A new op-ed in the Wall Street Journal this week argues that retirement plans are in need of guardrails to help employees from messing up their own investments—and points to financial advisors as part of the problem.
The piece dives into the new book written by Ian Ayres and Quinn Curtis, two law professors at Yale University and the University of Virginia who also penned the WSJ op-ed. “Retirement Guardrails: How Proactive Fiduciaries Can Improve Plan Outcomes,” offers an overview of the current retirement planning landscape and explores how plan sponsors can design menus to act as “guardrails” to strengthen their participants’ retirement incomes.
The article begins by claiming employees “are often their own worst enemies,” overwhelmed by an abundance of investment options that most have only slight knowledge of, and typically because both their employer and advisor have offered too little information on.
“What’s more, both the advisers that administer plans and help craft their menus, as well as the employers that offer the plans, often act as enablers for poor investment choices—the advisers because they include high-fee funds that they profit from in plan menus, and the employers because they don’t do enough to protect their workers from making investment mistakes,” Ayres and Curtis write.
As a result, employees increase their portfolio risk because they don’t diversify their investments, while others choose options that retain high fees and smaller returns, the two authors add. They estimate that about 10% of participants fall prey to one, or both, of these errors.
As an example, Ayres and Curtis look to a plan that offered employees the option of investing in a fund that tracked gold futures back in 2016. They found that 35% of participants had invested over half of their savings in the fund while 11% had put all of their money into it, thus pushing themselves off from any type of cushion a diversified portfolio would have if the riskier metal were to decline (spoiler alert: it ultimately did).
The authors saw an issue within the plan’s investment menu as well, noting that “it made it too easy for employees to invest too narrowly and pay too much in fees.” In these cases, employers were blinded to issues involving the plan’s menu because fund advisors did not provide information on how employees allocated and distributed their savings, wrote Ayres and Curtis. Additionally, they note that fund advisors will offer high-fee, undiversified menus due to high participant demand, thereby creating a problematic, never-ending, cycle.
So, how does a pattern like that break? Ayres and Curtis suggest employers could use their fiduciary status to attain more information from advisors. With new details in tow, plan sponsors can help their employees from making mistakes with their investments, including “streamlining plan menus by eliminating undiversified funds,” and “imposing various forms of allocation guardrails,” that set moderate limitations on investing in a sole fund, both write.
The authors add that with this thinking, guardrails can expand the number of risky investment options available to participants: Instead of refusing to add an investment like cryptocurrency, for example, offering a cap on the fund could allow participants to invest in it without posing a danger to savings.
Ayres and Curtis present these solutions keeping in mind that some participants might scoff at, or downright disagree, with such limitations—but it’s all part of an employer’s fiduciary duty that mandates prudent menu designs and reductions in allocation errors, they say. And, with no guardrails set for fiduciary lawsuits anytime soon, it’s possible that adding such limitations could prove effective, and safe, in the end.
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Amanda Umpierrez is the Managing Editor of 401(k) Specialist magazine. She is a financial services reporter with over six years of experience and a passion for telling stories and reporting news. Amanda received her degree in journalism and government and politics at St. John’s University. She is originally from Queens, New York, but now resides in Denver, Colorado with her partner. In her free time, Amanda enjoys running, cooking, and watching the latest drama show.
Great summary Amanda. In the authors’ use of the term “Advisors” it is unclear whether they refer to an independent fiduciary advisor (aka a “ 401(k) Specialist”) or the recordkeeper. I’m guessing the latter, because, in our view, specialists like those of us at SRP are in fact helping employers both avoid high fee funds, and see into participant allocation for the purpose of offering better more useful education to generate better outcomes. No conflict, no agenda, working in the exclusive best interest of participants. The authors use a tort analogy to stress that sponsors need to look deep into participants’ allocations to proactively prevent “allocation errors”. While that would hopefully help avoid participants losing large sums, it’s pushing the bounds of what’s practical or palatable for employers, especially those who are less paternalistic or able to know whether a participant may have outside assets which complement the more concentrated allocation of their retirement plan.
‘if the riskier “medal” were to decline’ (??)
I tend to agree with the precept, However, if I put 100% of mine into an S&P500 index fun, they need to let me do that. Forcing people to invest in what some committee thinks is best has the potential to be problematic. HELP folks be wise, yes. Decide FOR them — well…