No, You're Not To Blame

I'm impatient with critics who blame small investors for being "too greedy" during the bubble, as if you deserved the drubbing you took. There are some things the average American can't be expected to understand--among them, the baffling calculus of risk. Study after study show that large portions of the public don't know how stocks and bonds behave, let alone the various types of mutual funds in their 401(k)s. Popular investment "strategies" are often just fancy versions of pick-and-pray--and I haven't noticed God (or Vishnu or Zeus) hanging out at the Stock Exchange. Investor education can't solve this problem alone. We need better rules to help save people from themselves.

Investors also need more protection from high-level corporate greed. Take last week's qualifying round for the World Cheater's Cup. WorldCom ($3.85 billion in possible fraud) and Xerox ($1.9 billion in inflated revenue) trounced the defending champion Rite Aid ($1.6 billion in bad accounting, reported two years ago). By comparison, Enron looks like a piker, scoring a mere $1.2 billion in the deception game.

I'm not convinced that the CEO scandals are keeping investors out of stocks. Fears of new acts of terror may weigh more heavily on their minds. Or they may be paralyzed by their losses over the past two years. Recent economic data suggest that you should be buying into stocks, not hiding out. But forecasts are uncertain. Most people can't afford to be so wrong again.

In many parts of our lives, institutions limit the damage that chance and circumstance might do. There's unemployment pay, bank-deposit insurance, forced savings in Social Security, pooled-health- insurance protection at work. Paternalistic? You bet, and we're better for it.

The risks to retirement funds show that private savings could use a touch of paternalist attention. For example, take the workers--mostly young or lower paid--who don't contribute to their 401(k)s. All of them could afford some modest contribution for their own good. It makes sense to enroll them automatically, unless they opt out. Roughly 9 percent of companies now use automatic sign-ups, the Profit Sharing/401(k) Council of America (PSCA) reports. The company usually puts the money into guaranteed-income funds, now paying 5 to 6 percent. A worker can switch to stock funds at any time.

Richard Thaler, a professor at the University of Chicago, promotes an idea he calls Save More Tomorrow. Employees agree in advance to contribute a portion of their future salary raises to their 401(k)s. In a trial at Philips Electronics, the plan significantly increased employee participation. Thaler calls his approach "libertarian paternalism"--helping those who need it without forcing anyone to do anything.

Another idea with potential was endorsed last year by the Labor Department--namely, "managed accounts" for 401(k)s. Instead of trying to pick the right mutual funds yourself, an independent adviser would pick them for you. You'd get a diversified account plus someone who's keeping an eye on your money. The cost: up to 1 percent of assets, paid through the 401(k). It's up to employers to kick this off.

While I'd like to see saving made easier, I'd make borrowing harder. During the tech bubble, innocents borrowed from their retirement plans to buy stocks. Their brokers got the commission and the clients, the loss. A 401(k) plan should not let you borrow except in emergencies. That protects vulnerable people at no cost to those who don't borrow anyway.

A controversial way of defending you from mistakes involves the stock of the company you work for. Take Enron. The company matched employee 401(k) contributions with company stock. That stock couldn't be sold until employees reached 55. Even then, workers didn't sell because the stock looked so fabulous. In fact, they put more money in. You know the rest.

But has the lesson sunk in? Yes, at certain companies. The trade publication DC Plan Investing reports that a few employers are improving their plans. They're matching your contribution in cash instead of stock, or letting you switch out of company-contributed stock. Qwest, another telecom under financial strain, has just freed workers to sell their stock prior to the age of 55 (too late; Qwest is down 96 percent).

But workers with company stock tend to keep it--out of loyalty, inattention or memories of past success. To David Wray, head of PSCA, nothing should interfere with this "right." But as Enron shows, employees often don't understand the danger of staking their futures on a single stock. Retirement funds are just as important as bank deposits. Thanks to deposit insurance, you never risk all the money in your bank. There should be a cap on the amount you can risk on one stock in a 401(k).

Amid all the scandals, you probably overlooked some good news from Social Security. The trustees' report finds the system solid through 2041--three years longer than was thought a year ago. The taxes and benefits still need tweaking to cover boomer retirements. But as a safety net, this still shows paternalism at its best.