lineup, that conversation is a reasonable and productive place to start.
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