Whole lotta disputin’ goin’ on out there. On October 31, 2023, the Department of Labor issued its new fiduciary rule[i], followed by 60 days of public comment (now exceeding 19,000 submissions)! The last two months also included two days of public hearings[ii].
The new rule leaves fiduciary duties for 401(k) plan sponsors mostly unchanged—except perhaps interactions with vendors regarding their recommendations and consultations with individual participants, including investment selection, rollovers, and distributions.[iii]
So, expect the rule to be finalized later this week (that is plan sponsor humor); however, our experience with the 2016 rule suggests the possibility of litigation which might extend the timeline for quite a while.[iv]
Up In the Air – While You’re Restin’
This week, I read with fascination a recent Wall Street Journal (WSJ) article that reviewed BlackRock Investment Institute’s 2024 Investment Outlook[v], and suggested 401(k) participants should embrace a variant of “momentum investing”[vi]:
“…the backward-looking “momentum” strategy of annually switching into whichever sector previously did best, which doesn’t require powers of prediction, has also blown outright index investing out of the water recently. …”
The article concludes:
“… A semiannual “momentum” approach (to investing) might be a good middle ground, as it has proved more successful in the past couple of decades. As with diets and exercise routines, healthy life decisions are often made on a preset schedule.”
Wow! Readers of the WSJ must be quite different from most of the retirement savings plan participants I encountered over the past 44+ years, 40+ years in 401(k) plans.
Yes, individual account retirement savings plan participants are much more investment-savvy today than in the past, in part because we now have ~718,000+ plans and ~115+ million DC accounts[vii], including 644,000+ 401k plans and 96+ million 401k accounts.
However, many participants are newcomers to their 401(k) plans. Many have investments strewn across multiple accounts.[viii] New or experienced, the fact is that most 401(k) participants are financially illiterate and/or innumerate—at least when it comes to the sophistication necessary to invest a lifetime of savings.
One study of financial literacy I have frequently cited in the past has these three questions[ix]:
1) Suppose you had $100 in a savings account and the interest rate was 2% per year. After 5 years, how much do you think you would have in the account if you left the money to grow?
A) More than $102
B) Exactly $102
C) Less than $102
D) Don’t know
E) Prefer not to say
2) Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After 1 year, how much would you be able to buy with the money in this account?
A) More than today
B) Exactly the same
C) Less than today
D) Don’t know
E) Prefer not to say
3) Buying a single company’s stock usually provides a safer return than a stock mutual fund.
A) True
B) False
C) Don’t know
D) Prefer not to say
Past studies showed less than one-third of adults can correctly answer all three questions!
So, do you think plan sponsors, plan administrators, plan investment fiduciaries, recordkeepers and advisors can educate all 401(k) participants so that they can make informed decisions regarding all of the choices presented in most individual account retirement savings plans, including but not limited to:
- Whether to participate (401(k), IRA, etc.)
- Whether to participate in the 401(k), an IRA, or both,
- Whether to contribute pre-tax or Roth,
- Which to prioritize, 401(k) or:
- Paying down debts,
- Funding emergency savings,
- How much to contribute,
- Selecting investments:
- Affirmative elections or defaults,
- Affirmative elections—the risk and return characteristics, as well as fees, regarding stocks, bonds, capital preservation Core investment options,
- Defaults—explaining the Qualified Default Investment Alternative—typically a target date fund, glide path, landing point, mixed-use, etc.
- Reconciling the risks of loss of capital versus (inflation) erosion of capital,
- Plan loans versus in-service and post-separation, pre-retirement withdrawals, and
- Decumulation throughout retirement.
My response as a plan sponsor was to embrace a variety of defaults, applied perennially.
And, after looking at that list, I must reconsider the investment recommendation of my friend, Larry Starr, Executive Vice President, Cornerstone Retirement, regarding momentum investing over an extended period:
“You have to be right TWICE for each transaction and that is beyond the capability of any human being participant.”
If I were still in a plan sponsor role, Larry would also suggest I reconsider my past investment decisions regarding Core, QDIA and directed brokerage investment choices to account for participant capability. Larry would encourage me to consider limiting investments to a single option, a low-cost S&P 500 index[x], as:
“… possibly the most prudent investment process for long term retirement money.”
In terms of managing investment risk as participants approach retirement ages, Larry suggests a plan might allow for in-service and post-separation distributions after age 59 ½, 62, 65 or Social Security Full Retirement Age.
I say plan sponsors should avoid momentum investing until they can confirm success at educating participants on the above topics. Hopefully, every one of the 3,966,000 subscribers to the WSJ didn’t read the article. For those who did, a participant’s GOT to know their limitations.[xi]
SEE ALSO:
I am always interested in your comments, corrections, criticisms, and suggestions. Send them to me at jacktowarnicky@gmail.com
Disclaimer No. 1: My comments are my own based on my past experiences in plan sponsor and consulting roles and do not necessarily reflect those of any employer or association I have been employed by or affiliated with, past, present, or future.
Disclaimer No. 2: Information was provided by individuals with knowledge and experience in the industry and not as legal or tax advice. The issues presented here may have tax and legal implications, and you should discuss this matter with tax and legal counsel prior to choosing a course of action. This article is intended to be informational only. It is not and you/others should not use it as a substitute for legal, accounting, actuarial, tax or other professional advice. Any advice contained in this article was not intended or written to be used and cannot be used by anyone for the purpose of avoiding any Internal Revenue Code penalties that may be imposed on such person [or to promote, market or recommend any
transaction or subject addressed herein. You (others) should seek advice based on your (their) particular circumstances from an independent tax advisor.
[i] Department of Labor, Retirement Security Proposed Rule and Proposed Amendments to Class Prohibited Transaction Exemptions for Investment Advice Fiduciaries, 10/31/23, Accessed 1/4/24 at:
https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/fact-sheets/retirement-security-proposed-rule-and-proposed-amendments-to-class-pte-for-investment-advice-fiduciaries See also: https://www.federalregister.gov/documents/2023/11/03/2023-23779/retirement-security-rule-definition-of-an-investment-advice-fiduciary
[ii] Department of Labor, Retirement Security Rule: Definition of an Investment Advice Fiduciary and Related Exemptions Public Hearing, Accessed 1/4/24 at: https://www.dol.gov/agencies/ebsa/laws-and-regulations/rules-and-regulations/public-comments/1210-AC02-hearing
[iii] Mercer, What plan sponsors should know about DOL’s new fiduciary proposal, 12/8/23. “… The expanded definition would apply not just to retirement plans, but also to individual retirement accounts (IRAs) and health savings accounts (HSAs). Proposed amendments to seven prohibited transaction exemptions (PTEs) also accompany the proposal. … While the direct effect on plan sponsors appears modest, plan vendors may decide to modify their service models — including associated fees — and sales practices if the proposal is finalized as is. … Sponsors should be aware of potential vendor implications that could disrupt existing service arrangements, change the way sponsors select new vendors and limit plans’ investment opportunities. …”, Accessed 1/4/24 at: https://www.mercer.com/insights/law-and-policy/what-plan-sponsors-should-know-about-dol-s-new-fiduciary-proposal/
[iv] Department of Labor, Definition of the Term “Fiduciary”; Conflict of Interest Rule-Retirement Investment Advice, 4/8/16, Accessed 1/4/24 at: https://www.federalregister.gov/documents/2016/04/08/2016-07924/definition-of-the-term-fiduciary-conflict-of-interest-rule-retirement-investment-advice See also: Chamber of Commerce of the United States of America, et al. v. United States Department of Labor, et al., 5th Cir., 3/15/18, Accessed 1/4/24 at: https://www.ca5.uscourts.gov/opinions/pub/17/17-10238-CV0.pdf
[v] BlackRock Investment Institute, 2024 Global Outlook: Grabbing the wheel: putting money to work, 2023, “… What if you were able to accurately predict U.S. equity sector returns with perfect foresight? Acting on this hypothetical ability more frequently would have paid off much more since 2020 (see the right bars in the chart) than in the four years prior left bars). The upshot? Good insight, acted upon in a timely manner, has yielded greater rewards than buy and hold strategies since 2020.”, Accessed 1/4/24 at: https://www.blackrock.com/corporate/literature/whitepaper/bii-global-outlook-2024.pdf
[vi] J. Sindreu, You Should Mess With Your 401(k) More, Heard on the Street, Page B10, Wall Street Journal (WSJ) print edition, Wednesday, 1/3/24.
[vii] Employee Benefits Security Administration, Department of Labor, Private Pension Plan Bulletin Historical Tables and Graphs 1975-2021, September 2023, Accessed 1/4/24 at:
[viii] Author’s Note: Bureau of Labor Statistics data and reports confirm that median tenure of American workers has been less than five years for the past seven decades. Form 5500 reports confirm that 20+% of 401k plan accounts belong to term vested or retired participants. Of course, many more 401k participants have rolled over 401k assets to Individual Retirement Accounts.
[ix] A. Lusardi, O. Mitchell, The Big Three, “… questions that indicate one’s financial literacy … used worldwide, including in the U.S. National Financial Capability Study.” Accessed 1/4/24 at: https://gflec.org/education/big-three/
[x] Author’s Note: Especially the S&P 500 index option currently available in the retirement savings plan that has my lifetime of savings, where the tracking error has been zero, and the investment management fee is .48 basis points.
[xi] Paraphrasing C. Eastwood, as Dirty Harry, in Magnum Force, 1973