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?
Posted by JLM at 9:44 AM
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3 comments:

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.

3:01 PM
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.

5:37 PM
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.

9:56 AM

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