I used to love the old L.A. Law TV series (which aired 1986 to ‘94) because it humanized lawyers and showed that even though people can be deeply flawed, we can, on occasion, still be heart-wrenchingly kind. It also included one of my favorite scenes in all of television.
Attorney Ann Kelsey (played by Jill Eikenberry) was representing an actor who had played a superhero called The Salamander on TV but was fired by the network. Network execs claimed he was unstable and therefore hurt the brand of their superhero.
Eikenberry put him on the stand and led him through his story as a down-and-out actor who had been unfairly fired, and now the network was even refusing to let him eke out a meager living posing as The Salamander at public events such as sci-fi conventions. He sounded reasonable and sad. The judge looked sympathetic, the jury looked sympathetic, even the network execs looked sorry—it seemed the case was won.
Then the defense counsel stood up and asked the witness: “Why do you think it’s unfair that you were fired from the show?” At which, the actor screamed: “Because I AM THE SALAMANDER” and ripped off his suit revealing the Salamander costume underneath, and using suction cups on his shoes and gloves, started to climb the courtroom wall. The final shot is of Eikenberry putting her head down on the plaintiff’s table.
I was reminded of the Salamander scene the other day when I finally got around to reading a 401(k) study released in February by Ian Ayres of Yale Law School and Yale School of Management and Quinn Curtis of the University of Virginia School of Law titled: “Beyond Diversification: The Pervasive Problem of Excessive Fees and ‘Dominated Funds’ in 401(k) Plans.”
At first, I was encouraged that Ayres and Curtis had improved upon an earlier, somewhat flawed study of 401(k) fees, with a broader look at the myriad costs associated with 401(k) plans and an analysis of the real benefits of expanded investment options that have been the focus of regulators and lawmakers of late. Indeed, their study goes a long way to dispelling the myth that broader menus benefit retirement plan participants. But then I got to the fee section, where the professors tear off their caps and gowns to reveal their Salamander suits and start climbing the walls, with a renewed diatribe against managed mutual funds. Like Jill Eikenberry, I found myself with my head on my desk, wrestling with the question of how to assess a study that gets some things so right while it gets others so wrong.
First, the good stuff. Using a database of 3,500 401(k) plans, the authors use historic market data from 2002 to 2008 to compare the impact of restricted fund menus in plans, called “menu diversification losses,” with “investor diversification losses,” which compare the “returns that investors could receive on the optimal portfolio for their plan and the returns investors are actually expected to receive based on the actual portfolio held by plan investors.”
The answer is that the average 401(k) investor loses a mere 0.06% or 6 bps a year due to restricted plan fund choices. As the authors conclude: “Menu diversity is a non-problem […]. We find that employer-imposed menu limitations generally succeed at giving employees the substantial ability to diversify.”
This means that all the current hoopla about restrictive plan menus is misplaced, and the resulting fixes will help plan participants not at all. That raises the question of whether these efforts are simply misguided or the result of intentional misdirection.
The study also concluded that due to their own poor allocation choices, plan investors lose on average 0.65%, a not insignificant amount, particularly when compounded over decades. The authors don’t draw much of a conclusion from this data, but to my mind, one might reasonably conclude that retail retirement plan investors need the help of professional financial advisors—and lawmakers’ efforts might be better spent on requiring access to qualified advice.