NOW ENROLL EVERY AMERICAN IN ONE AND FUND THEM...:

The marketplace has spoken. When 401(k) plans began, in the aftermath of the Revenue Act of 1978, they were highly customized. Companies that adopted 401(k) plans used a variety of investments, including insurance-company pools, mutual funds, separate accounts, and company stock. All were actively managed. Effectively, every 401(k) plan was a tiny self-directed brokerage firm, offering a handful of options from which employees selected.

Moving Toward One

Over the decades, the 401(k) industry has gradually standardized. Some variety remains, because sponsors tend to adjust their 401(k) plans incrementally rather than overhaul them abruptly. However, the drive toward conformity is clear:

1) Plan lineups are shrinking, as sponsors eliminate their actively run funds.

2) Almost every plan now includes index funds.

3) Ditto for target-date funds, which are usually a plan's default investment.

These trends are most pronounced with Vanguard. Last year, the company reports, 60% of its 401(k) participants owned but a single fund. Among that group, 91% did so through one of the company's target-date funds. Such investors exemplify all three of the industry's prevailing forces. They require only a limited fund lineup; they index (the method of investing for Vanguard's target-date funds); and they hold a target-date fund, which was likely selected for them.

In the fund industry, where Vanguard treads, others follow. In other words, future retirees will invest quite differently than did the early 401(k) adopters. By and large, future 401(k) participants will hold target-date funds. When they invest otherwise, they will mostly use index funds. The actively managed funds that were once the 401(k) industry's mainstream will continue to lose popularity. [...]

For that reason, the recently published monograph Defined Contribution Plans by the CFA Institute--an impartial, not-for-profit organization that represents investment researchers and managers--recommends to plan sponsors that "passively managed funds" be "the default choice for their plans." Indeed, absent a strong belief to the contrary, "sponsors should make available only passively managed options."

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