The migration of American retirement savings from centralized, risk-pooling structures (Social Security and pensions) towards individual retirement plans (401(k) plans and other tax-favored, individually managed accounts) has had collateral consequences. In particular, the responsibility for making complicated financial choices has been redistributed to the individual saver — who typically lacks the knowledge and sophistication to make such choices. The result has been that many savers make costly mistakes in investing their portfolios. In response, academics and policymakers, most formally through the Pension Protection Act of 2006, have turned to a variety of typical "soft" remedies: nudges, increased disclosures, and tweaks to fiduciary relationships.
This Article argues that each of these soft interventions has failed and will continue to fail in improving the allocation of retirement portfolios. In particular, soft interventions are undermined by particular aspects of the retirement-allocation decision — including pervasive conflicts of interest in the mutual fund and retirement advisory industry, inherent difficulty, and legitimate uncertainty. In addition, the claim that these soft tactics respect savers' preferences is problematic, both descriptively and normatively. Those who opt out of the nudges are likely to include those who most need policy intervention. Those who accept the nudges are being pushed into a category of funds of dubious merit, and which appear to be worsening as institutions seek to exploit the default.
"Soft paternalism" is in vogue among academics and lawmakers, but too much is being asked of it. In explaining why, the Article contributes a skeptical note to the broader literature on nudging and disclosure. When fields are rife with conflicts of interest, soft-touch strategies will fare poorly. Since our tax-incentivized retirement system has paternalistic roots, we should more readily consider direct regulation of retirement account investments.
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