How did 401(k) plans get so hard?

It began with all the excitement of a three-ring circus (almost literally, you can read about it in “How Investment Theory Explains 401(k) Plan Sponsors’ Evolving Fiduciary Duties,” FiduciaryNews.com, Sept. 17, 2013). At the outset, 401(k) plans generally had just the minimum three options required to meet 404(c) standards. This seemed like a lot compared to the usual profit sharing plans offered then. It was enough to give us the control we thought we needed. We didn’t need to change our allocations more than once a quarter. We didn’t need to see our valuation more than once a year. 401(k) plans were easy. We went to bed happy.

What made 401(k) plans get so hard? I blame three things (and I know a lot of people – including some of my close friends – will get angry at me for saying this, but…): Employees, mutual funds and the Morningstar style box.

First, employees. For the vast bulk of employees, the original set-up of 401(k) plans was just fine, thank you very much. It was a simple savings vehicle that gave us the best shot to retirement comfortably without a pension and without Social Security. (Let’s be honest. I know that wasn’t the official line, but that’s what we were all thinking.) For those few, however, who wanted more control, who were more interested in investing than saving for retirement, the original 401(k) came up short. 

In came the mutual funds to fill this “need.” I’ve never bought into the idea that we need to value our 401(k) plans on a daily basis. I know how difficult it was (and perhaps still is today) for recordkeepers to unitize portfolios. I also know recordkeepers allied themselves with the mutual fund industry to promote the idea that daily valuation was a “necessity.” Once plan sponsors became convinced of this – perhaps at the insistent pestering of those few employees – the mutual funds took over the 401(k) industry. With daily valuation came daily trading. 

Daily trading? For a retirement plan? For assets already invested in diversified managed portfolios? Out went the long-term perspective we wanted employees to take (and which, for the most part, they gladly did before daily valuation) and in came the day-trading mentality that continues to exist even as you read this. (At least T. Rowe Price is minding the interests of its other shareholders by banning certain 401(k) investors from such short-term trading strategies.) Most folks work for a living. They can’t afford the time to spend every minute glued to CNBC readying their next day-trade. As they say, “C’mon, man!”