Implications of Investment Policy for Investors and Regulators – Part 1
An approach that uses smarter products rather than tries to make consumers smarter about finance calls for different kinds of investments and, in turn, changes to the way regulatory oversight is provided.
Under current regulation, accumulated defined contribution (DC) investments are restricted largely to stocks, bonds, and money market instruments, or mutual funds made up of them. The problem, as we have seen, is that these kinds of investments cannot deliver security in terms of income. Switching to the kind of income-driven investment strategy proposed here will require an altogether more sophisticated investment technology, for which the existing education-and-disclosure approach to regulation is clearly unworkable.
The logical alternative is to place the burden of oversight on the company sponsoring the plan: the participant’s employer, who generally has the financial expertise (or access to it) to assess the competences and processes of the plan providers. In fact, this is already starting to happen in the United States for example: their Pension Protection Act of 2006, with its opt-out provision and the associated setting of a default investment strategy for those who do not make a selection, encouraged employers to take a much more assertive role in managing DC plans. More, however, will be needed.
SOURCE: HARVARD BUSINESS REVIEW; INTERNET