401(k) Investments - Options for Selecting a “Prudent” Menu Blog Feature
Eric Droblyen

By: Eric Droblyen on September 30th, 2020

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401(k) Investments - Options for Selecting a “Prudent” Menu

Investments | Plan Setup | Fiduciary Responsibility

Believe it or not, ERISA imposes few fiduciary responsibilities on business owners when selecting investments for their 401(k) plan. They boil down to picking – and maintaining - enough “prudent” investments to allow plan participants to diversify their account “so as to minimize the risk of large losses.” Prudent 401(k) investments are simply funds that meet their investment objective for reasonable fees.

The problem? Most 401(k) providers have little – if any – incentive to help business owners to pick prudent investments. In fact, the opposite is true. They can grow their profits by steering business owners towards “imprudent” investments with excessive fees and/or inferior returns – in short, give conflicted investment advice. The worst part? It’s perfectly legal for them to do so.

If you’re a business owner, I want to help you avoid this trap. I have two recommendations for making prudent 401(k) investment selection a snap - 1) model your investment menu after the Federal Thrift Savings Plan, or 2) hire a fiduciary-grade financial advisor for professional investment advice. 

Meeting your fiduciary responsibility to diversify 401(k) investments

Before you start picking investments for your 401(k) plan, I recommend you first understand your fiduciary responsibility to diversify your investment menu. These requirements are outlined in ERISA section 404(c). Meeting them is not difficult. You just need to pick at least three “core” investments with materially different risk and return characteristics. A menu of equity (stocks), fixed income (bonds), and capital preservation (money market or stable value) funds can do the trick.

In short, your diversification responsibility is nothing to fear. Selecting “prudent” investments is where you're much more likely to land yourself into hot water. That’s why impartial guidance is so important. In my view, you have two clear options.

High 401(k) Fees

Option 1- Model your investment menu after the federal Thrift Savings Plan 

With 5.5 million participants and $558 billion in assets, the Federal government’s Thrift Savings Plan (TSP) is the largest defined contribution retirement plan in the United States. Despite the TSP’s mammoth size, it does not try to “beat the market” with actively-managed funds. Instead, it seeks cost-efficient market returns with passively-managed index funds.

The use of index funds by the largest retirement plan in the U.S. can seem surprising until you understand that most actively-managed funds fail to outperform "comparable" index funds – basically, funds with similar holdings - over long periods of time, net of fees.

The TSP’s funds are not available to private sector 401(k) plans, but you can pick a comparable menu using index funds from leading providers such as Vanguard, Blackrock, Schwab, and Fidelity. 

Below is a sample menu using Vanguard index funds. I would go as far to consider these funds indisputably prudent because they meet their investment objective – market returns – for low fees. 

TSP Fund


Comparable Fund


Exp Ratio

G Fund

Government securities (specially issued to the TSP)

Vanguard Federal Money Market Fund



F Fund

Government, corporate, and mortgage-backed bonds

Vanguard Total Bond Market Index (Admiral Shares)



C Fund

Stocks of large and medium-sized U.S. companies

Vanguard 500 Index (Admiral Shares)



S Fund

Stocks of small to medium-sized U.S. companies (not included in the C Fund)

Vanguard Extended Market Index (Admiral Shares)



I Fund

International stocks of 22 developed countries

Vanguard Total International Stock Index Fund (Admiral Shares)



Lifestyle Funds

Diversified portfolios based on various time horizons, using the G, F, C, S, and I Funds

Vanguard Target Retirement Income Fund



Vanguard Target Retirement 2015 Fund



Vanguard Target Retirement 2020 Fund



Vanguard Target Retirement 2025 Fund



Vanguard Target Retirement 2030 Fund



Vanguard Target Retirement 2035 Fund



Vanguard Target Retirement 2040 Fund



Vanguard Target Retirement 2045 Fund



Vanguard Target Retirement 2050 Fund



Vanguard Target Retirement 2055 Fund



Vanguard Target Retirement 2060 Fund



Option 2 - Hire a fiduciary-grade financial advisor for professional investment advice

If you want actively-managed funds for your 401(k) plan or more personalized portfolio management for your plan participants, I strongly recommend you hire a financial advisor for professional investment advice. 

However, you don’t want to hire just any financial advisor, you want to hire one that’s subject to a fiduciary standard of care. The reason is simple - only fiduciary-grade financial advisors are obligated by law to give impartial investment advice. In contrast, non-fiduciary advisors can give conflicted advice that favors investments with high commissions without consequences. In general, investment advisers are fiduciary-grade, while brokers and insurance agents are not.

The irony? Even though fiduciary-grade investment advisers are bound by a higher standard of care than non-fiduciary brokers and insurance agents, their advice often costs less. Don’t take my word for it. Check out our latest study of fiduciary-grade 401(k) advisor fees: 

Plan Asset Range

$0-$250k (260 plans)

$250k-$1M (260 plans)

$1M-$5M (233 plans)

Average Assets




Average Participants





0.05% - 7.41%

0.08% - 1.53%

0.05% - 1.00%









Avoid conflicted 401(k) investment advice!

Inappropriate investment selection is one of the top causes of 401(k) lawsuits today. In my view, the reason why so many plan fiduciaries find themselves in hot water is easy to understand - conflicted 401(k) investment advice is not illegal.

Because conflicted 401(k) investment advice is not illegal, you must know how to avoid it to pick “prudent” funds. Modeling your 401(k) investment menu after the TSP or hiring a fiduciary-grade financial advisor to pick investments for you are two ways to do that.

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About Eric Droblyen

Eric Droblyen began his career as an ERISA compliance specialist with Charles Schwab in the mid-1990s. His keen grasp on 401k plan administration and compliance matters has made Eric a sought after speaker. He has delivered presentations at a number of events, including the American Society of Pension Professionals and Actuaries (ASPPA) Annual Conference. As President and CEO of Employee Fiduciary, Eric is responsible for all aspects of the company’s operations and service delivery.

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