Good piece here from Ed Zelinsky (Cardozo) on the 401(k) aspect of the 2008 economic collapse from the Oxford University Press Blog:

Even as we contemplate the financial carnage of the Crash of 2008, the federal government sends a strong, paternalistic and, ultimately, misguided message to 401(k) participants: Invest your retirement savings in common stocks.

Congress, in the Pension Protection Act of 2006 (PPA), directed the Secretary of Labor to promulgate regulations specifying the “default investments” to which 401(k) funds will be directed if participants fail to make their own investment choices . . . .

When one cuts through the bureaucratic verbiage, a strong message emerges: 401(k) funds, particularly the funds of younger participants, should be invested in common stocks . . . .

Surveying the wreckage of the Crash of 2008, this looks like misguided paternalism. Many investors who buy common stocks in the current bearish environment are likely do well in the long run. But, as they say, past performance is no guarantee of future success. And some, particularly smaller investors, may sincerely and (from today’s perspective) rationally prefer to avoid the volatility associated with common stocks . . . .

Before the Crash of 2008, such paternalism looked plausible. At an as yet unknown date in the future, such paternalism may look plausible again. Today, it looks misguided.

Right on point and yet another way of diminishing the on-slaught of ERISA stock-drop litigation associated with the 2008 Crash. Less ownership of common stock results in less pain felt by employee-participants, and less possible stock-drop litigation.

Furthermore, I think there is an important lesson that can be drawn from the securities class action lawsuits of yore and the Contract with America response to it, the Private Securities Litigation Relief Act of 1995 (PSLRA). The PSLRA response to lawyer-driven lawsuits was almost the complete elimination of private attorney generals to regulate the financial industry. The Enron debacle was egg on Congress’ face and led to the passage of Sarbanes-Oxley in 2002. SOX has proven largely ineffective in cleaning up the mess because it largely relies on internal stuctures of self-regulation. Hence, the crash of 2008.

Instead, legislation to reform ERISA should focus on where the problem lies–not in the ability to bring private lawsuits under ERISA, but in the way Congress has provided incentives for employees to invest in their own company stock in their 401(k) plans. A common-sense limit, like the one that exists for defined benefit plans at 10% common stock for those pension funds, makes a lot of sense in light of the 2008 crash and the proliferation of stock drop litigation cases.

Cross posted at Workplace Prof Blog.