We’ve said elsewhere on this website that complying with ERISA §404(c) is an excellent way to limit the liability of the plan fiduciary with respect to participant investment decisions. An important assumption behind this regulation is that a plan sponsor can offer an investment education program that is sufficient to consider participant investments to be based on informed decisions.
They are not. There has yet to be a “generic” asset allocation or strategic investment course that is sophisticated, comprehensive and effective enough to qualify a part time, often disinterested investor to achieve the level of expertise comparable to full-time professionals in a complex industry.
While we believe it is important for a plan fiduciary to take advantage of the protection provided by adhering to the guideline established by ERISA §404(c), protecting the plan participant requires a different strategy.
There is a reason Target Date or Lifestyle funds are the fastest growing investment-of-choice in 401(k) plans. Many plan participants know they are over their head when it comes to making investment decisions. Furthermore, they have no interest in managing their own money. Target Date funds are an easy, single-decision solution: put your money in a fund with a target date closest to the year you plan to retire and let a professional manage the money from there.
At PrinCap Retirement Services, we like the concept behind Target Date funds but think there is an inherent flaw in their structure that could prove disastrous down the road. The primary variable in these funds is the amount of fixed income (bonds & CD’s) in the portfolio at retirement. Some have over 60% of the retirement assets in fixed income. The biggest threat to fixed income is inflation, and we don’t think it is prudent to invest as though there will be no inflation in our future.
Our answer to the problem is to build customized model portfolios where assets are allocated over eight sectors, including cash and fixed income, on the basis of market activity not the age of the investor. After all, markets respond to news, not age. Our model portfolios are dynamic investments in a dynamic world.