This month we have a question about how to handle the money invested in 401k funds in the lineup that you are replacing…

Erick, we’d like to make some changes in our plan investment menu. There are participants with money invested in the 401k funds we have identified to eliminate. Is it a good idea to grandfather these participants, allowing them to remain in those funds while closing them to new investors?

Answer: This should be a discussion with your plan’s investment professional. In fact, you may want to cover the topic with the plan’s attorney, just as a housekeeping matter. But as you make the decision, consider that even when the decision is made with the best of intentions, grandfathering may not achieve the desired outcome.
When you make a change to plan provisions, investment options or even your other benefits, nongrandfathered employees will likely find out about it. Whether new employees or those who are established come out “better off,” you can be sure the word will spread, and that could be disruptive.
And don’t forget the compliance aspect of making changes for one group over another, says Cammack Retirement. They cite the potential for failing future nondiscrimination tests that may result from grandfathering employees in certain situations. While that may not be the case when changing a plan investment, it underscores the need to think through potential outcomes when considering grandfathering in the plan.
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For plan sponsor use only, not for use with participants or the general public. This information is not intended as authoritative guidance or tax or legal advice. You should consult with your attorney or tax advisor for guidance on your specific situation.