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Why 401(k) investment choices don't matter anymore

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If you’re are as old as me, you spent the better part of your career first learning Modern Portfolio Theory as a theory, then seeing it put into practice, until finally watching it flail in agony as market gyrations proved what the contrarians were saying all along.

While entertaining, practitioners remained more concerned with the everyday business of marketing, selling, and servicing. In retrospect, making the sales process more important than actual investment results was MPT’s greatest gift to the industry. In essence, it made the sizzle more important than the steak. 

If the preceding paragraph depresses (or worse, angers) some of you, take heart. It just doesn’t matter anymore. And I’ll tell you why right now. 

One of the benefits of reporting on the industry each and every week involves having the opportunity to speak with many financial professionals all across the nation. You can’t imagine how enlightening this continues to be. It permits me to put my finger on the pulse of the hard-worker “Regular Joe” advisers. Sure, I’ve had many contacts with thoughtleaders, too. But thoughtleaders speak in rarified air. And when you’re constantly jetting from industry conference to industry conference, it’s a challenge to refine those thoughts in actual practice. 

That often leaves it to everyday advisers to takes those innovative ideas and forge them into practical usage. In other words, if thoughtleaders paint the picture of tomorrow, it’s the leading-edge practitioners who show you how that future will work. It sounds like the thoughtleaders get all the credit for being pioneers while the practitioners do all the hard labor. And that’s another advantage the everyday practitioner has. 

Thoughtleaders, almost by definition, promote provocative proposals. And, like the pioneers before them, thoughleaders regularly find they’re the ones with arrows in their back. Practitioners have the benefit flying under the radar. They can quietly create, implement, analyze, and improve in ways thoughtleaders can only – uh – “think” of. 

In speaking with both groups, you’d be amazed what I discovered concerning the subtle changes occurring in the 401(k) world right now (see “Investing vs. Saving – Why the 401k Fiduciary Must Emphasize Only One,”, February 3, 2015). 

While many practitioners remain committed to emphasizing investment-based education and sales techniques, a few of those on the vanguard have realized the future lies with fixating on savings strategies, not traditional investment strategies. 

That doesn’t mean investment selection at the plan level won’t matter. That due diligence remains a key fiduciary duty.

But, with studies showing very little long-term difference between competing investment styles, that due diligence process will shift from picking and choosing between those different styles (why not have them all?) towards sifting through a variety of complex conflict-of-interest analyses.

This, though, will stay isolated in the investment committee meeting. It’s the world of the plan participant that will change the most. 

Employees, long bored by repetitious education meetings filled with arcane industry jargon will find themselves released from the burden of making unenlightened investment decisions. Indeed, with the ascendency of the “one-portfolio” solution (e.g., target date and lifestyle funds), many are already opting not to make a decision at all. 

It is here where I see the most innovative service providers shifting from providing investment advice to offering financial coaching. Gone are the definitions of investment classes, the pretty asset allocation pie charts, and those wonder “grows to the sky” Ibbotson charts.

In their place are a single “Do-It-For-Me” or “Do-It-Myself” lifestyle decision and a series of behavioral techniques to keep the employee’s eye on the ball of retirement saving. 

Many no doubt will resist this future. Some will insist they can still work “the old-fashioned way” by limiting their advice to providing fiduciary services to plan sponsors. But even there, smarter plan sponsors are even now requiring service providers to frame investment due diligence not just in traditional terms, but in the new language of behavioral finance. 

The world changes. How will you become a part of that change?


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