James Kwak, “Improving Retirement Savings Options for Employees,” University of Pennsylvania Journal of Business Law 15, no. 2 (Winter 2013): 483-540
Americans do not save enough for retirement. One reason is that our retirement savings accounts — whether employer-sponsored defined-contribution plans such as 401(k) plans or individual retirement accounts — are heavily invested in actively managed mutual funds that siphon off tens of billions of dollars in fees every year yet deliver returns that trail the overall market. Under existing law, as interpreted by the courts, mutual funds may charge high fees to investors, and companies may offer expensive, active funds to their employees. This paper argues that the Employee Retirement Income Security Act should be reinterpreted, in light of basic principles of trust investment law and the underlying purpose of the statute, to strongly encourage employers to offer low-cost index funds in their pension plans. Existing Department of Labor regulations should be modified to clarify that the current safe harbor for participant- directed plans (in which participants select among investment options chosen by plan administrators) does not extend to plans that include expensive, actively managed funds. This would improve the investment options available to American workers and increase their chances of generating sufficient income in retirement.