Improving 401(k) Investment Performance

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Given the prevalence of 401(k) plans, workers’ widespread inability to make appropriate investment choices (e.g., excessive concentration in employer stock) is a first-order concern. This brief summarizes the key conclusions discussed at the June forum on the nature and sources of the underlying problem and potential solutions. Emerging evidence shows that default choices can strongly influence — and, from the perspective of economic decision making, improve — participation and contribution behavior in 401(k)s. A similar approach for asset allocation and investment options, while still preserving employees’ option to self-direct their accounts if they so choose, could be one solution to poor asset allocation choices. Even without establishing such a default, conference participants generally agreed that encouraging employers to promote diversification (for example, by reducing concentrations in employer stock, allowing 401(k) participants access to diversified mutual funds and/or making available independent investment expertise and management) could substantially improve 401(k) asset allocation. Plan sponsors that offer certain qualifying investment arrangements could receive a measure of safe harbor fiduciary protection. These types of solutions deal simultaneously with the frequently poor investment choices made in 401(k)s and the specific problem of overconcentration in employer stock.

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