99 Iowa L. Rev. 1 (2013)

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Abstract

The insights of choice architecture have produced regulatory and voluntary changes that have expanded the use of default settings in defined contribution plans, such as 401(k) plans. As a result, increased numbers of employees now save for retirement through 401(k) plans and many save more money. The current approach to investment default settings, however, has been less successful in achieving appropriate levels of investment risk. In addition, many employers, particularly small employers, remain reluctant to offer 401(k) plans. This Article shows that these two problems—selection of appropriate default investments and plan sponsorship levels—are linked. This is because the employer-centric trust model used in 401(k) plan regulation inherently limits the success of choice architecture principles. After examining three major proposals to reform the 401(k) plan system, this Article instead recommends that the locus of fiduciary obligation for default investments be reassigned from employers to the financial services firms that offer those investments.