The Seven Deadly Sins of 401(k) Plans

Seventh Deadly Sin: Rules? There Are No Rules!

After reading over the previous six deadly sins, readers can't help but wonder: How did all of these problems come to pass? Primarily because the rules that govern behavior within 401(k) plans range from unclear to nonexistent.

"If the chairman of a company's 401(k) committee called the Department of Labor and asks, 'What should I do to make sure I fulfill all my responsibilities?' There would be no answer, other than act prudently," Trone said. If the same chairman then hired an investment adviser to handle the 401(k) plan and "the adviser calls the Securities and Exchange Commission and asks the same question, there would be no real answer," Trone said. "The industry has never defined the details of a prudent investment process of fiduciaries."

Greenwich's Wechsler said the rules aren't entirely firm because "the 401(k) revolution was an unplanned one."

In the wake of the devastating bear market that left many investors pushing their retirement plans back a decade or more, efforts to reform the 401(k) industry and codify the rules that govern these plans are gearing up. Trone's Center for Fiduciary Studies in Pittsburgh trains employers, consultants and advisers in fiduciary responsibility and portfolio management.

Meanwhile, lawmakers and regulators examine the issue in committees. However, while reform is needed, individuals shouldn't wait with the hope of intervention from politicians. As Bridgeway Funds' founder John Montgomery told lawmakers regarding soft-dollar commissions this spring, quoting fellow Texan Ross Perot: "If you see a snake, just kill it; don't appoint a committee on snakes."

Retirement-industry experts see the best shot for genuine change in the 401(k) industry originating from within the group that has the most at stake: individual investors. "There's not going to be any real reform that will eradicate conflicts of interest," Siedle said. "These guys in Washington might demand more prospectus disclosure, and the fund industry will roll their eyes and go along with it because they know it won't change anything.

But, Siedle added, "we have this huge retirement population -- baby boomers and younger. If we get a large and informed population that wises up, that's my best hope."

What can individuals do? In the final segment of our multipart series, we'll provide readers with a 401(k) Bill of Rights that they can present to employers -- and help get the process of reform rolling.

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