In the world of retirement planning, the proposed rule from the Department of Labor to make it easier for companies to add alternative investments to 401(k) plans has sparked a debate. While some see it as a solution to a non-existent problem, I argue that it's a step backward for 401(k) investors. The core issue here is that 401(k) plans have been heading in the right direction over the past few decades, with a focus on low-cost index funds and collective investment trusts. This emphasis has proven beneficial, as research consistently shows a strong connection between fund performance and expenses. However, the proposed rule would allow alternative investments, which are often expensive and opaque, to be added to 401(k) menus. This is a problem, as it goes against the progress made in recent years. Personally, I think that the biggest problems with 401(k) plans relate to usability, accessibility, and helping investors at key life stages. For instance, roughly half of workers don't have access to a workplace-savings plan for retirement, and plans vary widely in quality and expenses. This bifurcation in plan quality is a significant issue, and a turnkey solution like the Thrift Savings Plan for the Masses could address it. Additionally, workers change jobs frequently, creating administrative headaches and missed compounding opportunities. One way to address these challenges would be to extend smart nudges and defaults to the rollover process. However, the proposed rule to add alternative investments is a distraction from the key spot where workers need help: figuring out how to position their assets and spend from their accounts in retirement. In my opinion, the proposed rule is a step backward, and it detracts from what really matters. Instead, policymakers and 401(k) plan sponsors should focus their energies on strategies that assist retiring employees at a life stage when they most need the help.
