Luigi Zingales of Chicago’s Booth School of Business has a new comprehensive paper on securities regulation. In it, he proposes a default rule for unsophisticated investors in 401(k) plans with an eye toward management costs.
A more delicate topic is whether to take a more paternalistic view toward investors who seem to behave in an uninformed or irrational way. At the very least, there is a strong case to apply some version of the “libertarian paternalism” à la Thaler and Sustein (2003), by introducing default options that favor low-cost indexed funds. For example, it could be required that every 401(k) plan contains at least one low-cost index fund, which should be the default option for investors, unless they specify otherwise.
It is true that most investors ignore the cost of management fees, but this perspective on default rules is unique since default rule discussions have typically focused on the underlying diversification and riskiness of assets.
Hat tip: Mostly Economics.