Question

A family-owned business with 100 employees wants to set up a retirement plan. If the organization implements a qualified defined contribution plan, what restrictions does the Employee Retirement Income Security Act impose on the investment of the assets?

The investment advisor for the employer cannot have any conflicts of interest.
The investment advisor of the plan must be a registered investment broker and not be employed by the organization.
The employer must have its assets covered through the Pension Benefit Guaranty Corporation.
The employer has a fiduciary responsibility to invest the pension fund as any prudent person would.

Answer 1

The Employee Retirement Income Security Act imposes a fiduciary responsibility on employers to invest the assets of a qualified defined contribution plan, such as 401(k)s and 403(b)s, prudently and to diversify investments to minimize risk. These contributions are made regularly, and the tax-deferred plans are portable, allowing employees to carry on with their retirement savings even after changing jobs.

Step-by-step explanation:

When a family-owned business with 100 employees decides to set up a qualified defined contribution plan, such as 401(k)s and 403(b)s, they are bound by the Employee Retirement Income Security Act (ERISA) to ensure that the investments of the plan's assets are handled with utmost care and prudence. Employers, acting as fiduciaries, must adhere to the "prudent person" standard, meaning that they are required to invest the pension fund's assets wisely and diversify to minimize the risk of large losses unless it is clearly prudent not to do so. The investments should be made in a manner consistent with the overall investment strategy, which aims to secure and increase the retirement benefits for the plan participants.

The employer's contributions to the worker's retirement account occur regularly, typically every paycheck. The employee often also contributes to this account. The funds in these tax deferred plans are invested in a variety of investment vehicles. The portability of these plans ensures that an employee can take their 401(k) with them when changing jobs which can lead to continuity in building retirement savings.