In an extraordinary article, Anna Prior writing at WSJ.com (“How to Fix the 401(k)”) proposes five reforms to make 401k plans better serve as a vehicle retirement. Overall, the article raises several points for serious discussion and appears to be relatively liberal – especially coming from the Journal. The proposed reforms:
- Simplify fee disclosure
- Require plans to offer low-cost index funds
- Require plan features that nudge people to save more
- Have those providing guidance be fiduciaries to the plan
- Start a national 401(k) plan for small employers
Fee disclosure: Strongly agree
The key to meaningful fee disclosure is clarity. We don’t need warning labels or “miles per gallon” style stickers – these kinds of disclosure can be gamed and distorted. What we do need is a way to get a clear apples-to-apples fee comparison standard, preferably expressed in dollar amounts. Allow plan providers to compete on a level playing field. I trust plan sponsors to make informed, rational decisions if they are given clear, accurate information.
Require low-cost index funds: Agree, but with caveats
As I have blogged previously, I am an advocate of index investing. Low-cost index funds allow participants market returns with the least drag.
I do have a problem with requiring index investments in all plans. Not all index funds are alike, and when the government regulates (Yikes!) this kind of requirement inefficiency is sure to ensue. I would prefer an incentive-based approach whereby plan sponsors who make such investments available are given some form of safe harbor relief from potential liabilities.
Behavioral economics in plan design: Strongly agree
The “nudge” works. Again, I support more incentives to plan sponsors to adopt automatic enrollment and escalation provisions. I’m even willing to go beyond the nudge to a “solid push.” Employees can opt out, but experience has shown that inertia is a fact of life for 401(k) investors. Get them started, and they keep going – but they need a push to get saving.
Fiduciary status of plan advisers: Strongly agree
I know there is a lot of debate on this issue, and I commend the Journal for this stand. It is time for the DOL to take action and set a standard.
While I understand the broker argument that a fiduciary standard will limit choice, I believe that the net effect will enhance choice overall. I am willing to take the risk of potential fee increases to eliminate some of the worst investment price practices.
Check out recent articles from The New York Times and Financial Advisor. Full disclosure: These articles present a positive view of the fiduciary standard.
National 401(k) plan: Disastrously bad idea
The idea is unworkable and unnecessary. The underlying assumption is that small businesses can’t get access to low-cost services. As I have spent the last 10 years proving that assumption wrong, I get more than a little upset when I hear the old “economies of scale” argument. Here’s the quote:
“A national 401(k) plan would allow small companies to benefit from economies of scale by pooling their resources and reining in individual costs, he says. He [John Rekenthaler, vice president of research at Morningstar Inc.] adds that such a platform would also lift the costs associated with fiduciary responsibility away from individual small employers since the funds in the national plan would be picked by a government entity.
Having individualized plans at small companies just isn't cost-effective, says Mr. Rekenthaler.”
The funds in the national plan would be picked by a government entity! Please.
What we need is more clarity. Getting the first four items done would make the fifth point irrelevant.