At the 2014 NAPA 401(k) Summit last week, there was an interesting point/counterpoint discussion between NAPA Executive Director/CEO Brian Graff and Teresa Ghilarducci, director of the Schwartz Center for Economic Policy Analysis at The New School for Social Research. Brian is famous for his tireless efforts to fight any attempt to undermine private retirement accounts. Prof. Ghilarducci would like to do away with private accounts altogether, in favor of government mandated and controlled retirement accounts.
Their discussion covered a range of topics. However, this post focuses on one topic: the proposal that all 401(k) plans require an index fund in a DC fund lineup. This proposal, which has been floated on Capitol Hill, is something that Ghilarducci would like to see made into law.
The effort to require that an index fund be in each DC investment lineup points to several misunderstandings about DC investor behavior and the nature of indexing:
• If the implicit message is that “indexing is good and not indexing is bad,” would this result in many DC participants investing 100% of their contributions into a single fund? After all, the government effectively endorses it — why else would they mandate it?
• How is an index fund defined? A price-weighted commercial index (e.g., S&P 500) or a custom index (e.g., tilted towards value). Would such a law seek to differentiate between “bulk beta” and “smart beta”?
• What happens if a price-weighted index is chosen as the government “safe harbor” index? Would the lawmakers be actually encouraging DC investors to become less diversified, thereby creating a bubble in the “endorsed” asset class? An asset class that rewards market value at the exclusion of all other factors?
The fact that such a proposal even exists points to how many lawmakers and industry activists are simply out of touch with the real world of DC investing and how participants make investment decisions. In addition to being a really bad idea, such a rule would open the door for the government to begin dictating investment options in a 401(k) plan — a very slippery slope that no defender of the private system wants to see happen.
In summary, there is a need to understand that government overreach is likely to be an incremental process (“just add one index fund to each plan”). This points to why it is important to focus on the erosion of private control over retirement accounts. If the alternative is waiting for that grand showdown when our lawmakers decide it is time for Social Security II, fighting these incremental battles clearly becomes the better choice.
