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‘Crisis’ or Can Opener?

Nobel Laureate Robert C. Merton created quite a stir last month. In an article published in the July-August issue of the Harvard Business Review, Merton accused 401(k) sponsors and administrators of managing their plans with the wrong goal in mind. Instead of focusing on asset value as a target, he wrote, 401(k) plans should be reengineered so that participants focus on a target income in retirement. 

The gist of Merton’s prescription for easing retirees’ “investment crisis”: plan sponsors and the financial services industry must get over their fixation on 401(k) account balances and annual returns, and focus instead on the sustainable income that current employees can expect in retirement. (Read The Wall Street Journal’s summary of the article here.) Merton, whose eponymous Black-Scholes-Merton options-pricing model won him and Myron Scholes the Nobel Prize in Economics in 1997 (Fischer Black died in 1995), is currently working with DFA to turn his ideas into a commercially viable strategy.

The latest, and one of the most insightful, commentary about Merton’s “crisis in retirement planning” article comes from John Rekenthaler, Morningstar’s VP of research. While Merton’s proposal is sound as far as it goes, Rekenthaler writes, Merton “neither demonstrates the existence of a retirement crisis, nor offers a proposal that would fix a crisis should it exist. His proposal does not restore defined benefit plans, expand 401(k) plans to the tens of millions who now lack them, increase contributions into such plans, or reduce consumer debt. Those are the biggest concerns with retirement planning, as opposed to the performance of existing 401(k) funds or poor investment behavior by 401(k) participants.” 

As for the can opener, you’ll have to read Rekenthaler’s post — I won’t spoil it for you.

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