Why Your Choices Are Limited Most employers hire a mutual fund, insurance company or bank to assist with recordkeeping the retirement plan. Often, in order to receive the necessary services, employers must agree to offer funds only from that fund company. Brokerage firms and some fund companies do allow a selection of funds from the entire investment universe. However the added complexity of choosing funds from such a diverse assortment would require significant time and energy on an employer's part. A similar burden would fall on the shoulders of each plan participant who would have to pick from thousands of choices.
Employers recognize they have an obligation to provide a diverse mix of choices for employees.
Offering appropriately manageable choices to employees can reduce the company's liability should investment performance not meet the employee's needs or expectations. The IRS doesn't specify the actual choices, but rather offers a definition of what's acceptable. These are not requirements, but rather guidelines, that when followed, can reduce the financial responsibility of the employer for investment performance. There are good reasons most employers offer only a limited number of investment choices. Plus, by limiting the mix, employers can meet their obligation to provide offerings that plan members can understand.