With participant-directed accounts, the plan assets are segregated so that each plan participant has control of his or her own investment account. Investment earnings depend on how each individual participant elects to invest their money.
The advantages of participant-directed accounts are reduced liability for the plan sponsor, and the ability for participants to elect an investment strategy that best suits their needs. If participants are making the investment decisions, the plan sponsor is not liable for investment decisions made by the participant. However, the plan sponsor is responsible for providing participants with a retirement program that satisfies certain requirements, and educating them so that informed decisions can be made.
The participants' ability to elect how to invest their own money gives them the ability to invest in a manner that best suits their needs. This way an older employee nearing retirement can preserve capital with a conservative portfolio allocation, while a younger employee, who is less sensitive to short term losses, could pursue a more aggressive portfolio allocation.