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This Is How We Rescued Retirement Savings From The 401k Frankenstein Created By An Infatuation With The ‘Style Box’
May 2020

By Christopher Carosa, CTFA

In the beginning, 401k plans were nothing more than profit sharing plans with three separate and unique options, generally speaking, “stocks,” “bonds,” and “cash.” Some enterprising portfolio managers created mixed asset portfolios with different risk characteristics. Individual plan portfolios presented no problem for registered investment advisers. 

On the other hand, without the technology to accommodate unitized pricing, recordkeepers found participant accounting with individually managed plan portfolios quite burdensome. Mutual funds, with their daily pricing, offered a way out.  Plan sponsors, sold on the idea of greater transparency and easier employee access to their investments, moved management from individual plan portfolios to the ultimate pooled investment vehicle — the mutual fund.

In 1992, Morningstar introduced their “Style Box” format. Prior to Morningstar’s innovative invention, the complexities of Modern Portfolio Theory (MPT) and the drive toward asset allocation it spearheaded were left only to sophisticated investor. The creators of MPT and its attendant offshoots would be awarded the Nobel Prize for their efforts in 1990. With the compelling narrative of the Nobel Prize-winning theory and the attractive display of Morningstar’s new classification system, it became almost impossible for plan sponsors to say “no.”

And, almost overnight, the 401k industry changed. Gone were the handful of mixed asset individually managed portfolios. In came asset class specific mutual funds but the tens and hundreds.

“With the wide adoption of MPT,” says Debashis Chowdhury, President of Canterbury Consulting Inc. in Newport Beach, California, “it is fair to say that most advisors of DC plan assets as well as the underlying investors themselves believed that it was important to fill all boxes to large extent so as not be overly concentrated in any specific asset class or style.”

Read the full article here.