Fixing the 401(k)

According to this article in InvestmentNews, Rep. Robert Andrews, D-N.J. spoke earlier today at a Barclays Global Investors event in New York and said believes that 401(k) system would be strengthened by providing participants with with independent investment advice.  Andrews is the Chairman of the House Subcommittee on Health, Employment Labor and Pensions wants to pass legislation that encourages companies to hire independent investment advisers for their participants.

Andrews made some comments that I generally agree with, specifically about participants being "woefully equipped" to make their own investment decisions and the fact that the 401(k) system needs to improved rather than scrapped entirely. 

I also think steps need to be taken to ensure that any advice is truly "independent" and that it's not simply an entry point for an advisor/broker/consultant to get access to a bunch of participants for the purposes of "cross-selling" other products and services.  Having considered what the actual economics of delivering individual participant advice would look like, I think it is a difficult business model to make profitable at this point.  The main issue is who is going to pay for it.  Participants?  I find it unlikely that most participants (especially those with low account balances) are going to be willing to pay enough to make it worthwhile for a competent advisor to spend the time necessary to make it work.

I still argue the point that the way to get participants to make better investment decisions isn't to provide more "education" or even simply individual investment advice that the participant needs to then turn around and implement themselves.  The idea that complete self-direction is an effective approach is flawed at best.  I think the best approach is to design the plan effectively so that the only investment options available are managed portfolios (constructed and managed by an ERISA-defined "Investment Manager") rather than individual mutual funds.  I spell out the idea, here. 

However, only providing managed portfolios is still a tough sell to employers at this point because of the backlash they expect from most employees who believe self-direction is their inalienable right.  Interestingly, when we provide managed portfolios for our clients we find that anywhere from 75-100% of participants choose them.