What Can ERISA Plans Invest In?

A 401(k) that hemorrhages money won't do your retirement plans any good. Workplace retirement plans covered by the Employee Retirement Income Security Act are restricted from certain types of investments. The restrictions are designed, in part, to prevent plan administrators from mismanaging your money for personal gain. ERISA also outlaws some specific investments.

Investment Options

The federal government doesn't have a list of approved investments for ERISA plans. Standard options include mutual funds, "collective investment" funds that pool money from multiple investors, and annuities. "Participant-directed" accounts -- those like 401(k)s that offer you a choice of investment options -- cannot invest in art, antiques, gems, coins, collectibles or alcoholic beverages. They can invest in precious metals only if they meet various federal requirements. ERISA limits how much some plans can invest in the employer's stock.

Disqualified Person

Most types of investment are acceptable under ERISA. However, the law bans certain transactions with "disqualified individuals." Plan administrators or fiduciaries, people providing services to the plan and the company whose employees participate in the plan, are all disqualified under ERISA. So is any person, company or partnership who owns 50 percent of the company stock. The prohibition is extended to spouses, children and parents of disqualified individuals.

Prohibited Transactions

Disqualified people aren't completely shut out from doing business with the plan. A company employee who provides services to the plan can get all the benefits other employees do, provided there's no special treatment. ERISA does ban any investment that transfers plan income or assets to a disqualified person, or that lets fiduciaries use assets for their own benefit. Prohibited transactions include roundabout methods, such as borrowing money from the plan or accessing plan money through a qualified person who does business with the plan.


When the IRS catches a disqualified person investing funds for her own gain, it can hit her with a tax penalty of 15 percent for each year that the prohibited transaction went on. If the guilty party doesn't pay the money back within 90 days of the IRS contacting her, the government can add a 100 percent tax penalty. Both taxes are based on the amount of money or fair market value of the plan assets involved.