What is the fiduciary responsibility around diversification of plan investments?

• A. Diversify to manage risk and protect plan assets; document and monitor diversification.
• B. Invest all assets in employer stock to align with the sponsor.
• C. Avoid diversification to maximize returns.
• D. Diversify only after a market crash.

Answer: (A)

Diversification reduces risk by spreading plan investments across different asset classes and investment options so a poor performance in one area doesn’t threaten the entire fund. Fiduciaries must act prudently and diversify to minimize the risk of large losses to participants’ benefits, unless there’s a clearly prudent reason not to diversify. It’s also essential to document the diversification decision and regularly monitor and adjust the portfolio to maintain prudent diversification over time. Investing everything in employer stock concentrates risk and contradicts diversification; aiming for higher returns by avoiding diversification ignores protection of plan assets, and waiting to diversify until after a market crash is reactive rather than part of a prudent process.