Participant-directed pension plans

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Under principle investment issues of participant-direct plan, CFAI mentions the point on diversification, quoting CFAI text: ERISA establishes a safe harbour for DC plan sponsors against claims of insufficient or imprudent investment choice if the plan has 1) at least three investment choices diversified versus each other,
May I know since a plan is participant-directed, meaning participants make the investment calls themselves, instead of a sponsor, why would it be necessary to have a ‘safe harbour’ should there be at least three investment choices made?
 
DC plans are heavily regulated, this might be the first reason since they are obligated to maintain safety margin and surplus. The other reason, there are few DC plans on market and sponsors take care about their Plan’s reputation and also seek to attract new participants.
 
Participants in DC plans which are employees often have limited investment knowledge and skills. That is why the sponsor should be responsible for offering diversified investment choices to participants.
 
I am a DC plan participant. I had to choose between 3 products. If I didn’t choose, they would put me into balanced by default what is mandatory prescribed. Anyway, I chose balanced.
 
In order for a plan to be participant directed, participants must be able to build a diverse portfolio. A plan sponsor could be worried that a participant may come back in the future and said they did not have the capability to build a diverse portfolio and file suit. This may deter plan sponsors from setting up participant directed plans, so the gov’t provided a safe harbor and said if you provide 3 that are different they would not be held responsible for the choices made by the participant.
 
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