Congress and the DOL attempted to address these twin issues but ended up getting it only half right. Could it be Washington's own failure to properly address the latter problem of "too conservative" investing might also indicate why 401(k) investors themselves continue to make bad investment decisions?

Oddly, government regulators could have gone two-for-two if only they continued addressing the first problem of non-participation. In resolving that issue, the DOL specifically refers to studies which suggest real-world solutions that increased employee participation. As outlined in the book "Nudge," (see "How to Nudge 401(k) Participation Higher," Fiduciary News, Sept. 23, 2011), there's plenty of evidence showing that simply forcing people to automatically defer income we get higher participation rates. In effect, both the legislation and the resultant DOL Rules recognized these behavior studies and tailored regulations to take advantage of this knowledge.

But things went sour when Washington tried to solve the second problem. The industry had long known far too many retirement investors placed their assets in short-term investments despite the (very) long-term goal of retirement. This resulted in a whole generation missing out on the full power of compounding. Rather than continue to reference academic research, however, legislators turned instead to industry lobbyists. As a result, instead of address the root cause of the (communications and performance presentation), big finance convince Congress to enumerate specific and – as we tragically discovered in 2008/2009 – untested investment products.

Worse, the lack of addressing the communications and performance presentations that deceive 401(k) investors, regulators continued to force the industry to use these misleading reports. This may have hurt retirement investors at the exact time they could have most benefited from it during the market crash three years ago. What could have been done differently?

First – and we were already aware of this in 2006 – we need to address the ongoing misrepresentation of performance reports by aligning those reporting periods closer to the actual investment objective of the 401(k) investor. Without this, we'll continue to experience "myopic" decision making, as described by Shlomo Benartzi and Richard Thaler in their seminal paper in behavioral economics "Risk Aversion or Myopia? Choices in Repeated Gambles and Retirement Investments" (see "3 Ways 401(k) Plan Sponsors Can Help Employees Make Better Investment Decisions," Fiduciary News, September 20, 2011). Simply put, if you want to invest for the long-term, don't look at annual returns.

Second – and this research continues today – we've got to stop relying on textual displays for performance. The SEC acknowledged this when a decade ago they began requiring mutual funds to publish performance return graphs. Unfortunately, these graphs only represent annual returns and, as Benartzi/Thaler suggest, can cause long-term investors to make bad investment decisions. Recent research confirms this (for specifics, see "3 More Ways 401(k) Plan Sponsors Can Help Employees Make Better Investment Decisions," Fiduciary News, September 27, 2011).

What's this all mean to the 401(k) plan sponsor? Certainly, neither the government nor the industry appear motivated to help the plan's employees. Unfortunately, as a fiduciary, the 401(k) plan sponsor doesn't have a choice. Plan sponsors, like any other trustee, must always put the interests of the employees (i.e., the beneficiaries) first. In this case, the plan sponsor should require their investment providers to provide performance information only in the manner consistent with how the academic research suggests it helps – not harms – the 401(k) investor.