For the 401(k) plan of the future to succeed we should offer professionally managed for all employees. Rather than plan participants choosing their own investment mix of funds a pensiion fund tyoe investment vehicle will work best. Individuals are ill prepared to manage their own retirement accounts.

Here’s what real reform would look like:

• Every plan should be required to have a minimum of five risk adjusted, globally diversified portfolios (ranging from conservative to aggressive), consisting solely of low management fee stock and bond index funds. Employees would take a short risk capacity survey and select the portfolio suitable for them;
• Investment advisers to 401(k) plans should be required to state in writing that they are “3(38) ERISA investment fiduciaries”, which means they can have no conflicts of interest. They would accept 100% of the liability for the selection and monitoring of the investment options in the plan. These advisers would be required to provide investment advice to all participants to be sure they have chosen a portfolio suitable for their investment objectives and capacity for risk.

These simple reforms would radically improve the expected returns of plan participants.

The underlying fallacy in current efforts at 401(k) plan reform is that employees are capable of making intelligent investment choices when presented with a dizzying array of mostly poor investment options. I recently spent time with a group of nurse anesthetists whose plan we advise. It never occurred to me to ask them to give me ten needles and five choices of anesthesia (some good and some dangerous) and let me handle their next patient.

Why do we assume employees can be skilled investment advisers? We need reform that makes the process of making investment selections in 401(k) plans foolproof. Current reform just doesn’t cut it.

Plan sponsors would benefit from these two proposals because this mirrors the old pension plan. The participants in their plan would improve results and reduce anxiety.

Please comment or call to discuss how this would affect your company no matter the size.