When it comes to improving the 401(k) plan, you hear a laundry list of complaints as to why 401(k) plans suck. Yet the laundry lists never come up with any suggestions on how to improve them.
So I offer two suggestions on how to really improve 401(k) plans. They both will be extremely unpopular and folks in the industry will say how either of these proposals will be gloom and doom for 401(k) plans. I may not be necessarily 100% in support of one of these draconian options (actually only one is), but the fact is that a shock to the system will improve the system.
So my gloom and doom choices would be:
- The Department of Labor would revise their financial advice regulations to make it more cost effective for plan providers to prove it and make sure all participant directed 401(k) plans are required to offer investment advice, or
- Eliminate participant direction of 401(k) plans and for the system to go back to its roots of being balance forward, trustee directed retirement plans.
Both proposals have absolutely no shot of ever happening because the industry is inundated with providers who would lose out if one of these proposals came out (yes, the mutual fund companies).
While everyone is fee obsessed, the main trouble regarding 401(k) plans is that with the advent of daily valued, participant directed plans is that it required the person least sophisticated to make investment decisions (the plan participant). It also gave the plan sponsor some false security that as long as participant directed their investments, they had unlimited liability protection under ERISA Section 404(c).
While these proposals will never come into being, at least I have offered something to improve 401(k) plans. Either requiring affordable investment advice or getting plan participants out of the investment decision making process will help try to alleviate the biggest problem affecting retirement plans is that participants don’t have the background to make investment decisions, which only exacerbates the problems affecting 401(k) plans.