Is participant-direction really in participants' best interests?

In his July Fiduciary Corner column in InvestmentNews, Blaine looks at the evolution of 401(k) plans and how no amount of tinkering with the formula has reliably equipped participants to make good investment choices.  Dalbar's annual Quantitative Analysis of Investment Behavior study famously demonstrates that almost without fail, investors fail to keep up with market growth.  Legal and regulatory changes to allow for improved investment choices and education have not resulted in improved results. In addition, the cost of participant direction and the lack of incentive for plan sponsor's to control costs has caused plan fees to become the target of lawsuits.

Rather than continue to try to make work what has continued to prove to be an exercise in futility, Blaine suggests that it may be time to reconsider the notion of participant-direction altogether.  Centrally administered portfolios, as you'll find in foundations, endowments and defined benefit plans, tend to be less complicated and more successful.  It places a dedicated fiduciary in a position of accountability from design to execution who is in a better position to draw on the support of professional advisors and managers to be more responsive to the changing circumstances that will be faced on the road to retirement. Perhaps it would be in participants' best interests to move to committee or trustee-directed portfolios and try to mimic that success?

Make sure you read Blaine's full article at InvestmentNews.com and click the "Recommend" button at the top of the page if you like it.  We've already received some feedback via email from those who disagree with and support this idea, and we'd like to hear more and respond to it in hope of advancing the conversation on how to provide an environment more conducive to success for retirement.  Please leave those thoughts in the comments section below. 

Comments

[Mark C Griffith, AIFA]

There really is no logical argument that can support participant direction if and only if the trustee-directed approach follows a proper prudent approach with independent input based on the demographics of the plan. Prior to the surge in participant direction, plan trustees (especially in smaller closely held companies) generally had the largest account balances and therefore managed the accounts based on their own time horizon, risk tolerance and diversification needs. Hence the portfolios were not truly managed in the best interest of all participants. Taking Blaine's suggestion a step further, retirement accounts should be managed by an independent (non-participant) body with multiple investment strategies tailored to the diversity (age, risk, income etc.)of the participant group. Although logically this approach may be best for participants, there is an entire industry supported by the failed system of retail accounts in an institutional environment. It is similar to the logic behind a flat or consumption tax replacing the current income tax structure. Good idea but good luck getting it implemented.