What should a plan sponsor do for a defined contribution (DC) plan?

A plan sponsor for a defined contribution (DC) plan has a fiduciary responsibility to ensure that the investment options available to participants are suitable and diversified. Selecting answer B reflects this responsibility by emphasizing the importance of providing a range of appropriate investment choices while minimizing the concentration of risk associated with company stock.

Diversification is a key principle in investment management, as it helps mitigate risk by spreading investments across various asset classes. By minimizing the investment in company stock, the plan sponsor reduces participants' exposure to the risks associated with the company's performance, thus promoting a more stable investment strategy for participants. Additionally, providing suitable investment options ensures that plan participants can align their investment choices with their individual risk tolerance, time horizons, and retirement goals.

In contrast, investing entirely in company stock exposes participants to significant risks, as they would be overly reliant on the performance of a single entity. Offering unlimited choices, while seemingly favorable, can overwhelm participants and lead to decision paralysis or suboptimal choices, particularly among those who may lack investment expertise. Encouraging higher-risk investments without considering individual risk tolerances could lead to inappropriate investment decisions, especially for less experienced investors. Therefore, providing suitable options and minimizing concentrated risks is the best practice for a plan sponsor in a DC plan.