Reform Could Help 401(k) Plans Steer Clear of Trouble

Kenneth Vilcheck and Gary Shuford

After the worst stock market performance since the Great Depression, 401(k) plans have come under intense scrutiny from their sponsors, participants and Congress. The question is why weren’t the losses avoided or minimized, especially for workers close to retirement, whose accounts won’t have time to recover. That’s an especially acute question for target-date lifestyle funds. These were created to be a single-choice, risk adverse investment for participants who wanted someone else to make their investment choices as well as decisions about asset allocation. As the target date of retirement approaches, the funds’ asset mix becomes increasingly conservative – the asset allocation favors bonds over stocks. Unfortunately, participants in such plans didn’t avoid the market’s recent collapse – both the stock and bond markets were decimated at the same time, which is rare. The plans also tend to have little or no holdings of risk-free investments, so sharp losses were unavoidable. As a result, Congress is clamoring for reform. One solution is an advised 401(k) plan that could avoid future catastrophes.