While the Frontline’s recently program on 401(k) plans was very sobering, a lot of people missed the point of it and I also think that the folks who produced the program did as well.
While many in the 401(k) industry don’t like any criticism, the problems with 401(k) plan are a lot greater than high fees, self dealing among providers, and poor active funds. Frontline misses the point in its inference that inexpensive index mutual funds will cure the problems of 401(k) plans.
The problem again rests in the fact that participant directed plans shifted the responsibility of investing to the people in this industry who really have no business in making any investment decisions, the plan participant. The Frontline program really didn’t do any examination that plan participants get little or no information in making investment decisions and that the recent guidance allowing for plan providers to give investment advice is not really giving plan participants the help they need.
I love John Bogle like the next guy, but even with an all index fund lineup, poorly educated plan participants will still make poor investment decisions because most plan participants don’t understand the power of dollar cost averaging and diversification, the essential building blocks of investing.
When I worked at a law firm, we had a poor 401(k) plan that offered no education or any review of the fund lineup for about 10 years until I got there. I had one plan participant who put 100% of his allocation towards the midcap funds because midcap meant it was the middle of the market. Well, I guess an S&P Mid-Cap 400 won’t do him a lot of good at 100% allocation, but the Frontline producers may assume that it does because index funds are low cost and do better than 70% of the active funds in its class.
As I’ve stated before, investment education for most 401(k) plans is either non-existent or piss poor. Plan providers, especially investment advisors need to do a better job to convey their message of investment education or hire providers who can do the job.
401(k) plans can do better, it’s up to all of us including plan sponsors to do better. We need to start on better education for plan participants.