PRUDENT RISKS FOR ANXIOUS WORKERS

As worker-directed pensions become the norm, American workers must inc reasingly make complex investment decisions. In this Article, we argue that the current system of pension regulation offers little protectio n to the significant group of workers who are financially unsophistica ted. The applicable fiduciary rules, found in ERISA, leave beneficiari es unnecessarily exposed to unique risk by allowing trustees to make i nvestments that are undiversified as long as those investments ate ind ividually low in risk. We propose a two-part reform of the current rul es governing pension fiduciaries. First, the basic standard governing all fiduciaries should be revised to require fiduciaries to attempt to eliminate unique risk. Second, small plan administrators need guidanc e about investment strategy in the form of a system of safe harbor rul es. Indeed, small plans should be encouraged to contract out the admin istration of their funds. With adequate fiduciary rules, an expanded s ystem of worker-directed plans might have many advantages over the cur rent system of defined benefit plans, which have proven tremendously d ifficult to regulate, and Social Security, whose unfunded benefit stru cture reduces national savings and threatens the financial security of the system.