401(k) should offer variety of fund choices

Practice Pointers. By Amy S. Born, AMNews contributor. Nov. 17, 2003.

PRACTICE POINTERS

Answers to questions about the business side of your practice

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Question I am establishing a 401(k) plan for my employees. How many fund choices and what types of funds should I offer?

Answer There is no clear cut answer as to how many fund choices should be offered in a retirement plan. Too few options could expose you, as the plan's trustee, to liability. On the other hand, offering too many choices may create confusion and result in low participation rates.

However, the funds you offer should cover all the broad-asset categories, including large, midsize and small company stocks, international stocks, and more conservative options such as fixed income (bonds).

The definition of large company stocks has changed over time but generally refers to any stock with market capitalization in excess of $8 billion. Market capitalization is simply the number of outstanding shares of a company multiplied by its current stock price. For example, if General Motors has 560.7 million shares outstanding, and its stock price is trading on the open market at $41 per share, then its market capitalization would be nearly $23 billion.

Under current definitions, a company would be considered a small stock if its capitalization were less than $1.4 billion. A midsize company's stock capitalization would fall somewhere in between.