Does Your 401(k) Need ‘Guardrails?’

A new WSJ op-ed says that 401(k)s “too often lead employees to make financially harmful mistakes.”  And yes, advisors are (apparently) part of the problem.

The “problem”—at least according to the op-ed authors is that, left to their own devices participants are said to be inclined to overindulge in bad investment choices; choices they claim are the result of plan sponsors’ ignorance of how their workforce is actually using the options—an ignorance born of advisors failing to provide that information. Advisors, they comment, who “don’t have any financial incentive to provide such information, or to design plans in ways that would tend to reduce diversification mistakes to begin with.”

Now I can’t speak for every advisor, but I know plenty who are actually devoting a fair amount of time and energy to tracking—and sharing, certainly in the aggregate—the asset allocation decisions of the participants in the plan with the plan committee. Beyond that, no small number of participants are individually counseled in financial wellness sessions toward “better” decisions with their portfolios—and that completely ignores the large (and growing) reliance on professionally managed alternatives like target-date funds and managed accounts by participant-savers.

But these researchers—who turn out to be none other than Professor Ian Ayres[i] of Yale University and Professor Quinn Curtis, a colleague from the University of Virginia—want to put some guardrails on employee choice(s) to solve a problem they detected in a single large plan…back in 2016.

The current op-ed—“inspired” by (or perhaps attempting to inspire sales of) their just-published book “Retirement Guardrails” (which can be obtained for a mere $110 in hardcover, or $34 paperback)—calls out for criticism a retirement system they say allows workers to put portfolios at risk by failing to diversify their investments and choosing investment options with “relatively high fees that eat into their returns.” They “estimate” that about 10% of participants fall prey to one, or both, of those errors.

In fairness (and we’ll accept at face value their factual assertions) once upon a time the University of Virginia’s 403(b) plan had a lineup in excess of 200 fund choices (not an uncommon array in university 403(b) plans, as those who follow litigation in this area can attest)—among them (apparently) one that tracked gold futures. And, in 2016 (when the study was conducted, and at a time when gold, for a while, was arguably an intriguing opportunity—before it wasn’t), the professors claim that a third (35%) of the participants in that program held more than half their savings in that fund—including 11% who were betting their entire balance on, not red, but…gold.[ii]

As noted above, Ayres’ solution for all this is—“guardrails”—basically imposing limits[iii] on how much participants might be permitted to invest in certain funds—funds that, in the estimation of the plan fiduciary MIGHT be harmful in large “doses.” 

What’s more puzzling—and troubling—is that he seems to have bootstrapped (and to my eyes out of thin air) a fiduciary obligation[iv] to not only prudently review and monitor the services and investments offered by a plan, but to track, investigate and, yes, limit the asset allocations of participants among options that are deemed subject to misuse/abuse. Indeed, he basically makes a product liability argument that those who build these menus have an obligation to monitor and remedy their (potential) misuse just like that imposed on a product manufacturer who knowingly distributes a dangerous product. And, by the way—he not only lays this at the feet of the plan sponsor/fiduciary and their advisor—but also as a responsibility for the recordkeeper platform provider (the ultimate “manufacturer”) themselves.

Now, there’s a reason that Preparation H contains a warning that the product is not to be taken orally—and that electric hair dryers bear a label that cautions against using them in the tub (I’m less sure about the labels on pillows warning of dire consequences for their removal). People, being people, do, in fact, sometimes do dumb things, and we know that even with carefully crafted instruments like target-date funds, individuals can (and do) split their investments between those one-size-is-supposed-to-be-enough options.

It’s not so much that “saving participants from themselves” isn’t a laudable undertaking—but one can’t help but wonder just how intrusive and/or expert plan fiduciaries are expected to be in order to strike an appropriate “balance” in such things. Let’s face it—it’s hard enough to make sure that the options on the investment menu satisfy—and continue to satisfy—ERISA’s rigorous standards for prudence—under this solution fiduciaries would also be expected to track (and restrict) the how much?      

Well, the good news—at least for now—is that there wouldn’t appear to be any actual fiduciary obligation to do so. ERISA 404(c) provides both a structure and a means to provide participants with the opportunity for an informed choice, and—as noted above, current plan design trends suggest that there are solid, prudent options aplenty for those unable or willing to do so. 

That said, you never know when a federal district court judge somewhere (or a plaintiff’s attorney) might latch on to the idea. At which point, the statute notwithstanding, there’ll be no putting “guardrails” on the potential for litigation.

- Nevin E. Adams, JD

 

---

[i] If those names seem familiar—there’s a reason. You may remember Professor Ayres from an incident several years back when he wrote to thousands of plan sponsors, alerting them that, based on his analysis of Form 5500 data that they were sponsoring a “potential high cost plan.” Not that he was just trying to be helpful in bringing this to their attention (Quinn Curtis was also working with him on that project)—he also told them that he planned to publish the results of his analysis, and to share those with, among others, The New York Times, and The Wall Street Journal—as well as via Twitter with a special hashtag identifying their company. And he did this on the stationary of Yale University.

[ii] There’s another disparity with the 401(k)s they are seeking to impose this solution on; unlike participants in the University of Virginia plan, most 401(k) participants don’t have access to a defined benefit pension plan.

[iii] The notion of such guardrails isn't really innovative, even within the context of retirement plans. Ayres acknowledges the (voluntary) application in situations involving company stock, and similar constraints have (voluntarily) been imposed on features such as a self-directed brokerage account, and among plans contemplating cryptocurrency as an option as well. The difference is that those adoptions were limited in scope and voluntary—unlike the type of guardrails Ayres touts. 

[iv] The book subheading says, “proactive fiduciaries,” but the text implies a deeper obligation, anchored on the authors’ assessment of court rulings.