I was feeling pretty good about that part of the Pension Protection Act of 2006 that will make investment advice more available to 401(k) plan participants. Even about that part that will allow 401(k) providers to offer advice since the Department of Labor will be providing regulations to avoid self-dealing.
Feeling good that is until my FeedDemon led me to a post that Barry Barnitz had on his blog, Financial page. He posted a study, The Adequacy of Investment Choices Offered By 401K Plans, by Edwin J. Elton of New York University’s Department of Finance, Martin J. Gruber, also of New York University’s Department of Finance, and Christopher R. Blake of Fordham University’s Graduate School of Business Administration.
These researchers examined the adequacy and characteristics of the investment choices offered to 401(k) plan participants in over 400 plans. Claiming to be the first such study, they reported that:
- 62% of the plans surveyed have inadequate fund choices, and that over a 20-year period this makes a difference in terminal wealth of over 300%.
- The funds included in the plans are riskier than the general population of funds in the same categories.
- Index funds chosen by 401(k) plan administrators are on average inferior to the S&P 500 index funds selected by the aggregate of investors.
- There was weak evidence that the use of consultants or sophisticated strategies leads to better results.
Now I’m not feeling so good.