Investment Options in a 401(k) Plan: A Sponsor Guide

When employees think about their 401(k), they usually think about performance. When regulators (and plaintiffs’ attorneys) look at a 401(k), they focus on process: how the plan sponsor selected and monitored the investment options made available to participants.

This guide breaks down how a 401(k) investment lineup works, what types of investment vehicles can be included (including newer topics like ETFs, CITs, SDBAs, and crypto), and practical ways plan sponsors can get expert help while reducing fiduciary liability.

How a plan sponsor makes investments available to participants

In most 401(k) plans, participants choose from a menu of investment options—commonly called the plan’s investment lineup. The plan sponsor (often supported by an advisor and/or a committee) is responsible for selecting that lineup and monitoring it over time.

Under ERISA (the federal law that governs most private-sector retirement plans), sponsors have a fiduciary duty to act prudently and solely in participants’ best interests. That doesn’t mean you must pick the “best-performing” funds; it means you need a prudent, repeatable process to select and monitor options.

In practical terms, making investments available usually includes:

• Establishing governance (an investment committee and meeting cadence, even if informal for small plans)

• Documenting criteria for selecting and replacing options (often through an Investment Policy Statement, or IPS)

• Working with providers (recordkeeper, custodian, advisor) to implement the lineup on the participant platform

• Monitoring fees, performance relative to benchmarks/peers, and whether each option still serves its role

• Communicating changes to participants in a clear, timely way

If you want the regulatory “source of truth,” the U.S. Department of Labor provides fiduciary guidance and publications through EBSA at DOL/EBSA, including practical discussions of fiduciary responsibilities. You can also review ERISA’s fiduciary standards via the U.S. Code on Congress.gov/GovInfo (ERISA fiduciary provisions).

How a 401(k) investment lineup works (and why structure matters)

A well-built lineup isn’t just a random list of funds. It’s a set of options that work together so participants can build diversified portfolios aligned with their time horizons and risk tolerance.

Most lineups are designed around a few core building blocks:

• A default option for participants who don’t make an election (often a target-date fund series, used as the plan’s QDIA)

• Core diversified choices (U.S. stock, international stock, bonds, and sometimes a balanced option)

• Capital preservation (money market and/or stable value)

• Specialty options (real estate, inflation-protected bonds, small cap, emerging markets, etc.)—used sparingly

• Optional “expanded choice” through a self-directed brokerage account (SDBA) for participants who want more control

From a fiduciary perspective, the lineup should be designed so that a typical participant can reasonably construct a diversified portfolio without needing to be an investment expert.

Types of investment vehicles that can be in a 401(k) lineup

“Investment option” is the participant-facing term. Behind the scenes, that option might be delivered through different investment vehicles—each with its own pricing, transparency, and operational considerations.

Mutual funds (the most common)

Mutual funds are widely used in 401(k) plans because they’re familiar, easy to administer, and available across most recordkeepers. They can be actively managed or index-based. For sponsors, key considerations typically include:

• Total cost (expense ratios plus any plan-level admin costs)

• Share class selection (institutional share classes often have lower expenses)

• Fit in the lineup (avoiding unnecessary duplication)

Collective Investment Trusts (CITs)

CITs are pooled investment vehicles typically available to qualified retirement plans. They can sometimes offer lower costs than comparable mutual funds, but they may have different disclosure formats and operational constraints depending on your recordkeeper.

Learn more about collective investment trusts (CIT)

Exchange-Traded Funds (ETFs)

ETFs are widely used in retail investing, but their use inside 401(k) lineups depends on recordkeeper capabilities and how the ETF is implemented (some platforms support them directly; others use them through a managed account or brokerage window).

Learn more about ETFs in retirement plans

Stable value (capital preservation)

Stable value options are designed to preserve principal while seeking returns typically higher than money market funds, often through insurance “wrap” structures. They can be a valuable part of a lineup for participants nearing retirement or those who want lower volatility—but they also come with contract terms and restrictions sponsors should understand.

Learn more about stable value funds in retirement plans

Self-Directed Brokerage Accounts (SDBAs)

An SDBA (sometimes called a brokerage window) allows participants to access a much broader range of investments beyond the core lineup. This can help satisfy participants who want more choice, but it can also raise important governance questions:

• Who is eligible to use it (all participants or only those meeting certain criteria)?

• What restrictions apply (e.g., no options trading, no margin, no certain high-risk products)?

• How will the sponsor monitor the SDBA offering and communications?

Learn more about stocks and equities in retirement plans

Crypto in 401(k) plans (use with caution)

Crypto has attracted attention as an investment option, but it’s also an area of heightened fiduciary scrutiny due to volatility, valuation questions, custody concerns, and participant risk. Sponsors considering crypto should proceed carefully, document their analysis, and understand the operational and compliance implications.

How to build (and maintain) a prudent lineup: a practical checklist

Every plan is different, but most prudent lineups follow a consistent approach. Here’s a sponsor-friendly checklist that also supports good documentation.

1. Define the lineup’s “roles” (default option, core equity, core fixed income, capital preservation, specialty).

2. Set selection criteria (fees, benchmark fit, manager tenure, performance consistency, risk metrics).

3. Decide on vehicle types (mutual funds vs. CITs vs. ETFs) based on cost, recordkeeper support, and participant experience.

4. Review total plan costs, not just fund expense ratios (investment + recordkeeping + advisor).

5. Monitor regularly (commonly quarterly reviews with an annual deep dive).

6. Document decisions (meeting notes, reports reviewed, reasons for changes).

7. Communicate clearly when you make changes (what’s changing, when, and what participants should do).

Reducing fiduciary liability with 3(21) and 3(38) support

Many sponsors want help selecting and monitoring investments—but also want to reduce fiduciary exposure. That’s where ERISA fiduciary advisor and fiduciary manager roles come in.

Get the full rundown on 3(21) vs 3(38) fiuciary options

What a 3(21) fiduciary advisor does

A 3(21) investment fiduciary provides advice and recommendations, but the plan sponsor retains final decision-making authority. In other words, the advisor helps you build and monitor the lineup, but you approve changes.

What a 3(38) fiduciary investment manager does

A 3(38) investment manager has discretionary authority to select, monitor, and replace investments (within the scope defined in their agreement). This can materially reduce the sponsor’s day-to-day fiduciary burden for investment decisions—though the sponsor still must prudently select and monitor the 3(38) manager.

Internal link note: You asked to “explain and link to 3(38).” If you have a post, share the URL and we’ll link it with anchor text like “how an ERISA 3(38) investment manager can reduce fiduciary workload.”

How to get help building your 401(k) lineup

If you’re evaluating your lineup (or building one for a new plan), the right support can improve outcomes and reduce risk.

• Work with a qualified retirement plan advisor who can help with benchmarking, fee analysis, and investment monitoring. See our guide on how to hire a retirement plan advisor and browse vetted options in our 401(k) financial advisors directory.

• Coordinate with ERISA counsel when making major changes (e.g., adding an SDBA, changing share classes, or revising your IPS). Explore our ERISA attorneys directory.

• Stay on top of compliance—investment governance often intersects with reporting and audit requirements. If you need a refresher, read what a Form 5500 is and, if applicable, what a 401(k) audit is and when you need one. For plans approaching audit season, what is needed for a 401(k) audit and where to find it can help your team prepare.

• Protect plan assets with the right bond. Most ERISA plans must have an ERISA fidelity bond. Learn what an ERISA bond is and how to buy one and compare options through our ERISA bond providers directory.

And if you’re evaluating providers more broadly (recordkeepers, third-party administrators, bundled solutions), you can start with our retirement plan providers directory.

Conclusion: A better lineup starts with a better process

A strong 401(k) lineup is a balance of cost, diversification, participant usability, and ongoing oversight. Whether your plan uses mutual funds, CITs, stable value, ETFs, an SDBA, or other options, the sponsor’s responsibility is to follow a prudent process—and document it.

If you want to reduce workload and fiduciary risk, consider engaging a 3(21) fiduciary advisor or a 3(38) investment manager, and make sure the arrangement is clearly documented. To get started, review how to hire a retirement plan advisor or browse our 401(k) financial advisors directory to find the right fit for your plan.