As worker-directed pensions become the norm, American workers must increasingly make complex investment decisions. In this Article, we argue that the current system of pension regulation offers little protection to the significant group of workers who are financially unsophisticated. The applicable fiduciary rules, found in ERISA, leave beneficiaries unnecessarily exposed to unique risk by allowing trustees to make investments that are undiversified as long as those investments are individually low in risk.
We propose a two-part reform of the current rules governing pension fiduciaries. First, the basic standard governing all fiduciaries should be revised to require fiduciaries to attempt to eliminate unique risk. Second, small plan administrators need guidance about investment strategy in the form of a system of safe harbor rules. Indeed, small plans should be encouraged to contract out the administration of their funds. With adequate fiduciary rules, an expanded system of worker-directed plans might have many advantages over the current system of defined benefit plans, which have proven tremendously difficult to regulate, and Social Security, whose unfunded benefit structure reduces national savings and threatens the financial security of the system.
