Monday, May 16, 2011

Should the Prudent Investor Always Follow the Crowd?

Child: The other kids are doing it, why can't I?

Parent: Just because everybody's doing it, doesn't make it right.

Ron Lieber wants those overseeing 401(k) plans to think like the parent. See Why 401(k)'s Should Offer Index Funds.

Most plans – over 60 percent – don't yet offer a basic menu of low-expense index funds. Lieber offers a hypothetical example showing how that lack might cost an employee $100,000 or more over a working lifetime.

According to Erisa, 401(k) plans should be investing with the “care, skill, prudence and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.”

As long as most company plans don't offer a basic menu of index funds, do the people overseeing Galactic Gidgets' plan have a fiduciary duty to offer their employees an index funds option? If  not, would that duty automatically kick in once a bare majority of other plans do offer such an option?


Jim Gust said...

per the article, 82% of plans already offer a stock index option. that's the important one. who cares if the plan doesn't have an index fund for international holdings? most of the s&p 500 have strong international exposure already. but only by making an international index fund plus a bond index fund part of the analysis can the author make the case that "most" participants lack access to index funds.

i believe in index funds, of course, and i'm surprised that even 18% of plans are not yet on board with them for stocks. yes, i think there could be a fiduciary issue there.

JLM said...

Yup, asking for an international equities index fund was a stretch. But asset allocators insist on forgetting that many domestic equities are global.

JLM said...

To finish my thought, if plan participants are being told they should invest in international equities and T-bonds, then they ought to be provided with inexpensive, "passive" ways to do so.