Abstract: Americans do not save enough for retirement. One reason is that our retirement savings
accounts—whether employer-sponsored defined-contribution plans such as 401(k) plans or
individual retirement accounts—are heavily invested in actively managed mutual funds that
siphon off tens of billions of dollars in fees every year yet deliver returns that trail the overall
market. Under existing law, as interpreted by the courts, mutual funds may charge high fees to
investors, and companies may offer expensive, active funds to their employees. This paper
argues that the Employee Retirement Income Security Act should be reinterpreted, in light of
basic principles of trust investment law and the underlying purpose of the statute, to strongly
encourage employers to offer low-cost index funds in their pension plans. Existing Department
of Labor regulations should be modified to clarify that the current safe harbor for participantdirected
plans (in which participants select among investment options chosen by plan
administrators) does not extend to plans that include expensive, actively managed funds. This
would improve the investment options available to American workers and increase their chances
of generating sufficient income in retirement.